The Data Center sector remains one of the strongest niche sectors in commercial real estate. Find out how the sector is performing by watching this new video featuring David Guarino, Green Street’s Data Center sector head for the U.S. and Europe.

Looking back at the start of last year, the demand surge that came from the top global tech companies was unprecedented. The amount of data center space that they absorbed was like nothing we’ve ever seen before in the history of the sector. The sector has only been around 20 years, but it was just eye-popping numbers. This completely turned the sector 180 degrees and now we’re headed towards a potential golden age.

When a strong wave of demand hits, vacancies fall, especially in important markets like North Virginia. Due to the inability to get data centers in those markets at that time, not only were they leasing existing vacant space, but they were also pre-leasing new development projects as well. Therefore, if you want to take space in a data center today, you would be waiting until 2024/2025 due to the heavily pre-leased development pipelines.

That has been what pushed the pendulum, shifting power away from tenants who were calling the shots, back to the landlords now. Thus, we are seeing data center rents rise, on average 10% last year, and we are expecting the same this year as well as consistent growth in the years going forward.

“This strong supply growth is driven by changes in our habits and what we do,” says Guarino. The reality is that the demand in our expectations is going to outpace the supply growth, so the supply growth is not as concerning as it appears.

Artificial Intelligence, The New Buzzword 

The big wild card for the sector is Artificial Intelligence. This could be a significant source of demand that may prove these supply growth forecasts to be on the conservative side if the demand is as real as it appears to be. There are certainly some developments from AI trickling through into leasing. Most likely we’ll see the excitement realize in terms of leasing data in the end of 2023 or early into 2024, but it is absolutely coming.

This year’s forecasted M-RevPAF growth is 7%, with an expected 7% growth in 2024 and a bit slower in the years following. The big picture is that if you own data centers, you are in good position as a landlord, and if you’re trying to develop data centers and can get access to supplying the site well as getting a lease signed, you are in a very good position for the future.

For more insight on the Data Center sector at the midyear point, contact us to subscribe to Green Street Research: https://www.greenstreet.com/contact-us. You can also click here to register and watch the full replay of the webinar, "It's Not All Doom & Gloom: Midyear Sector-Level Takeaways."