U.S. DATA CENTER TRENDS REPORT H Surging demand from large cloud users driving record absorption

Transcription

1 U.S. DATA CENTER TRENDS REPORT H Surging demand from large cloud users driving record absorption

2 U.S. DATA CENTER TRENDS REPORT H Contents 03 Market Fundamentals 07 Capital Investment 09 Things to Watch 11 Primary Markets 14 Secondary Markets 16 Appendix Executive Summary Demand from hyperscale cloud users led to more than 177 megawatts (MW) of net absorption in the first half of With nearly two-thirds of the 2017 net absorption (an annual record) already recorded in H1 2018, the market is on pace for another record year. Strong investor interest in the data center sector continued, with more than $7 billion of investment in H1 2018, 47% of which was in asset-level transactions. Development pipelines in large primary markets like Northern Virginia and Silicon Valley are rapidly being preleased to meet the speed-to-market requirements of occupiers. National pricing trends did not keep pace with strong market fundamentals in H1, as cloud users demanded lower prices for the large wholesale colocation capacity transactions they require CBRE, Inc. 2

3 U.S. DATA CENTER TRENDS REPORT H Market Fundamentals The North American wholesale data center market continued its substantial growth of recent years in H Despite the delivery of new supply, positive net absorption resulted from strong demand from hyperscale cloud users for deployments often in excess of 3 MW. In Northern Virginia the world s largest data center market 65% of net absorption came from hyperscale cloud users. The seven primary U.S. data center markets Atlanta, Chicago, Dallas/Ft. Worth, New York Tri-State, Northern Virginia, Phoenix and Silicon Valley recorded more than 177 MW of positive net absorption in H1. With nearly two-thirds of the annual record absorption total in 2017 already recorded in H1 2018, the market is on pace for another record year. Figure 1: Primary Market Fundamentals Market Inventory Y-o-Y Change Available MW/ Vacancy Rate *Vacancy Y-o-Y changes are calculated by comparing the difference between H and H **Rental rates are quoted asking rates for 250+ kw at N+1/Tier III requirements. Source: CBRE Research, CBRE Data Center Solutions, H Y-o-Y Change* Net Absorption Rental Rates (kw/mo)** Northern Virginia MW p MW 53.3 MW / 6.6% p 80 bps MW $120-$140 Phoenix MW p 46.0 MW 25.8 MW / 12.1% p 320 bps 32.5 MW $120-$135 Dallas/Ft. Worth MW p 33.4 MW 51.3 MW / 19.2% p 40 bps 19.1 MW $120-$140 Silicon Valley MW p 40.0 MW 11.4 MW / 4.9% q 50 bps 10.6 MW $150-$170 Chicago MW p 56.6 MW 27.6 MW / 11.2% p 870 bps 9.4 MW $130-$145 Atlanta MW p 6.0 MW 19.2 MW / 14.7% u 0 bps 3.0 MW $120-$135 New York Tri-State MW p 2.1 MW 22.4 MW / 14.2% q 400 bps 2.5 MW $130-$150 Figure 2: H Wholesale Secondary Market Fundamentals Y-o-Y Available MW/ Market Inventory Change Vacancy Rate *Vacancy Y-o-Y changes are calculated by comparing the difference between H and H **Rental rates are quoted asking rates for 250+ kw at N+1/Tier III requirements. Source: CBRE Research, CBRE Data Center Solutions, H Y-o-Y Change* Net Absorption Rental Rates (kw/mo)** Austin/San Antonio MW p 9.0 MW 10.1 MW / 8.1% q 130 bps 9.8 MW $140- $155 Seattle 95.5 MW p 2.0 MW 12.8 MW / 13.4% q 470 bps 6.1 MW $125-$150 Southern California MW p 16.0 MW 19.6 MW / 18.8% p 250 bps 5.2 MW $130-$160 Denver 92.6 MW p 4.4 MW 21.7 MW / 23.4% p 70 bps 1.8 MW $130-$150 Houston 97.1 MW p 0.4 MW 22.0 MW / 22.7% q 230 bps 1.1 MW $140-$165 Charlotte/Raleigh 55.6 MW p 4.7 MW 14.1 MW / 25.3% p 300 bps -2.9 MW $130- $ CBRE, Inc. 3

4 U.S. DATA CENTER TRENDS REPORT H Demand in the primary markets was also fueled by enterprise deployments ranging from 250 KW to 500 KW. Larger expansions and an increase in smaller wholesale deployments led to activity above historical averages in secondary markets such as Austin/San Antonio, Houston and Seattle. Strong demand from data center providers resulted in more than 474 MW of capacity under development within U.S. primary markets in H1, nearly 55% of which is preleased. A large portion of this preleasing activity was by hyperscale cloud users in Northern Virginia. Figure 3: Inventory Growth of Primary Data Center Markets Since 2015 % Growth 150% 100% 50% 0% Dallas/Ft. Worth Northern Virginia Chicago Silicon Valley Phoenix Atlanta New York* *Tri-State Region; Source: CBRE Research, CBRE Data Center Solutions, H Figure 4: Primary Markets - Net Absorption & Pre-Leasing Megawatts Net Absorption (MW) Pre-leased (MW) H Source: CBRE Research, CBRE Data Center Solutions, H Similar to hyperscale users, enterprise end-users need for rapid deployments remained a crucial factor for site-selection decisions, with a focus on readily available turnkey data center space. Furthermore, many enterprise end users business strategies involved strategic infrastructure deployments and consolidation of their owned-portfolios. In secondary markets like Seattle, the increased demand stemming from expansions and new entrants led to announcements of future development projects CBRE, Inc. 4

5 U.S. DATA CENTER TRENDS REPORT H Figure 5: Net Absorption vs. Under Construction by Primary Market Megawatts H Net Absorption (MW) H Under Construction (MW) Northern VA Phoenix Dallas/Ft. Worth Silicon Valley Chicago Atlanta New York* *Tri-State; Source: CBRE Research, CBRE Data Center Solutions, H Regardless of the user type, vacancy rates for commissioned data center space in most markets slightly increased, as developers continued to deliver large blocks of capacity. For the first time, the Silicon Valley vacancy rate fell below 5%, as first-generation available capacity remained scarce. These tight market conditions have forced occupiers to expand into other primary and secondary markets. Figure 6: Net Absorption vs. Under Construction by Secondary Market Megawatts H Net Absorption (MW) H Under Construction (MW) Austin/San Antonio Seattle Southern California Denver Houston Charlotte/Raleigh Source: CBRE Research, CBRE Data Center Solutions, H CBRE, Inc. 5

6 U.S. DATA CENTER TRENDS REPORT H Figure 7: Construction Pipeline by Primary Market Available & Pre-Leased Supply Under Construction Megawatts H Pre-Leased H U/C Available Northern Virginia Phoenix Dallas/Ft. Worth Silicon Valley Atlanta New York* Chicago *Tri-State; Source: CBRE Research, CBRE Data Center Solutions, H Phoenix, with record levels of construction, is a recipient of this expansion based demand. Land transactions completed a few quarters ago have led to new providers and expansions within the market. To match the demand, more than 60 MW are currently under construction in Phoenix, with more than 120 MW announced for future buildout CBRE, Inc. 6

7 U.S. DATA CENTER TRENDS REPORT H Capital Investment North American data center investment volume reached $7 billion in H1, inclusive of single-asset, portfolio and entity-level transactions. This level of investment is only at nearly 35% of 2017 s record-setting total volume driven by large entity-level transactions. Investment volume in H1 was balanced between transaction types, as opposed to 2017 s entity-level heavy volume. The for-sale inventory is competitive and includes readily available corporate assets trading for capitalization rates ranging from 5.5% to 7.5% for stabilized assets. Figure 8: North American Investment $ Millions 25,000 20,000 15,000 10,000 5,000 The three largest transactions in H were: 1. GTT Communications acquisition of Interoute and its 15 data centers, 17 virtual data centers and 51 colocation facilities for $2.3 billion. The acquisition provides a significant increase in GTT s fiber network footprint. 2. Iron Mountain s acquisition of IO Data Centers for $1.3 billion. The transaction included the land and buildings of four data centers in the U.S. and will add more than 700,000 sq. ft. of capacity to Iron Mountain s portfolio. 3. Equinix s acquisition of the Infomart Data Center facility in Dallas for $800 million. This was the largest single-asset transaction in H Infomart is a significant interconnection hub in the U.S and provides Equinix with additional capacity for their offerings. Single and portfolio asset-level sales continued to garner a larger share of total North American investment volume, accounting for 48% of the total in H1 compared to 27% of total volume in all of Significant asset-level transactions included: Mapletree s acquisition of 14 data centers from Carter Validus for $750 million. The portfolio is focused on longer leases with established tenants, spans nine states and adds more than 2.0 million sq. ft. to Mapletree s management H Source: CBRE Research, CBRE Data Center Solutions, H Figure 9: North American Investment $ Millions Asset Entity 25,000 20,000 15,000 10,000 5, H Source: CBRE Research, CBRE Data Center Solutions, H CBRE, Inc. 7

8 U.S. DATA CENTER TRENDS REPORT H Ensono s acquisition of Wipro s hosted data center business for $405 million, which includes eight data centers and more than 900 employees. Managed services continued to trade in H1. For example, Internap bought SingleHop for $132 million to strengthen its managed hosting and private cloud offerings. Future managed-service consolidations are expected as companies seek additional strategic acquisitions to bolster the products they can provide to their customers. While 2018 investment volume may not exceed the record volume of 2017, the investment market is expected to produce strong results driven by the following: Sale-leaseback/partial-leaseback from enterprise users. Hyperscale users looking for development partners and creative ways to deliver low-cost turnkey capacity. Continued influx of new investors in the data center space. Figure 10: H Largest Global Transactions Transaction Type Buyer Seller Sale Price (M)* Buyer Type Location Entity GTT Communications Interoute $2,300.0 Occupier/Operator North America Entity Iron Mountain IO Data Centers $1,315.0 Occupier/Operator North America Asset Equinix (REIT) ASB Real Estate, DCI Technology Holdings $800.0 Occupier/Operator North America Entity Equinix (REIT) Ontario Teachers' $792.0 Occupier/Operator APAC Asset Mapletree Carter Validus $750.0 Investment North America Asset IPI Data Center Partners Management ASB Real Estate Undisclosed Occupier/Operator North America Asset Ensono Wipro $405.0 Occupier/Operator North America Asset Keppel DC REIT Kingsland Development, Nylect Holdings $295.0 Occupier/Operator APAC Asset Iron Mountain Evoswitch $235.0 Occupier/Operator EMEA Entity InfraVia Green Data Centers $217.0 Occupier/Operator EMEA Asset NextDC APDC $212.0 Occupier/Operator APAC Managed Services Internap SingleHop $132.0 Occupier/Operator North America Asset CBRE Global Investors Duke Realty $109.9 Occupier/Operator North America *Millions Note: includes closed deals over $100 million. Source: CBRE Research, CBRE Data Center Solutions, H CBRE, Inc. 8

9 U.S. DATA CENTER TRENDS REPORT H Things to Watch The Evolution of Demand How will the appetite for turnkey data center space continue with technological advances, including big data, edge computing, 5G and the Internet of Things (IoT)? Will hyperscale cloud activity lead to another year of record-breaking absorption? Will relatively high levels of preleasing lead to more speculative development? Will providers continue to deliver supply in markets to match demand or will active capacity requirements seek new market opportunities? What will be the impact of new providers on market dynamics? Capital Investment Will the volume of enterprise data center sales increase as more companies adopt a Hybrid IT deployment strategy? Will there be additional provider consolidation through mergers and acquisitions, which have historically accounted for much of the annual investment volume? Are investors still attracted to for-sale assets that need upgrading? 2018 CBRE, Inc. 9

10 U.S. DATA CENTER TRENDS REPORT H Demand: A Tale of Two Segments New York Southern Tri-State Figure 11: Data Center Market Cycle: Primary U.S. Markets Phoenix Atlanta EXPANSION RECOVERY Silicon Valley VACANCY UNDER SUPPLY RENT MARKET LANDLORD FAVORABLE TENANT FAVORABLE Chicago EQUILIBRIUM Source: CBRE Research, CBRE Data Center Solutions, H Figure 12: Data Center Market Maturity Market Growth BALANCED/ GROWTH VACANCY OVER SUPPLY RENT CONTRACTION Northern Virginia Dallas/Ft. Worth *The Data Center Market Cycle Graph reflects the current wholesale market conditions, taking into consideration the following variables: Demand (leasing, absorption, requirements in the market) Supply (existing vacancy, future availabilities, construction pipeline) Rental rate trend Distance from the horizontal market equilibrium line generally implies the relative strength and/or weakness of a market relative to each other and their historical trends. Arrows indicate most recent trend. Categories typically represent the following conditions: Expansion: landlord/provider-favorable conditions; under-supplied market, strong demand, declining vacancy and upward pressure on pricing Balanced/Growth: landlord/provider-favorable conditions; new supply more evenly balanced, stable or slightly increasing vacancy, rent growth slowing or flat Contraction: tenant-favorable conditions; over-supplied market, increasing vacancy, weak demand, downward pressure on pricing Recovery: tenant-favorable conditions; stable or slightly declining vacancy, moderate but improved demand, rent growth flat or increasing Northern Virginia High Dallas/Fort Worth Silicon Valley Chicago Atlanta Moderate Seattle Phoenix Low Houston Charlotte/Raleigh Denver Austin/San Antonio Southern California New York Tri-State Developing/Tertiary Source: CBRE Research, CBRE Data Center Solutions, H Emerging/Secondary Market Profile Mature/Primary 2018 CBRE, Inc. 10

11 U.S. DATA CENTER TRENDS REPORT H Primary Market Insights Atlanta Net Absorption* 65.6% Vacancy Rate* 14.7% Atlanta s data center market is positioned for growth, with an all-time-record 21 MW currently under development. Expansions by Switch, CyrusOne, zcolo, T5 and Databank will bring new capacity to the market in the coming quarters. More than $5 billion of future investment has been announced by multi-tenant data center providers and hyperscale cloud providers. This includes T5 s $100 million ATLII Atlanta facility. Overall, the limited large blocks of availability led to the completion of smaller transactions in the first half of Upon delivery of capacity in the next six to 18 months, hyperscale and enterprise users with active requirements will have more options to find availability for additional deployments. Many factors, including nationally competitive incentives, cost-effective land and relatively low operating costs, will continue to grow demand in the Atlanta market. Noteworthy changes to tax-incentive policy occurred in 2018, as the state of Georgia rolled out new legislation to aid in attracting data center developments of more than $250 million through reduced sales tax on data center equipment. This specific legislative change is designed to help Atlanta compete for data center business both regionally and nationally. Chicago Net Absorption* 123.8% Vacancy Rate* 11.2% Delivery of new supply in Chicago well outplaced demand in H1 2018, as the vacancy rate increased by nearly 9 percentage points from a year ago. For the first time in multiple quarters, the market featured several immediately available large, contiguous blocks of commissioned capacity. While the new supply has yet to be absorbed, interest is not lacking. The interest has led to new providers entering or planning to enter the market (RagingWire, Stream, CoreSite and Cloud HQ) and expansions by existing providers (ServerFarm and T5). As of Q2 2018, more than 140 MW of new capacity is planned in Chicago. All things considered, Chicago remains geographically and demographically well-positioned to capture future demand from both enterprise and hyperscale users. *Arrows indicate change from H to H CBRE, Inc. 11

12 U.S. DATA CENTER TRENDS REPORT H Dallas/Ft. Worth Net Absorption* 42.8% Vacancy Rate* 19.2% Dallas/Ft. Worth began 2018 with strong leasing activity from the enterprise sector, with approximately 25% coming from national hyperscale users taking 1 MW to 4 MW blocks. The absorption was diversified across CyrusOne, Aligned, QTS, Digital Realty, DataBank and RagingWire facilities. Providers including Digital Realty and QTS added supply totaling more than 20 MW in H1 to capture some of the highest demand for wholesale capacity in the country. Dallas has become one of the few data center markets in the world to provide numerous contiguous availabilities and options for future on-site expansions. Thus, it is well-positioned for larger hyperscale deployments compared to many other national markets that have sub-8% vacancy rates. Recently completed developments include DataBank s Plano campus and CyrusOne s Allen campus. New developments from Stream, QTS and EdgeCore will break ground this year. Equinix s $800 million acquisition of the Infomart Data Center facility from DCI Technology Holdings and ASB Real Estate marked the largest North American single-asset data center transaction in H The property traded for nearly $500 per sq. ft. and provides Equinix with interconnection access unlike any provider in the region. New York Tri-State Net Absorption* 16.7% Vacancy Rate* 14.2% The New York Tri-State data center market remained steady in H Positive momentum from leasing activity brought construction activity to 16.5 MW, led by Iron Mountain, Digital Realty and QTS. More than 23% of this under-construction capacity is preleased the highest level of preleasing in three years. Additional absorption should come from existing requirements for in-market expansions, primarily from financial and health-care companies. Traditionally driven by retail colocation activity, the New York Tri-State market captured both smaller wholesale and retail deployments in H1. Amid economic and financial constraints, providers continue to diversify offerings to attract primarily retail with smaller wholesale colocation deployments. Northern Virginia Net Absorption* 141% Vacancy Rate* 6.6% The Northern Virginia data center market had the strongest start of any U.S data center market with net absorption of 100 MW. More absorption occurred in Northern Virginia in H1 than in all the other primary markets combined. Despite several new large-scale deliveries, the record demand has resulted in limited large blocks of availability and kept the vacancy rate to a tight 6.6%. New projects totaling 297 MW in capacity from providers including CloudHQ, CyrusOne, Digital Realty, Vantage Data Centers, Sentinel Data Centers, Sabey Data Centers and QTS are already 79% preleased. Projects with another 280 MW of capacity are planned for the second half of the year. Colocation demand is forcing local governments to carefully consider legislation that could affect new construction and growth. In Prince William County, the board of supervisors rejected legislation that would have raised the tax rate for data center equipment. *Arrows indicate change from H to H CBRE, Inc. 12

13 U.S. DATA CENTER TRENDS REPORT H Phoenix Net Absorption* 802.8% Vacancy Rate* 12.1% Phoenix recorded 32.5 MW of positive net absorption in H1, making it one of the most active data center markets in the country. Wholesale providers expanded across the market, adding more than 46 MW of new supply. With these additions, the wholesale vacancy rate rose 320 bps to 12.1%. Construction activity totalled more than 60 MW of capacity the second-largest amount of all primary markets. Expansions and new facilities are underway by providers such as CyrusOne, Aligned Data Centers, Iron Mountain and EdgeCore. With a growing construction pipeline, Phoenix has the potential for future growth. There are numerous multi-megawatt requirements due to Phoenix s status as an attractive market for West Coast and national expansion. Strong incentive programs and lower operating costs should continue to attract hyperscale and enterprise users. Silicon Valley Net Absorption* 67.9% Vacancy Rate* 4.9% Silicon Valley remained the most supplyconstrained market in the U.S., with a sub-5% vacancy rate for the first time since CBRE began tracking the data center industry in The vacancy rate has dropped 50 bps since the beginning of 2017, as first-generation wholesale capacity is in extreme demand. Net absorption in H primarily occurred in CoreSite s new SV7 facility due to limited availability in other facilities. Some providers, including Equinix, are attempting to capture wholesale capacity in the market, as they have commitments from multiple technologyfocused companies. New supply totaling 29.5 MW in capacity is currently underway by developers, including Vantage Data Centers, CoreSite and Digital Realty. Additional supply is expected from new entrants to the market, including RagingWire. Demand has led to preleasing levels of 45.1% of new capacity. Wholesale demand is expected to match previous years levels, as new capacity comes online over the next six to 18 months. *Arrows indicate change from H to H CBRE, Inc. 13

14 U.S. DATA CENTER TRENDS REPORT H Secondary Market Insights Austin/San Antonio Net Absorption* 68.8% Vacancy Rate* 8.1% Demand remains stable, with activity primarily in Data Foundry, CyrusOne and Digital Realty facilities. Construction activity is primarily by Digital Realty and Data Foundry. Enterprise users have accounted for much of 2018 s leasing activity. Most deals are retail colocation, with larger deals averaging 250 KW. Much of the market demand is from large hyperscale users offering a mixture of internet cloud exchanges. Charlotte/Raleigh Net Absorption* 221.2% Vacancy Rate* 25.3% Fundamentals have flattened over the past few quarters. Providers in this emerging market are a blend of single-tenant data centers and smaller retail and wholesale colocation facilities. Activity is from smaller deployments, average 250 KW, focused on geographic access. Enterprise users are primarily in the financial and technology industries. Tierpoint and Flexential were the most active providers in H While the current vacancy rate seems elevated, it represents only 14.1 MW of available capacity. The Charlotte-Raleigh market is among the few in the nation with cost-effective land available for additional development, as well as low-cost power. This combination bodes well for future demand. Denver Net Absorption* 55% Vacancy Rate* 23.4% H1 absorption levels matched historical annual averages, as primarily retail colocation deals were completed. Wholesale occupiers primarily came from the health-care and technology industries. Construction activity totalled nearly 12 MW, with projects underway by EdgeConnex, CoreSite, Flexential and Zayo. Planned announcements include one from Iron Mountain. *Arrows indicate change from H to H CBRE, Inc. 14

15 U.S. DATA CENTER TRENDS REPORT H Houston Net Absorption* 257.1% Vacancy Rate* 22.7% Houston had a relatively slow start to the year, as new development stalled. Primarily dependent on the oil & gas sector, Houston has new demand from health-care, transportation and cryptocurrency occupiers. CyrusOne remains the largest data center provider in the market with more than 48% of the existing inventory. Data Foundry currently has a large block of available capacity. Seattle Net Absorption* 177.3% Vacancy Rate* 13.4% Absorption in H was more than double that of any previous half year. Requirements greater than 500 KW came primarily from expansions by hyperscale cloud providers and global technology companies. Digital Realty and Sabey Data Centers have 2.5 MW of capacity under construction. Southern California Net Absorption* 173.7% Vacancy Rate* 18.8% CoreSite renewed its 160,000-sq.-ft. lease at One Wilshire and added another 17,000 sq. ft. The renewal extended options at Coresite s LA1 facility through Leasing activity in the market was primarily led by technology, entertainment and healthcare companies. CoreSite commenced construction of a 28,000 sq. ft. turnkey data center at LA2, which is 100% preleased. LA2 now is near capacity, and the company has plans for an LA3 development that will deliver 18 MW of capacity in *Arrows indicate change from H to H CBRE, Inc. 15

16 U.S. DATA CENTER TRENDS APPENDIX H Appendix Figure 13: Market Definitions Term Powered Shells Hyperscale Cloud Service Provider Wholesale Colocation Retail Colocation Hybrid IT Enterprise Data Centers Data Center Net Absorption Data Center Power Definition Purpose built or hardened shell; Power and Fiber to site; no equipment included. Multi-megawatt user, typically 5+ MW and larger. Building shell & infrastructure to PDU providing space, power & cooling; Generally in demised suites above 250 KW. Building shell & infrastructure in shared environment, space generally divided by racks or cages; may include IT hardware as well as a menu of services. A combination of cloud services, third-party colocation and owned, on-premise infrastructures. Hardened data centers; houses "mission critical" operations of individual companies. Net change in existing/commissioned wholesale power capacity. Measured in kilowatts (kw) and megawatts (MW) CBRE, Inc. 16

17 U.S. DATA CENTER TRENDS REPORT H To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at Additional U.S. Research from CBRE can be found here. FOR MORE INFORMATION, PLEASE CONTACT: Pat Lynch Senior Managing Director Data Center Solutions Michael Kane Senior Research Analyst Data Center Solutions Spencer G. Levy Head of Research and Senior Economic Advisor, Americas Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

18 Hybrid IT Solutions Continue to Bring Opportunity to the Data Center Industry

19 Contents 05 Somewhere Up There: The Cloud 06 IT and Real Estate: A Vital Convergence 07 Pricing Paradox 12 Market Overviews Atlanta Chicago Dallas/Ft. Worth New York Tri-State Region Northern Virginia Phoenix Silicon Valley 16 Appendix 08 Capital Investment 2018 CBRE, Inc. 2

20 Executive Summary Providers delivering speculative data center capacity are pacing deliveries to match user demand and absorption trends. North American data center investment volume totaled more than $20 billion in 2017, as providers and users monetized certain assets and migrated to hybrid IT environments. Heightened demand from multi-megawatt hyperscale cloud users led to record annual wholesale positive net absorption in Pricing models have become more user-centric, driven by the combination of traditional real estate and hybrid IT needs CBRE, Inc. 3

21 The North American wholesale data center market continues to thrive, evidenced by three consecutive years of more than 190 megawatts (MW) of positive net absorption and elevated levels of new supply in seven major U.S. data center markets. Figure 1: 2017 Wholesale Market Fundamentals Market Inventory Y-o-Y Change Available MW/ Vacancy Rate Y-o-Y Change 2017 Net Absorption Rental Rates (kw/mo)* Northern Virginia 692 MW 137 MW 39.9 MW / 5.8% 140 bps MW $120-$150 Silicon Valley 224 MW 63 MW 11.5 MW / 5.1% 140 bps 61.5 MW $150-$170 Dallas/Ft. Worth 252 MW 54 MW 50.2 MW / 19.9% 90 bps 36.2 MW $120-$145 Chicago 230 MW 43 MW 20.0 MW / 8.7% 440 bps 31.0 MW $130-$145 New York Tri-State Region 156 MW 3 MW 23.8 MW / 15.2 % 410 bps 7.4 MW $130-$150 Phoenix 169 MW 14 MW 12.4 MW / 7.3% 430 bps 6.3 MW $120-$135 Atlanta 117 MW - MW 8.8 MW / 7.5% 310 bps 3.8 MW $120-$135 Southern California 95 MW 8 MW 15.8 MW / 16.6% 60 bps 8.4 MW $130-$160 Boston 63.4 MW 4 MW 15.6 MW / 24.6% 90 bps 3.8 MW $150-$180 Seattle 106 MW 2 MW 19.9 MW / 18.8% 50 bps 3.3 MW $125-$150 *Rental rates are quoted asking rates for 250+ kw at N+1/Tier III requirements. Source: CBRE Research, CBRE Data Center Solutions, H Figure 2: Primary Markets - Net Absorption & Pre-Leasing MegaWatts Source: CBRE Research, H Pre-Leased According to the Cisco Global Cloud Index, data center providers and users are strategizing to capitalize on the estimated threefold increases in annual global data center IP traffic over the next five years, which is projected at a compound annual growth rate (CAGR) of 25% from 2016 to CBRE, Inc. 4

22 Somewhere Up There: The Cloud Why? Companies are increasingly turning to the cloud for a growing percentage of their computing needs. Industry expectations are that by 2020, cloud revenues will range from $50 billion to $60 billion a 50% to 60% increase from 2017 revenues. How? Demand drivers in H between traditional enterprise end-users and hyperscale cloud providers varied as they acclimated to the rapid evolution of the marketplace. Enterprise end-users (e.g., financial services, health care, retail industry verticals, etc.) continued an enduring growth pattern as they pivoted from ownership toward scalable deployments where IT capacity is migrated to the cloud and third-party solutions. Large-scale data center operators remain well positioned for hyperscale user deployments as they strive for facility flexibility by instituting hybrid infrastructure designs. End-users across the industry approached the market with increased sophistication focused on hybrid IT environments, speed to market and future-proofing flexibility CBRE, Inc. 5

23 IT and Real Estate: A Vital Convergence Why? Accelerating data needs from providers and elevated enterprise IT spending trends are driving public and private growth, as traditional enterprises move toward hybrid cloud architectures. How? As the data center market matures, success depends on how well IT platforms integrate with real estate needs. This symbiotic relationship has manifested itself in various forms, from upgrading on-premise architecture and physical facilities to capital partnerships/investment in more than 15 key acquisitions in This successful coordination enabled data center providers to rapidly roll out new services (e.g., network/connectivity offerings, private/public cloud options) to attract new users and expansions by existing users CBRE, Inc. 6

24 Pricing Paradox Why? The technological advances, introduction of new services from providers and increased interest from the investment community created uncertainty for pricing models regarding services, space and power requirements. How? Traditional real estate pricing stabilized over the past three years, averaging $125 to $145 per kilowatt per month (modified gross) across primary and secondary markets. The pricing variance will remain more dependent upon user needs, such as redundancy, IT requirements and access to cloud on-ramps, along with tenant profile (i.e., tenant type and credit) and geographical costs (i.e., taxes, incentives and power costs). Slight near-term increases in pricing are expected, as providers build out service offerings that mesh the real estate and technology needs of the users CBRE, Inc. 7

25 Capital Investment Consolidation and repositioning led to a staggering investment volume totaling more than $20 billion of single-asset, portfolio and entity-level sales in North America last year. This total exceeds the total transaction volume of the previous three years combined. Figure 3: North American Investment $ (millions) 25,000 20,000 15,000 10,000 5, Source: CBRE Research, H Overall investment activity in 2017 was heavily weighted by several large entity-level transactions: Digital Realty acquired DuPont Fabros and its 12 assets, including sites in Northern Virginia, Chicago and Silicon Valley, for approximately $7.6 billion. Digital Realty will use this acquisition to expand its hyperscale and enterprise product offerings. BC Partners/Medina Capital/Cyxtera Technologies purchased CenturyLink s data center portfolio of 57 assets for $2.3 billion. The portfolio totals more than 195 MW of power across 2.6 million sq. ft. of raised floor. GI Partners/Peak 10 purchased ViaWest and formed Flexential for nearly $1.7 billion. The 24 assets included in the deal will position the company as a national provider of hybrid IT solutions CBRE, Inc. 8

26 Figure 4a: 2017 Largest Completed North American Transactions Date Transaction Type Buyer Seller Sale Price ($ Millions) Buyer Type Jun Entity-level Digital Realty DuPont Fabros $7,600 Occupier/Operator Sep Managed Services Rackspace Datapipe $4,300 Occupier/Operator May Asset Equinix Verizon $3,600 Occupier/Operator Apr Entity-level BC Partners/Medina Capital/Cyxtera CenturyLink $2,300 Investment Jun Entity-level Peak10 ViaWest $1,675 Occupier/Operator Feb Entity-level Stonepeak Cologix $1,250 Investment Jun Entity-level Digital Bridge Vantage Data Centers $1,200 Occupier/Operator Feb Entity-level CyrusOne Sentinel $490 Occupier/Operator Aug Managed Services Cisco Springpath $320 Occupier/Operator Oct Asset Digital Realty Carter Validus $315 Occupier/Operator Jan Asset GI Partners Hines $276 Investment Jun Asset Carter Validus Cousins Properties $166 Investment Jul Asset Iron Mountain Forttrust $128 Occupier/Operator Jan Asset JDM Partners State Farm Insurance $125 Investment Note: includes closed deals over $100 million. Source: CBRE Research, H Figure 4b: 2018 Announced Global Transactions Transaction Type Buyer Seller Sale Price ($ Millions) Entity-level Iron Mountain IO $1,300 Asset-Level Equinix Infomart $800 Entity-level Equinix Ontario Teachers Pension Fund $792 Entity-level MapleTree Carter Validus $750 Asset-Level CyrusOne Zenium $440 Entity-level InfraVia Green Data Centers $216 Entity-level Internap Singlehop $132 Note: includes deals over $100 million. Source: CBRE Research, H CBRE, Inc. 9

27 Figure 5: Global Asset-Level Sales History Asset Sales ($ millions) $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $ Source: CBRE Research, H Asset-level transactions represented nearly 22% of total North America data center investment volume last year. Investor interest grew rapidly, as asset-level volume was greater than the aggregate trailing three-year total. Noteworthy asset-level transactions included: Equinix s acquisition of a 29-data-center portfolio from Verizon for $3.6 billion. The portfolio spans 15 markets and brings Equinix s total global footprint to more than 175 International Business Exchange data centers. Digital Realty s purchase of Carter Validus Northlake, IL facility for $315 million. Capital investment trends in 2017 followed suit with broad national trends in the data center space. Further demonstrating the convergence of IT and real estate, the need for future flexibility via hybrid IT solutions and cost optimization from end-users drove demand for sale-leaseback opportunities. Multiple sale-leaseback transactions are slated to close in 2018, with the expectation for additional for-sale inventory. Managed service-based transactions set record volume in 2017, as providers sought to add hybrid service offerings to their organizations. For example, Rackspace extended its managed cloud (public and private) market share by acquiring Datapipe for $4.3 million. In addition to cloud and managed hosting services, the transaction gave Rackspace a physical presence in colocation facilities on the U.S. West Coast and in Brazil, China and Russia CBRE, Inc. 10

28 Enterprise users seek right-sizing through evaluation of sale and partial leaseback opportunities. CBRE expects more than $300 million in transaction volume from these deals in 2018, as corporate clients leverage their current portfolios and align with their future needs through implementation of hybrid IT solutions. Overall, industry expectations are strong for 2018 and beyond for investment from operators, investors and end-users as they search for opportunities to maximize efficiencies, enter new markets and utilize new service offerings. Figure 6: 2017 North American Investment Profile Managed Services 19% Asset Level 22% Entity Level 59% Source: CBRE Research, H CBRE, Inc. 11

29 Market Overviews Figure 7: Net Absorption Vs. Under Construction by Market MegaWatts Atlanta Chicago Dallas/Ft. Worth Northern VA Phoenix Silicon Valley New York Tri-State 2017 Net Absorption Q4 Under Construction Source: CBRE Research, H Figure 8: Construction Pipeline Available & Pre-Leased Supply Under Construction MegaWatts Northern VA Dallas/ Ft. Worth Phoenix Silicon Valley Chicago New York Tri-State Southern CA Atlanta Seattle Boston Source: CBRE Research, H Q4 Pre-Leased Q4 U/C Available 2018 CBRE, Inc. 12

30 Atlanta Atlanta s data center market continued its positive momentum in H2 2017, emerging as one of the more active markets for future development announcements. Net absorption in H totaled roughly 2 MW, bringing the vacancy rate to 7.5% the lowest level ever recorded for the market by CBRE. While the construction pipeline remained at 13.5 MW, market expansions from entrants including Switch, CyrusOne, Digital Realty and DataSite will positively impact market fundamentals going forward. Diversification of the wholesale provider profile will help cater to a more varied user base, which is a departure from traditional enterprise demand to cloud and hyperscale providers. This traction, along with cost-effective land prices, competitive incentives and favorable operating costs, allows the market to compete on a regional and local level with primary and secondary markets, respectively. Chicago Chicago remains a supply-constrained market with availability at 20 MW, although H absorption reached 26 MW. The most notable delivery in the second half of the year was 9 MW at CyrusOne s Aurora facility. While availability is above historical averages, expectations for quick absorption in early 2018 are high due to limited options for contiguous wholesale space. Provider speed-to-market remains a concern, as demand continues to outpace supply with 16.6 MW currently under construction at Digital Realty, T5 Data Centers and QTS facilities. Digital Realty s acquisition of the Carter Validus site at 505 N. Railroad Ave. for $315 million marked the largest North American single-asset transaction in The same property traded hands for $212 million in 2012, representing a 48.6% appreciation in sale price CBRE, Inc. 13

31 Dallas/Ft. Worth Dallas/Ft. Worth (DFW) ended 2017 with 36.2 MW of positive net absorption, of which 3 MW occurred during H2 2017, making it one of the most active data center markets in the country. Wholesale and retail colocation providers expanded across the market, adding more than 50 MW of new supply. Despite these additions, the wholesale vacancy rate fell 90 basis points (bps) year-over-year to 19.9%. DFW has not seen the same level of hyperscale cloud demand that other major markets have seen in the past year, and the demand pipeline has been largely driven by enterprise users. As a result, several multi-mw deals bypassed DFW in 2017 due to a lack of contiguous space. However, with the uptick in construction activity, CBRE anticipates this trend will change. At year-end, approximately 40 MW of capacity was under construction, with notable projects from Digital Realty, CyrusOne, DataBank, Infomart, RagingWire and QTS. Alliance Park in Ft. Worth has seen robust enterprise activity, as one of the world s largest social media companies has grown its campus to more than 50 MW and continues to expand. Hillwood, T5 Data Centers and Iconiq recently announced a partnership that will result in more than 400 acres of future data center development at Alliance Park. New York Tri-State Region The New York Tri-State data center market continued its positive momentum, as its demand dynamic transitions from primarily a wholesale market to a retail/wholesale-oriented market. Nearly 5 MW of positive absorption in H almost matching the total for all of 2016 represents the favorable increase in market demand for smaller retail colocation requirements. This welcomed change in demand dynamic is notable, since limited incentives and higher power costs have historically been a headwind to users considering the market. The construction pipeline currently stands at 20 MW, with more than 17 MW available. Expectations are for an uptick in retail colocation activity with the new development. Providers with a hybrid offering will continue to remain highly competitive in this changing market. Due to geographic diversity and population density, the New York Tri-State market could effectively service edge computing requirements within the region CBRE, Inc. 14

32 Northern Virginia The Northern Virginia data center market remained the most active in the world, with annual absorption totaling 121 MW in 2017, of which 80 MW occurred in H2. Providers raced to meet this demand, with 85 MW of supply delivered in the second half of the year. Construction has continued at the same rate seen over the past 12 months, with 20% of the 86 MW currently underway already pre-leased. RagingWire, Iron Mountain, QTS, Infomart, CyrusOne, Digital Realty, Sabey and CoreSite are slated to deliver additional supply in Amid all the activity, tight market conditions prevailed. Vacancy remained at 5.8%, with available commissioned capacity at 39.9 MW. Phoenix Strong leasing momentum in the Phoenix data center market in H was reflected by positive net absorption of nearly 3 MW, although this total doesn t reflect the nearly 8 MW of leasing activity over the same period. In addition to leasing activity, more than 28 MW of wholesale capacity was under construction, with build outs from Aligned Data Centers, CyrusOne and Digital Realty. Arizona remained an attractive destination market for West Coast expansion. Its diversity in providers and markets, strong incentives programs and lower operating costs should continue to attract users in The Silicon Valley data center market has historically been constrained by limited wholesale inventory, yet scarcity of first-generation wholesale data center space began to alleviate with the delivery of 29.5 MW of new supply in H Year-end vacancy of 5.1%, down 140 bps year-overyear, represented 11.5 MW of existing available wholesale capacity. Silicon Valley Net absorption in H totaled 28.5 MW, primarily attributable to the delivery of Digital Realty s phase 4 facility and Vantage V6. While annual net absorption soared over historical averages, net new leasing activity represented consistent demand levels given the lack of existing supply. Capacity under construction totaled 21 MW at year-end, with 100% of that inventory available. Rapid absorption of this new supply is expected. The market s development pipeline should facilitate additional wholesale options in the future that will likely see similar demand characteristics CBRE, Inc. 15

33 Appendix Figure 9: Data Center Market Cycle: U.S. Primary Markets Chicago Silicon Valley Northern Virginia Phoenix Atlanta EXPANSION LANDLORD FAVORABLE BALANCED/GROWTH Dallas/Ft. Worth VACANCY UNDER SUPPLY RENT MARKET EQUILIBRIUM New York Southern Tri-State VACANCY OVER SUPPLY RENT RECOVERY TENANT FAVORABLE CONTRACTION Source: CBRE Research, H *The Data Center Market Cycle chart reflects the current wholesale market conditions, taking into consideration the following variables: Demand (leasing, absorption, requirements in the market) Supply (existing vacancy, future availabilities, construction pipeline) Rental rate trend Distance from the horizontal market equilibrium line generally implies the relative strength and/or weakness of a market relative to others and their historical trends. Arrows indicate most recent trend. Categories typically represent the following conditions: Expansion: landlord/provider-favorable conditions; under-supplied market, strong demand, declining vacancy and upward pressure on pricing Balanced/Growth: landlord/provider-favorable conditions; new supply more evenly balanced, stable or slightly increasing vacancy, rent growth slowing or flat Contraction: tenant-favorable conditions; over-supplied market, increasing vacancy, weak demand, downward pressure on pricing Recovery: tenant-favorable conditions; stable or slightly declining vacancy, moderate but improved demand, rent growth flat or increasing 2018 CBRE, Inc. 16

34 Figure 10: Data Center Market Maturity Market Growth HIGH MODERATE Seattle/Pacific NW Atlanta Phoenix Northern VA Dallas/Ft. Worth Silicon Valley Chicago New York Tri-State LOW Southern California Boston Source: CBRE Research, H Developing/Tertiary Emerging/Secondary Market Profile Mature/Primary Market Definitions POWERED SHELLS Purpose built or hardened shell; power and fiber to site; no equipment included. HYBRID IT A combination of cloud services, third-party colocation and owned, on-premise infrastructures. HYPERSCALE CLOUD SERVICE PROVIDER Multi-megawatt user, typically 5+ MW and larger. ENTERPRISE DATA CENTERS Hardened data centers; houses mission critical operations of individual companies. WHOLESALE COLOCATION Building shell & infrastructure to PDU providing space, power & cooling; Generally in demised suites above 250 KW. RETAIL COLOCATION Building shell & infrastructure in shared environment, space generally divided by racks or cages; may include IT hardware as well as a menu of services. DATA CENTER NET ABSORPTION Net change in existing/commissioned wholesale power capacity. DATA CENTER POWER Measured in kilowatts (kw) and megawatts (MW) CBRE, Inc. 17

35 Contacts To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at Additional U.S. Research from CBRE can be found here. Pat Lynch Senior Managing Director Data Center Solutions Spencer G. Levy Head of Research and Senior Economic Advisor, Americas Follow Spencer on Jeff West Director of Research & Analysis Data Center Solutions Follow Jeff on Michael Kane Senior Research Analyst Data Center Solutions Learn more about about CBRE's Data Center Solutions Team by visiting us at: cbre.com/datacenters Follow us on and on LinkedIn - CBRE Data Centers Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.