This audio is automatically generated. Please let us know if you have any feedback.
As companies expand their cloud deployments and AI models devour servers, data center capacity is at the top of the list of looming IT concerns.
According to a report from CBRE Group on Monday, availability reached a historic low in the first half of the year despite increasing supply and construction activity.
Vacancy rates in major markets, including Northern Virginia, Silicon Valley and the New York tri-state area, fell to 2.8% from 3.3% a year ago, while supply in these markets increased 24% year-over-year, compared to 19% in the same period last year.
A flood of new construction has not alleviated the bottlenecks, Gordon Dolven, head of American data center research at CBRE Group, told CIO Dive.
“The number of plants under construction has increased dramatically since 2020,” Dolvin said, pointing to a 69% increase in construction activity compared to the previous year. “The challenge we face is the bottleneck in the schedules to get these plants electrified and actually operational.”
In the cloud services space, AWS, Microsoft and Google Cloud compete for enterprise customers. But those same hyperscale providers are now competing for enterprises looking to secure valuable data center capacity.
Despite a multi-billion-dollar construction boom, data center availability has virtually bottomed out in major markets. In Northern Virginia, vacancy rates fell below 1% in the first three months of the year despite inventory increasing 18% year-over-year, driving availability to near zero, according to CBRE estimates.
Availability in primary markets is largely, if not entirely, due to customers moving from one location to another – just as job changes account for the lion’s share of unemployment when the unemployment rate falls below two or three percent.
“In theory, zero availability is possible,” says Pat Lynch, executive managing director and global head of data center solutions at CBRE. “But when the vacancy rate is below three or four percent, it’s usually a temporary solution and very few customers leave because they have nowhere else to go.”
As cloud providers ramp up their high-capacity infrastructure to support AI capabilities, they are burning through their inventory while building. According to the study, nearly 80% of the data center space currently being built in primary markets is already leased.
“It’s safe to say that the pre-publication number is even higher today than it was at the time the data was collected,” Lynch said.
Data congestion in Northern Virginia
The lack of space has driven up prices in some regions. While national colocation and rental space costs rose only an average of 7% year-over-year in the first six months of 2024, prices in Northern Virginia rose by as much as 50%.
The region is a leader in infrastructure and has the world’s largest concentration of computing resources, according to Synergy Research Group. The Northern Virginia data center hub represents 7% of global capacity, the company said in a report Monday.
“Northern Virginia is not only the leading location for hyperscale data centers, but also the world’s largest colocation market,” John Dinsdale, SRG’s principal analyst and head of research, said in an email. “It achieved this by being the original epicenter of the world’s internet infrastructure and continuing to be a hub for data center deployment.”
As Northern Virginia and other major markets reach capacity limits, other regions are having to fill the gap. According to a study by SRG, Oregon, Iowa and Ohio have now overtaken Silicon Valley as a provider of hyperscale data center capacity, with Nebraska, Arizona and Southern Virginia not far behind.
“Proximity to customers is a key driver of the colocation market, so data centers tend to be located in metropolitan areas where many companies and economic activities are concentrated,” Dinsdale said. “That will not change, but we are seeing the increasing emergence of many metropolitan areas in countries with smaller economies that are growing rapidly.”
In secondary markets, rental costs are lower because construction activity has increased and data center vacancy rates were 9.7% in the first half of the year, according to analysis by CBRE, but there are trade-offs in latency, security and performance.
“CIOs have different preferences when it comes to where and how they process, compute and store data,” Lynch said. “It’s not always an option, but if you can’t find space in Northern Virginia, you might be able to look in Atlanta or Columbus.”
Waiting for the pressure to ease is not a viable solution when even the hyperscalers are struggling with capacity constraints.
“Smaller companies, Fortune 100 companies with lower requirements, end up in side rooms because that’s all they can get,” Lynch said.
The hyperscalers and social media companies are using their power in the cloud space to buy up huge inventories long before they are even built.
For a bank or an insurance company that only needs two megawatts in a primary market, it will be tough, says Lynch. “The big players are on an elephant hunt – they’re aiming for triples and home runs.”
