METROPOLITAN PHOENIX DATA CENTER MARKET RECORDS 3.1 PERCENT VACANCY TO CLOSE OUT 2016

For the first time in nearly two years, the Phoenix wholesale data center market will have multiple megawatts (MW) of new speculative capacity delivered by a number of different operators in 2017, according to a new report from CBRE Group, Inc.

 

With an existing wholesale vacancy rate down to a scant 3.1 percent—the lowest among all primary data center markets tracked by CBRE—new deliveries will provide much needed relief for a market that has been severely supply-constrained since 2015.

 

Ranked as the sixth largest wholesale market in the U.S., Phoenix has nearly 153 MW of existing inventory and 2016 saw net absorption total 10.3 MW. However, market activity was actually significantly higher: taking into account the quick turnaround of several sublease offerings and pre-leasing activity, gross leasing totaled nearly 31 MW for the year, and experts say market activity and user demand is expected to remain strong.

 

“With competitive pricing for both construction and power, Arizona will continue to position itself as a destination for data center development,” said Luke Denmon, senior associate, Data Center Solutions, CBRE. “However, in the recent years the lack of available product has resulted in Phoenix being passed over during multi-market site selections. The good news is, with 27.6 MW currently under construction and several other projects planned, tenants looking for a megawatt of data center capacity will have multiple new options from which to choose.”

 

Looking at over-arching U.S. data center trends, it appears enterprise-driven requirements are generally shrinking as end users become more sophisticated at scaling or rightsizing their IT needs and incorporating cloud solutions that effectively reduce traditional space and power-based colocation requirements. However, while cloud providers dominated multi-MW requirements in 2016, enterprise users were equally active in Northern Virginia, albeit on a much smaller-scale.

 

Although existing/commissioned vacancy rates remain an extremely tight 4.6 percent, a spate of new speculative development is scheduled for delivery in 2017. The construction pipeline is currently 45 percent pre-leased and, while an impressive number, could still potentially provide an influx of nearly 66 MW of speculative capacity.

 

There are currently 271 MW under construction in major markets, more than 160 MW of which are being delivered on a speculative basis. The largest volume of construction is in Northern Virginia (121 MW), and upwards of 40 MW of new capacity are expected in markets like Dallas/ Ft. Worth and Silicon Valley. Even with the addition of much-needed new supply, market conditions in nearly all major data center markets should remain landlord-favorable in 2017 from a supply-demand balance perspective.

 

“The C-suite at most enterprises has arguably never been more attuned to the costs, potential risks and pitfalls of building and operating their own data centers,” said Pat Lynch, senior managing director, Data Center Solutions, CBRE. “The result in 2017 will likely be a continued wave of enterprise data center facilities becoming available as companies continue to migrate to hybrid IT solutions (cloud, colocation and others) and their enterprise data centers become a smaller part of their IT footprint.”

 

The first signs of this trend have already started to appear: After a lackluster 2015, total sales volume for data center assets increased dramatically to nearly $1.78 billion in 2016 at an average price per square foot of $275. This total does not include several announced large portfolio transactions that are slated to close in 2017.

 

“The sustained magnitude of market leasing in 2017 will likely depend on how accurate cloud providers were in forecasting customer demand and subsequently provisioned data center capacity to meet it,” said Mr. Lynch. “Additionally, legacy corporate data center assets are poised to come to market in 2017 in a big way. While not likely a supply-side risk to the multi-tenant market, well-connected real estate near critical population centers has the potential to command strong demand and pricing.”

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