Real Estate
Data Centers: Demand Outpacing Supply Amid AI
Chart
May 23, 2024
The boom in artificial intelligence (AI) is driving explosive growth in demand for data centers. Data centers house the technology required to compute, store and transmit AI-related data. At the same time, limitations on power availability are constraining new data center supply growth. Against this backdrop, we believe growing data center demand will not be easily met with new supply, creating a supportive outlook for data center real estate rent growth and valuations.
Data center demand, as measured in megawatts (MW) of power leased by users, continues to set records, and we expect it to only accelerate further amid the digitization of the global economy over coming decades. Amazon, for example, has said it plans to spend nearly $150 billion on data centers over the next 15 years.1
While new data center construction has increased, as shown in the chart above, it is not keeping pace with the spike in demand. We believe the key factor constraining the delivery of new supply is the availability of affordable, reliable power. Advanced computing applications like generative AI require more electricity than older technologies, resulting in greater power demand from both existing and new data centers. Current electrical grids are already having trouble keeping pace. In addition, much of the supply under construction in the U.S. won’t be ready until 2025 or later, and the majority of capacity coming online in 2024 is preleased.
Given power constraints and preleasing trends, we feel net absorption trends and rental rates can remain strong for the next several years. Asking rents for data centers are rising rapidly after years of anemic growth, with rates in primary markets up 15% and 16% in 2022 and 2023, respectively. 2 While the ultimate use cases related to AI remain largely unknown, we expect that data center supply-and-demand dynamics will continue to favor landlords for the foreseeable future. As technology tenants race to bring on capacity, we believe data center developers and landlords with proven capabilities to source reliable, affordable and sustainable sources of power will be best positioned to help tenants reduce operating costs and meet sustainability initiatives. And in the process, potentially fetch favorable market rents to drive net operating income growth.
ENDNOTES
2 Source: CBRE
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