Dive Brief:

• Data center supply in major “primary” markets like Northern Virginia, Atlanta and Chicago surged 34% year-over-year in 2024 to 6,922.6 MW, with a further 6,350 MW under construction at year-end, CBRE said in a Feb. 26 report.
• The data center vacancy rate in primary markets fell to 1.9%, driving up the average asking rates for a 250-to-500-kilowatt requirement by 2.6% year-over-year to $184.06/kW, reflecting tight supply and robust demand for AI and cloud services, CBRE said in its North America Data Center Trends H2 2024 report.
• Volume-based discounts for larger tenants “have been significantly reduced or eliminated” due to rising demand for large, contiguous spaces, while data center operators grapple with elevated construction and equipment costs and “persistent shortages in critical materials like generators, chillers and transformers,” CBRE said.

Dive Insight:

Surging demand from organizations’ use of AI is driving the record data center development, CBRE says.

The demand is giving AI-related occupiers increasing influence over data center development decisions like site selection, design and operational requirements. These occupiers are “prioritizing markets with scalable power capacity and advanced connectivity solutions,” the report says. 

Demand is also showing up in pricing trends. 

Last year was the third consecutive year of pricing increases for 250-to-500-kW slots in primary markets, CBRE said. Following steady single-digit annual declines from 2015 to 2021, average pricing rose 14.5% in 2022, 18.6% in 2023 and 12.6% in 2024.

Robust tenant demand, healthy investor appetite for alternative real estate assets and recent interest rate declines are among the factors fueling an exponential increase in data center investment activity, CBRE said. Annual sales volumes reached $6.5 billion in 2024 as average sale prices increased year-over-year, reflecting “the growing scale of data center campuses,” CBRE said. Five transactions exceeded $400 million last year.

Notable capital market developments included a $1.2 billion joint venture between Wren House, BlackRock and colocation provider QTS to acquire majority ownership of three stabilized Northern Virginia data centers and a joint venture worth at least $15 billion between GIC, Canada Pension Plan Investment Board and colocation provider Equinix to expand Equinix’s xScale hyperscale data center portfolio, CBRE said.

Vacancy rates declined in all primary markets, with sharper declines in Phoenix, the New York Tri-State region and Hillsboro, Oregon, near Portland, where vacancy rates fell more than 300 basis points year over year. The average rental rate increase was sharpest in Hillsboro, at 46%, according to the report.

Despite high construction costs and long lead times for critical equipment, data center capacity under construction in primary markets at year-end 2024 more than doubled from year-end 2023, CBRE said. Among facilities over 10 MW set for delivery this year, “only a handful … are not yet leased, reflecting the scarcity of large-scale available inventory,” CBRE said.

Under-construction capacity increased the most — by 195% — in Atlanta, followed by Chicago at 125% and Northern Virginia at 116%. Atlanta also saw the most net absorption in 2024, the first time any data center market has surpassed Northern Virginia on that metric, CBRE said.

Among secondary markets, Houston, Southern California and Charlotte/Raleigh saw significant vacancy declines in 2024, while construction activity surged in Charlotte/Raleigh and Austin/San Antonio, according to the report. But despite record construction volumes, demand for data center capacity will continue to outpace supply, and project timelines will continue to exceed three years amid scarcity of key electrical components and infrastructure, CBRE said.

Power availability remains the top priority for data center developers looking at greenfield sites, according to the report. While renewable power sources “will continue to gain traction in 2025,” onsite natural gas generation — and possibly more environmentally friendly fuels, such as hydrotreated vegetable oil — will increasingly help developers offset periods of peak load on utility grids while increasing facilities’ resiliency, CBRE said.

Onsite gas-fired cooling systems may also play a role in improving data centers’ power efficiency and reducing grid strain, Tecogen and Vertiv said in a separate announcement. The companies — which provide onsite power, heating and cooling equipment and critical digital infrastructure solutions, respectively — announced a partnership Monday to deploy gas-powered chillers to help data centers sidestep power constraints in congested markets.