In the rapidly evolving landscape of technology, where artificial intelligence (AI) and machine learning are becoming ubiquitous across industries, the data center industry is poised for unprecedented growth. In a monumental shift, data centers are emerging as the backbone of this AI-driven transformation, with JLL’s newly released 1H 2023 North American Data Center Report revealing that the sector is experiencing record-breaking expansion due to AI integration and the ongoing adoption of cloud services.

The report highlights four key areas:

  1. Supply imbalance: Market conditions will remain tight through 2024
  2. Artificial intelligence: New technologies will drive greater data center adoption
  3. Edge: Reducing latency drives growth outside of core markets
  4. Capital markets: Investor demand will remain elevated

Unstoppable Momentum Amidst Challenges

Even in the face of supply chain disruptions and a challenging economic environment, the data center industry shows no signs of slowing down. JLL’s report highlights that the first half of 2023 witnessed remarkable absorption rates, fueled by the rush of hyperscalers, financial institutions, healthcare corporations, and other major enterprises to secure data center space. What’s more, a significant portion of the supply projected for the third and fourth quarters of 2023 is already preleased or under exclusivity agreements. This surge in demand also translates to supply shortages and preleasing for the upcoming year, painting a picture of an industry in high demand and limited availability.

AI and Cloud: Catalysts for Unprecedented Growth

Artificial intelligence and cloud services are steering the data center sector towards record-breaking growth. AI’s escalating requirements and the sustained embrace of cloud computing are the primary engines propelling hyperscale expansion. This growth extends beyond the tangible infrastructure; it reflects a broader transformation that’s accelerating the pace of innovation and progress.

Primary Markets: Phoenix and the Northwest Shine

In a notable shift, primary data center markets such as Phoenix and the Northwest have outperformed Northern Virginia in terms of absorption. With 194.5 MW and 185.9 MW respectively, they surpass Northern Virginia’s 184 MW in the first half of 2023. As these primary markets experience inventory limitations in colocation space, data center operators are adjusting pricing by 20-30%. The overflow from these constrained markets is being absorbed by secondary markets like Columbus, Salt Lake City, Reno, and Austin, solidifying their role in accommodating the industry’s growth.

AI: Redefining Data Center Infrastructure

AI’s increasing implementation necessitates higher computing power and resources, driving an uptick in leasing demand. The demand for edge computing, accelerated by generative AI like ChatGPT, further underscores the data center’s role in enhancing scale and delivering AI applications with remarkable speed and efficiency. With AI models shifting data center infrastructure, there’s a push towards higher power densities and unique cooling solutions, prompting innovations to improve cooling and energy efficiency.

Resilience in Investment and Capital Markets

In the midst of a high-interest rate environment, data center lender and investor demand remain robust, offering a bright spot in the capital markets. Various lenders, including life companies, banks, debt funds, and CMBS/SASB, continue to show interest in the sector. Moreover, record-setting M&A activity in the data center sector underscores the industry’s resilience and growth potential, as evidenced by M&A valuation and EBITDA multiples.

JLL’s 1H 2023 North American Data Center Report illuminates a landscape of unprecedented growth driven by the fusion of AI and cloud services. The data center industry isn’t just evolving; it’s leading the charge in a transformative era. As AI continues to reshape industries and cloud adoption remains steadfast, data centers serve as the foundation upon which innovation and progress are built. With a relentless drive to meet increasing demand and redefine industry standards, data centers stand as key enablers of a future that’s both connected and promising.

For more information, you can download the report here or download it as a PDF here.