Colliers Capital Markets recently spoke to Raul Saavedra, Executive Vice President, Data Center Advisory, about the booming data center sector. Here are the takeaways.
Colliers Capital Markets (CCM): Fundamentals are strong in the data center world, but supply chain issues are creating challenges for users. How is the market responding to this?
Raul Saavedra (RS): Users are responding by accelerating commitments. They have their own supply chain challenges with commitments, so they have to sign for space further in advance to address delivery. They are aware that other users are concerned that supply may not be there when they need it, so they are banking land and space more than ever. There are a lot of large deals with reservation pricing incorporated.
Operators and investors are doubling down in markets that are strong fundamentally. You see land banking in tight markets like Santa Clara that also have major entitlement hurdles, primarily by those already in that market that are well capitalized.
CCM: What are the biggest hurdles to development today?
RS: Three main hurdles are costs, available power, and available materials/labor. The data center sector has seen rapid increases in land costs, as they compete with other property uses, including industrial. Power procurement is challenging in almost every major market, and I am not sure it can be solved in the short term without major cooperation. In California, owner/operators are building substations to help facilitate power delivery. Materials costs have increased across the board, while supply chain disruptions have caused materials shortages and lengthened construction timelines. At the same time, labor is less available today because of a record amount of industrial product underway across the country. However, the market is recalibrating after June’s CPI announcement, so these expectations could change in the days ahead.
Three main hurdles are costs, available power, and available materials/labor. The data center sector has seen rapid increases in land costs, as they compete with other property uses, including industrial.
CCM: Inflation is all over the news. How has it affected data center operations?
RS: It hasn’t yet slowed things down. But it has caused landlords to shift risk and push back on rent escalations that are less than historical CPI. I don’t think you can justify only one to two percent escalations given the inflation exposure.
CCM: Many big tech firms have plans for carbon neutrality in the years ahead — how are data centers playing into their ESG goals?
RS: Tech firms are definitely accelerating their goals. For example, they want to know what power mix is going directly to the data center, as in where and how that energy is generated. For many, carbon offsets don’t really address the issue. Data centers are inherently big power users — they have tremendous power draw. This is a topic the industry will face and needs solutions to in the years ahead.
CCM: Where is the market looking to now and in the future?
RS: Investors seeing cap rates increase are focused on the biggest and safest markets. There is a flight to quality. Users are in a similar boat and will source land and space in a top-tier market if they can. Others are moving to new markets to procure utilities and begin operations. Site selection is incredibly important, and that is something we can help our clients with. There is a perfect storm in the data center universe today, and users need an expert to guide them.
Investors seeing cap rates increase are focused on the biggest and safest markets. There is a flight to quality.
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