Six key markets—Northern Virginia, Silicon Valley, Phoenix, Atlanta, Chicago and Dallas—accounted for 72% of that development in 2022. The cost of power and lease rates have consistently been critical factors for the decision-making of both data center operators and tenants. Since the pandemic, both power and lease rates have shifted dramatically. How have these rates changed? Is there a connection between the two? And what is the outlook for the sector?
In terms of power, the major data center markets saw a sharp rise in power costs from May through August 2022, before retreating later that fall1. Atlanta experienced the greatest jump in pricing, up to $0.147 per kilowatt-hour (kWh) in June of 2022, as turmoil in global energy markets and local power availability affected the Lithia Springs data center cluster. Starting in September 2022, power pricing began to moderate across major markets, though there were noticeable differences in how much rates decreased.
Lease rates for both hyperscale and wholesale data center space show that while energy prices can impact the market, other factors—namely the rapid rise of inflation—are playing a key role. In January 2022, the core consumer price index (CPI) for all urban consumers surpassed 6%, and the impact on the energy market was quick. By March, every market, except for Silicon Valley, showed a year-over-year (YoY) increase of at least 11% in the cost of electricity. Silicon Valley is a unique market in this regard, as local private utilities near the data center cluster of Santa Clara have experienced less drastic increases in pricing as compared to larger utility providers in the San Francisco Bay Area as a whole – which saw increases in pricing of 19% YoY. The increases throughout the rest of the year in Phoenix were moderate, but from April through September, the monthly average for YoY increase in price was above 35%.
How did lease rates change over the same time period? The largest YoY increase for hyperscale lease rates (over 4 MWh) came in Silicon Valley, where the average rate went from $106 per kilowatt per month in 2021 to $154 in 2022, a jump of 45.3%. The market is clearly one where providers and tenants will need to be aware of the specific utility pricing for their municipality. Despite the increasing cost of the market, interest from a host of users has grown with high performance computing (HPC) opportunities in the market associated with surging interest in artificial intelligence. The second-highest increase in lease rates came in Northern Virginia, where lease rates were 30.1% higher than they had been a year earlier, driven additionally by limited supply in a market with a vacancy hovering near 1%. Dallas, which had previously had some of the lowest lease rates among the top six markets, has started to see pricing in line with the others. Meanwhile, Phoenix and Chicago reported increases of 12.9% and 12.2%, respectively. Atlanta—which had the largest increase in power costs—saw the smallest increase in hyperscale lease rates, at just 2.9%.
Lease rates for both hyperscale and wholesale data center space show that while energy prices can impact the market, other factors—namely the rapid rise of inflation—are playing a key role.
LEASE RATES, HYPERSCALE
Lease rates in the hyperscale market were driven not only by energy prices, but also the performance of lease rates and power costs in the early part of 2023. Asking rates in Atlanta remained flat, but every other market saw an increase of 4.5% to 6.5% during the first few months of the year. The increase in power costs on a YoY basis in those markets ranged from 3.4% to 59.6%. Chicago and Phoenix have seen the most similar trends, with the cost per kilowatt per month leasing rates within $2 to $5 from 2019 through the early part of 2023—despite a noticeably higher increase in electricity costs in Chicago.
Lease rates for wholesale data center space provide more historical data, and the trend from 2017 through 2020 was a contraction of rates across all markets. This was most notable in Northern Virginia, where the price dropped from $143 kW per month in 2017 to $103 in 2020, a decrease of 28%. From that point on, the markets took divergent paths. Northern Virginia, Phoenix and Chicago saw lower wholesale lease rates in 2021 than they had in 2020, while rates were unchanged in Atlanta and saw a small rise in Silicon Valley.
Despite experiencing volatility due to power costs, Atlanta was the most stable market in terms of lease rates for both hyperscale and wholesale data center space.
The difference in the markets became even more pronounced in 2022, as Atlanta and Chicago saw the wholesale data center only slightly cange, whereas other markets saw a substantial increase. Phoenix saw wholesale leasing rates rise by 19.5%, while both Northern Virginia and Silicon Valley experienced increases of over 30%. The first several months of 2023 saw wholesale rates rise in all six markets.
Hyperscale lease rates in Phoenix and Chicago moved in close with one another, up 12.9% and 12.2% in 2022, and up 4.8% and 4.5% in early 2023.
Through early 2023, the six markets mentioned above had dominated the data center market. Given the large head start these markets already have, it is unlikely any of them will be displaced soon, as the primary North American data center markets. But demand for data center space means additional development will be needed, and many more markets have growing pipelines of data centers that range from edge to hyperscale sizing. Power costs will be important when deciding where those projects are located, although other factors, including geographic location, availability of land, zoning ordinances, regulatory issues and construction costs, will need to be considered as well.