| | May 201619CIOReviewCXO INSIGHTsAmidst a steady flow of domestic and foreign investment, the commercial real estate sector has been a stalwart performer during the most recent economic recovery in the U.S. Across the board; prices have largely returned to near-peak levels with overall rents for commercial office space having increased nearly 20 percent since 2011. So would it be surprising to learn that rental rates for wholesale and retail or colocation data center space have declined nearly 20-25 percent over the same time period? Even in an environment that produced nearly record setting absorption and leasing volume in multi-tenant facilities in 2015?The growth and maturation of the multi-tenant data center real estate market has been as rapid and ever-changing as the technology that resides within a facility's walls and drives the applications and business needs influencing users on a daily basis. In conjunction, a growing array of strategic opportunities have also emerged for end users who either own or lease their data centers and are looking to optimize and reduce their data center related expenses.Climate of the Wholesale and Retail Colocation MarketsLeasing volume in third-party data centers set a new benchmark in the U.S. in 2015, with occupancy gains totaling over 200 MW in core data center markets alone (which CBRE defines as Atlanta, Chicago, Dallas, New York/New Jersey, Northern Virginia and Silicon Valley). While large requirements from cloud services and IT infrastructure providers often dominate the headlines, demand is being driven by industries of all shapes and sizes--from financial services firms, healthcare systems and even local public school districts. Emerging destination markets like Portland, Minneapolis and North Carolina have also seen an enormous upswing in new supply as they provide attractive, lower cost options for data center operators and end users. In a sector where flexibility and cost savings often underpin requirements, demand for data center space has long been considered somewhat recession-proof and shows no sign of waning despite the emergence of ominous economic clouds in early 2016. An increasingly diverse pool of colocation options also allows users to consider and leverage cost savings affiliated with different markets and geographies, including differences in tax rates and incentives and an often wide variability in the costs of power, real estate, network and staffing.The pace of new supply will remain robust--there are more than 150 MW currently under construction in CBRE's core markets alone and more than 50 percent of that capacity is pre-leased. This is reflective of a recent shift in philosophy from data center providers who have adopted a "just-in-time" delivery model to adding new capacity, a model that has resulted in most U.S. markets currently being very landlord-favorable from supply and demand perspectives.A Perfect Storm for Reducing CostsWhile the high costs of data center builds always make them a risky project, this disciplined approach to adding capacity has also been a reaction aimed to help stabilize pricing trends, which have seen drastic compression at times over the past several years. Market pricing for colocation transactions did stabilize in 2015 with several markets also seeing moderate increases on the magnitude of 3-5 percent. However, macro pricing trends have been at-odds from the normal expectations of a vibrant, high growth market and there are several contributing factors at play, including the advancement of data center designs, economies of scale achievable by operators who build, own and operate data centers as their core business, and the relative immaturity of the multi-tenant data center market, which has yet to fully traverse through an expansion-By Patrick Lynch, Managing Director, CBRE Data Center SolutionsData Centers­Through The Real Estate LensPatrick Lynch
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