An AI Land Grab Is Redefining Data Centre Market Dynamics
By: Wasil Ahmed
In recent years, the data center market has undergone a dramatic transformation. Companies like Equinix grappled with stagnant rent growth stemming from an oversupply of data center space and the superior bargaining power of large tech tenants. However, the landscape has changed. This is due to surging demand primarily driven by the rise of artificial intelligence (AI).
Historically, data center landlords offered attractive deals to tech giants leasing large volumes of space. As more companies transitioned their data from on-site storage to public cloud services, major cloud providers gained unprecedented negotiating power. Amazon, for instance, pays 50% lower per kilowatt compared to smaller corporate or government tenants.
Today, demand has far outpaced supply. According to CBRE, vacancy rates for data center space in North America have plunged to a record low of 2.8% in the first half of 2024. This shortage has shifted the power dynamic, empowering landlords to raise rents. Notably, rents for hyperscale tech tenants increased by 19% year-over-year.
This surge in demand isn’t limited to major players; it extends to smaller corporate and government customers who prefer direct data center leasing for security and regulation reasons. Equinix recently raised its profit forecasts, reflecting a 17% increase in adjusted EBITDA in the second quarter.
The broader investment climate for data centers is booming. Blackstone reports a staggering data-center development pipeline valued at over $70 billion, while Amazon has committed to a $100 billion investment in data centers over the next decade.
Despite this growth, the market is unlikely to face an oversupply in the near term due to construction delays and power supply challenges. Building timelines have stretched considerably, primarily due to supply-chain bottlenecks as power utilities struggle to expand transmission lines at the pace required by data center operators. As a result, facilities that once took about three years to build in 2022 now face extended timelines of up to seven years.
The scarcity of available space has led to a surge in pre-leasing, with approximately 80% of facilities that are under construction already committed. This is often to investment-grade tenants on long-term contracts spanning 10 to 15 years. This shift demonstrates the market’s evolution from weak rent growth to robust demand in a constrained environment.
Discussion Question: How will this shift in market dynamics affect innovation and investments in AI?
Sources:
1.Data-Center Owners Get an Edge Over Big Tech Tenants, Finally - WSJ
2.North America Data Center Trends H1 2024 | CBRE
3.Why invest in the data center economy | McKinsey
4.Equinix Reports First Quarter 2024 Results
More About the Author: Wasil Ahmed