The North American data center market is at near capacity, which means that enterprises looking for colocation services may not be able to get the space they need at the data center they want, or they may have to pay a premium for it.
Market researcher datacenterHawk, which helps companies search for colocation and cloud service providers, says that the North American data center market is facing record-high demand, although the rate of growth has slowed somewhat due to economic headwinds.
High demand and low inventory (available space) have resulted in a vacancy rate in major North American markets of just 2.88%, according to datacenterHawk’s 1Q 2023 Data Center Market Recap. In the secondary markets, it’s 5%.
Data centers have virtually no empty space to lease or sell to customers, especially those in the largest markets such as Northern Virginia and Washington state. No vacancy means there’s no space to lease for co-location customers, who will then have to go to other providers that may not be their first choice.
Markets that just a couple of years ago had 5 to 10 providers that could accommodate a 1-4 megawatt requirement now have only two to four providers that could handle that same requirement. This has caused prices to increase from 5% to 20%, depending on the market. Additionally, newly developed capacity is frequently preleased in its entirety by hyperscale companies, leaving little new availability options for the enterprise user.
And due to long delivery timelines and power procurement delays, demand is still outpacing providers’ ability to deliver new capacity. As a result, it’s unlikely vacancy rates will rise anytime soon.
David Liggitt, founder of datacenterHawk, says the problem lies with demand by hyperscale companies. These companies account for 80% or more of all leasing in North America, and they were very active in 2021 and 2022, taking up much of the vacant supply.
“Data center operators are all working hard to add capacity, but the challenges have increased, too. The key components of building a data center (land acquisition, power procurement, MEP equipment, construction, financing) have all become more difficult in the last two years. This is extending development timelines and making it more expensive. Demand is still elevated historically, and the problems stated above do not have quick or easy solutions,” Liggitt said.
What’s worse, Liggitt expects the current conditions to persist for the next two to three years. Data center operators just can’t build facilities fast enough.
However, the economy may soften the blow, albeit inadvertently. Due to high interest rates and cutbacks in spending, many enterprise users are currently favoring a conservative strategy when it comes to their IT infrastructure. So the fix for many enterprises is simply to buy less.
Latin America an emerging data center market
The report notes that growth in popular data-center markets like Virginia and California is being stymied by the lack of power and land to expand, so data center operators are looking at out-of-the-way locations in smaller states and cities.
That also includes outside of the United States. datacenterHawk says the Latin American data center industry is currently experiencing a surge in growth, largely due to strong industry tailwinds such as technology adoption and data center investment.
Post-pandemic, Latin America is expected to see the highest global growth in technology adoption, which will drive demand for colocation in key Latin American markets such as Mexico, Brazil, Chile, and Colombia over the next decade.
datacenterHawk believes the Latin American market will catch up to the data center growth seen in the rest of the world, and the region is likely to experience a larger percentage growth curve until sufficient digital infrastructure is in place to support the demand.
This means a rise in the trend of “nearshoring” in Mexico, where there is increased foreign investment in the country to build data centers that will serve the neighboring regions.
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