Energy constraints are limiting datacenter advances

Growing demand for datacenters has run into power supply issues, and this energy constraint could limit or delay development in markets such as Tokyo, Singapore and Hong Kong, warns a recent CBRE report. However, this same constraint is fuelling demand for hyperscale facilities in emerging markets such as Mumbai and Greater Seoul, where power availability is high.

According to the study, power supply is a major concern for datacenter operators in North America, Europe, Latin America and Asia-Pacific. CBRE’s report analyzed key variables, such as total datacenter inventory, vacancy rates, net absorption, rental prices and rates, and availability, in established and emerging markets across these four regions.

Due to high demand, certain secondary markets with robust power supplies are expected to attract more datacenter operators. New facilities are popping up in all four regions, despite limited power availability. Northern Virginia in the US remains the largest datacenter market in the world, with 2,132 megawatts (MW) of total asset inventory.

The growth of Artificial Intelligence (AI) technologies has contributed to steady leasing activity despite higher interest rates and economic uncertainty. This is expected to drive future demand for datacenters and other technologies such as streaming, gaming and self-driving cars are expected to further boost demand for high-performance datacenters.

The inventory of datacenter assets continues to grow in many markets, where energy availability and other variables have not yet slowed developments.

Despite this increase, vacancy rates have fallen in all parts of the world as high demand is outpacing supply growth. Delays in building new facilities and challenges in the energy business are affecting all markets. For example, spaces in Tokyo and Hong Kong are down between 1.5% and 2% year-on-year. Singapore, the world’s most energy-constrained datacenter market, has less than 4 MW of available capacity and a record vacancy rate of less than 2%.

The current global shortage has led to a significant increase in prices associated with datacenters. Singapore is currently one of the most expensive markets in the world, with prices exceeding $300 per kW, while Tokyo’s figures have remained relatively stable at around $200 per kW.

Inventory, prices and vacancy by region

In North America, the inventory of datacenter assets continues to grow, with Northern Virginia leading the global ranking in CBRE’s study.

Prices in North America continued to rise in the first quarter of 2023. There is not enough available space to meet demand. Unavailability of power, expensive land, high material and labour costs, and supply chain delays have slowed the completion of new construction. Local governments are working to address permitting and transmission project delays, particularly as utilities aim to connect renewable energy to power grids. Rental rates have maintained a consistent upward trend since the first quarter of 2023.

Vacancy is down in all major North American markets. In Northern Virginia, MW availability fell from 46.6 MW to 38.4 MW last year, despite 19.5% growth in datacenter asset inventory. Chicago tops the North American ranking with the most significant reduction in vacancy, from 8.2% to 6.7% year-on-year. Despite uncertainty in future availability and high-energy costs, Silicon Valley remains near record low vacancy at 2.9%.

In Europe, data centre supply grew year-on-year in Frankfurt, London, Amsterdam and Paris, as providers are working to meet strong demand in most of the region’s major markets. Significant ongoing developments and deliveries of certain mega-projects are expected this year, despite energy availability issues. Most of the new deals will take place in London and Frankfurt.

Prices have increased in key European markets given strong demand and higher construction and operating costs. These factors have caused rental rates to rise over the past 18 months. Rates are highest are in Frankfurt and London. Higher operating and construction costs have caused rental rates to rise as well.

In the European cities known as FLAP (Frankfurt, London, Amsterdam, and Paris), the average vacancy rate fell from 17% in Q1 2022 to 12.7% in Q1 2023. In London, vacancy fell from 21.6% to 15.3%; in Frankfurt, from 8.6% to 4.8%. There will be little relief for capacity seekers in Europe’s major markets in 2023. More supply is expected to arrive throughout the year, although the vacancy rate should remain low given that demand is likely to remain strong.

In Latin America, there was 672 MW of datacenter asset inventory in Q1 2023, mainly in Brazil, Mexico, Chile, and Colombia. The region has experienced significant growth over the past three years, with supply doubling since the first quarter of 2020. Brazil has grown the fastest, by 127% in the period between 2020 and 2022. It is also the largest datacenter market, with around 67% of the region’s inventory.

Colocation rental rates in Latin America are increasing due to higher demand for datacenter services. Prices are notably higher in Latin America compared to more mature Western markets of North America and Europe. Limited supply, high tariffs and taxes are important factors impacting rental values.

The average vacancy rate fell from 12.2% in Q1 2022 to 8.6% in the same period of 2023. This trend is most notable in Santiago, where it went from 11.7% in Q1 2022 to 3% in Q1 2023. Querétaro is also showing very low vacancy at 3.1%. Most of the region’s new developments have been pre-let to hyperscalers, with persistent high demand.

In Asia-Pacific, the inventory of datacenter assets is growing rapidly, reaching an impressive scale, according to CBRE. Tokyo, Sydney, and Singapore currently boast more than half a GW of active capacity. Sydney’s inventory has grown 30% year-on-year. Power unavailability is a major emerging challenge in some Asia-Pacific markets. Overall, operators and investors are optimistic about the region’s potential and are expanding ventures beyond Tier 1 cities.

Colocation rental rates in Asia-Pacific remain high despite new developments and macroeconomic uncertainty. Singapore is one of the most expensive markets in the world, charging more than $300 per kW, while Tokyo prices remain stable at around $200 per kW. Colocation rates in Sydney are among the most competitive in Asia-Pacific, still within an attractive range for new entrants and investors.

Vacancy has fallen in most major markets over the past 12 months, except in Sydney where a major new development has come on stream. Singapore has less than 4MW of space available for lease and a record low vacancy rate of less than 2%. Tokyo and Hong Kong have also reduced vacancies by 1.5%.