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Report Confirms Large Cloud Providers Drive Q1 Leasing

The NADC report confirmed that it was Microsoft that leased 22 MW in Ashburn, VA, plus another 9 MW in San Antonio from data center REIT CyrusOne.

Despite record leasing in 2015, cloud service providers continue to have a large appetite for data center space, especially in Northern Virginia.

Jim Kerrigan, managing principal at North American Data Centers (NADC), a data center-focused commercial real estate firm, confirmed that large cloud providers continue to actively look to lease space from third-party landlords.

NADC just released its Q1 2016 leasing update, which highlighted the Northern Virginia hub continues to be the strongest data center market nationally. A steady supply of new projects in Loudon County has led to the lowest wholesale pricing ($105-$115/kW) in the country, even though tenant demand remains robust.

Demand in Northern Virginia is largely due to the network connectivity, and cloud dense ecosystems which attract content providers, social networks, as well as numerous government contractors and agencies.

During Q1, Virginia extended sales tax incentives for data centers from 2020 through 2035. Dominion Power and NOVEC provide electricity at $.045-$.065 per kW/hour, while trying to keep up with demand from data centers.

In addition to Northern Virginia's existing 4 million square feet of data centers, the NADA report anticipates that the 125 acre former MCI campus will be marketed to be sold within the next three months.

Cloud Absorption Is Accelerating

The first quarter of 2016, has seen leasing momentum continue after record absorption in many markets during 2015.

Read more: Who Leased the Most Data Center Space in 2015?

Amazon Web Services continues to be actively looking for space in addition to build-to-suits, with Microsoft aggressively expanding its cloud footprint in order to gain market share. Now Google has officially tossed its hat into the expansion race, having announced the intention to launch 10 more cloud regions by the end of 2016.

Read more: Diane Greene: Google is “Dead Serious” about Enterprise Cloud

The NADC report confirmed that it was Microsoft who leased 22 MW in Ashburn, VA, plus another 9 MW in San Antonio from data center REIT CyrusOne. Microsoft also leased 16 MW in Santa Clara, CA from DuPont Fabros, which significantly reduced the amount of available space in that market.

Even Equinix is getting in on the cloud feeding frenzy in Ashburn, Virginia, having recently leased 2 MW of data center space to Google. Equinix began construction on the first phase of its new 45 acre Ashburn campus in October 2015. Kerrigan told Data Center Knowledge that he would not be surprised to see Equinix sign more 2 MW strategic deals in the future.

NADA - 1Q'16 Ashburn combo chart Apr12'16

Source: North American Data Centers - April 2016

He added, "It is ironic that everyone is concerned that the cloud is going to eliminate the need for data center space when in reality the cloud absorbed 40 percent of wholesale space in 2015, and if the first quarter is indicative of the rest of 2016, it will be closer to 75 percent for multi-tenant data centers."

Read more: Hybrid Cloud Growth Powers Data Center REITs 19.6 Percent Higher

This cloud momentum may be critical for landlords in 2016, since the report noted enterprise customers have historically been reluctant to sign new deals prior to a national election.

National Leasing Trends

Overall, the colocation and wholesale market is the tightest that NADC's Kerrigan has ever seen, a direct result of record leasing over the last two quarters.

However, there are a handful of markets or properties that have not benefited from the surge in leasing activity. Notably, Houston and Minneapolis have seen a significant new supply over the last few quarters, but limited demand.

While the CyrusOne sale-leaseback of CME Group's Chicago Globex data center announced earlier this year was somewhat unique, Kerrigan believes the enterprise data center outsourcing trend is clearly gaining strength. The NADA report noted that there was a $300 million pipeline of data center assets which companies are looking to monetize.

Another trend in 2016, has been more large users looking for N solutions, rather than N+1 or 2N.

Kerrigan's firm sees the colocation market tightening for Chicago, Dallas, and Ashburn, which should firm up pricing for Equinix and Telx (Digital) at certain key facilities.

The North American Data Centers April 2016 report is available here.

TAGS: Cloud
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