CB RE RESEARCH

2 0 1 8 U. S .
R E A L E S TAT E
MARKET
OUTLOOK

Data Centers
 I NTRODUCTION

Despite continued economic growth, the outlook for commercial real estate in 2018 is cloudy as the
cycle enters its late stages, with policy uncertainty—particularly regarding corporate tax reform and the
direction of interest rates—looming large. In times like these, “agility” is more important than ever for
investors and occupiers.

RETAIL : AGILE BY MARKET

Retail’s biggest disruptor isn’t e-commerce; it is demographics. Most big-box retailer closings have
occurred in secondary markets, some of which have seen declines in both population and wealth. While
SPENCER G. LEVY high-density markets have not been immune to retail disruption, they have been better able to re-tenant
Head of Research and evolve. Technology has made retail easier, cheaper and faster, but has not changed how people like
& Senior Economic to make shopping decisions in-store. Take full advantage of the current capital markets weakness in
Advisor, Americas
retail and buy in areas with strong demographics.
CBRE Research
INDUSTRIAL : AGILE BY ASSET TYPE
Big-box warehouses are in their golden era, from tenant and capital demand perspectives. The good
news is that all megatrends point to this continuing, but it has gotten to be very expensive to build or
buy big-box. The better news is that the golden era of industrial is now expanding into smaller, last-mile
facilities near high-density urban centers, and this opportunity is only now garnering institutional
attention. Institutional-grade industrial real estate doesn’t have to be big-box anymore. It can be a
strategically located box and, with omnichannnel, it may not be “industrial” at all, but a hybrid retail/
industrial facility.

OFFICE , MULTIFAMILY: AGILE BY CAPITAL STRUCTURE

The best-performing markets of the current expansion include some that can be highly volatile in a
downturn, such as Austin, Boston and San Francisco. But don’t panic in the event of a market pullback.
Rather, make your capital structure bulletproof. This includes extending your existing debt to five years
or more so you’re not subject to a liquidity crunch. It also involves active communication with your
equity partners about what may be required during the downturn, including spending more money.
Given the historic cyclicality of our industry, the best time to spend is during a downturn. Don’t pull
back on spending and don’t jump the gun on selling in these great and dynamic markets. Create an
agile debt and equity capital stack to best position your assets.

OCCUPIER: AGILE BY PORTFOLIO FLEXIBILITY

Large occupiers need to think about agility in both individual-market and portfolio terms, including the
length of leases, options to expand or contract space, and the availability of talent. Double down on
commercial real estate in those submarkets where you expect to attract, retain and create pools of talent
for your business. The current labor shortage in the U.S. is only going to get worse. The very low national
unemployment rate is 50% lower in many of the high-skill trades. While agility protects your downside
risk/cost overall, don’t put all your eggs in the “save money” basket. Rather, put many of your scarce
resources into the “make money” basket of markets with deep talent pools.

Agility is the key in markets with unusual uncertainty.

© 2017 CBRE, Inc. 2018 U.S. REAL ESTATE MARKET OUTLOOK CBRE RESEARCH

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 DATA CENTERS

© 2017 CBRE, Inc. 2018 U.S. REAL ESTATE MARKET OUTLOOK CBRE RESEARCH

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 DATA CENTERS

The U.S. wholesale data center market continues to thrive, with
sustained record-setting absorption levels for the past three
years. Our outlook for data center demand remains bullish,
fueled by ever-increasing data consumption, storage, compute
power and the rapid evolution of technology—from self-driving
vehicles, to networked homes, to advancements in mobile,
interconnectivity and content delivery. Transformation and
flexibility are the key themes in the multi-tenant data center
space in 2018.
Investors should focus on primary data center markets such as
Northern Virginia, Chicago, North Carolina and Portland, where
hyperscale cloud service providers (CSPs) are locating and which
have direct cloud on-ramps, interconnection hubs and cloud
nodes. Investment risks include potential oversupply of data
center facilities, and power disruptions that lead to a significant
amount of downtime for data center operations. Other
considerations include whether there is a growing market for
niche cloud providers, whether cloud adoption will help or hurt
demand in the colocation market, and whether international
data center operators will find success in the U.S. market.
Perhaps more than any other real estate asset type, the data
center sector has emerged as one of the most globally focused.
For both multi-national enterprise users and hyperscale cloud
service providers, data center requirements continue to stretch
around the world, with single users often simultaneously
focusing on far-flung locations like Tokyo, Portland, Chicago
and Amsterdam.
CLOUD ADOPTION
The rapid adoption of cloud solutions has fueled a bifurcation
of demand channels: traditional enterprise end-users and
hyperscale cloud providers. Enterprise end-users (e.g., financial
services, insurance, retail industry verticals) continue to
migrate from owning and operating their own facilities and
deploying IT infrastructure to a hybrid mix of third-party
colocation and the cloud. The outlook for 2018 is for continued
small but rapidly expanding end-user data center requirements
focused on major interconnection hubs near major cloud
service provider nodes.
To keep up with cloud adoption demand, hyperscale CSPs will
continue their focus on cost-competitive solutions to keep
cloud pricing low. However, their need to expand rapidly and in
multiple markets will continue to fuel their own builds as well
as their deployments with third-party data center operators.

FIGURE 21: PRIMARY MARKETS - NET ABSORPTION & PRE-LEASING

Megawatts
200

150

100

50

0
2015 2016 H1 2017 Pre-Leased

Source: CBRE Research, H1 2017.

© 2017 CBRE, Inc. 2018 U.S. REAL ESTATE MARKET OUTLOOK CBRE RESEARCH

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 DATA CENTERS

M&A/INVESTMENT CONSTRUCTION BOOM?

Capital flowing into the data center space exploded in 2017,
with many new investors and operators entering the space.
Total investment volume likely will exceed $20 billion for the
year. While investor demand will remain robust in 2018, the
lack of opportunities and the intricacies of data center assets—
particularly value-add and single- to multi-tenant conversions—
may curtail the record-setting volume of 2017.
DATA SECURITY
There have been a significant number of headline-grabbing,
data-related outages and breaches in the past year, several of
which contributed to third-party data center leases in several
markets as concerns about mitigating data security risks
reached the C-suite level. We expect this will continue
contributing to demand in 2018, particularly as many
enterprise users become increasingly sensitive to the risk in
owning and operating their own data center facilities, outside
of their core business.
Nearly 300 megawatts are scheduled for delivery next year in the
primary data center markets that CBRE tracks.1 We do not
foresee any risk of oversupply, since key markets like Chicago,
Northern Virginia and Silicon Valley currently have vacancy
rates near or below 5%. Furthermore, pre-leasing levels remain
high, with nearly 50% of oncoming capacity already committed.
Looking ahead, a trend toward more speculative development
is clearly shifting the sector. Potential tenants are more willing
to share expansion goals and needs with operators and,
anecdotally, data center providers have lamented missing
opportunities due to their inability to deliver product in the
necessary timeframe.
1
Atlanta, Chicago, Dallas/Ft. Worth, Northern Virginia, New York/New
Jersey/Connecticut Tri-State, Phoenix and Silicon Valley.

FIGURE 22: DATA CENTER MARKET MATURITY

Northern Virginia
High

Silicon Valley

Chicago

Dallas/Fort Worth
MARKET GROWTH

Atlanta
Moderate

Phoeni x
Minneapolis
Portland
Las Vegas
North Carolina
Denver New York/New Jersey
Southern California
Low

Austin/San Antonio Houston

Boston

Developing/ Emerging/ Mature/

Tertiary Secondary Primary
MARKET PROFILE
Source: CBRE Research, H1 2017.

© 2017 CBRE, Inc. 2018 U.S. REAL ESTATE MARKET OUTLOOK CBRE RESEARCH

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CON TAC T S

Pat Lynch
Senior Managing Director
Data Center Solutions
+1 303 628 1765
pat.lynch@cbre.com

Spencer G. Levy
Americas Head of Research &
Senior Economic Advisor
+1 617 912 5236
spencer.levy@cbre.com
Twitter: @SpencerGLevy
Follow Spencer on LinkedIn

Jeff West
Director of Research & Analysis
Data Center Solutions
+1 503 221 4806
jeff.west@cbre.com
Twitter: @jeffwestcbre

Jeremy Meyers
Business Development Manager
Data Center Solutions
+1 303 628 1788
jeremy.meyers@cbre.com

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