As the appetite for data consumption and storage continues to grow, developers across the U.S. are busy working to meet the rising demand.
CBRE estimates that nearly 300 megawatts of capacity is slated for delivery in 2018 in the primary markets the company tracks. Chicago, Dallas and Northern Virginia have the largest under-construction pipelines in the world, according to Jones Lang LaSalle Inc.
Demand for data center space is coming from two main groups: large enterprise users like financial services, insurance and retail companies that are shifting from owning and operating their own data centers to third-party data center operators; and the cloud and hyperscale cloud service providers like Microsoft Azure, Oracle, IBM, Google and Amazon Web Services, which are building their own data centers and also turning to third-party data center owners, including real estate investment trusts.
Among SNL-covered REITs, Digital Realty Trust Inc. and CyrusOne Inc. have the most data center properties under construction in the U.S., at six and four, respectively, followed by CoreSite Realty Corp. and Corporate Office Properties Trust, at three apiece. Including properties in the preconstruction phase, CyrusOne has 28 total U.S. development properties, followed by Digital Realty at 17.

One of the most active markets for REIT data center development is Northern Virginia, long considered one of the most prominent and active data center markets in the U.S. Mark Bauer, a managing director in JLL's data center practice, described Northern Virginia as "the heart of the internet" and called it the gateway to Europe's internet infrastructure for data leaving the U.S.
Of the 19 in-construction data center properties owned by SNL-covered companies and listed individually in filings, 11 are in the vicinity of Northern Virginia, and with the exception of CyrusOne, all the REITs with data centers under construction have at least one project underway in that market.
Three of Digital Realty's six projects are in Ashburn, Va. While there is a large amount of construction ongoing in Northern Virginia, Digital Realty CEO Bill Stein said the company is comfortable with its development exposure and pace of absorption in the market. Speaking during a recent earnings call, he said the market has seen vacancy rates hovering in the low single digits, and he expects all the developable land for data centers in Loudoun County, Va., to be built out in the coming years. "We believe our strategic landholdings represent a precious commodity and a key competitive advantage," Stein added, according to a transcript.
Digital Realty also has projects in Santa Clara, Calif., and Franklin Park and Elk Grove Village, Ill. CyrusOne's projects are in Austin and Allen, Texas; Somerset, N.J.; and Chandler, Ariz.
In its 2018 outlook for the data center sector, CBRE said there was little risk of oversupply in major data center markets like Chicago, Northern Virginia and Silicon Valley, which currently have vacancy rates near or below 5% and nearly 50% of the space expected to come online in 2018 has been pre-leased.

Baird analyst David Rodgers said in an interview that with data center vacancy at an estimated 10% and construction running at about 10% of existing stock, data center owners likely will not be able to push rents significantly across much of the market.
"But as long as demand continues to be near double digits as well, you would think you would see pretty good balance in the industry, with development returns that are arguably still relatively attractive when you look at other things you can do across the real estate landscape," he said.
Data center developers, in particular the REITs, are currently building centers at scale and in a more disciplined fashion compared to the data center building boom of the late 1990s and early 2000s, Pat Lynch, senior managing director for CBRE, said.
"Someone may have announced a million square feet of data center space in a particular market; they're not building a million square feet," Lynch said. "They're building the potential with power and cooling to get to that scale, they're building in [50,000-] or 100,000-square-foot increments."
The new data centers built by the REITs are also of higher quality compared to data centers built by corporate enterprise users a decade ago, that were in some cases three times more expensive, Lynch said.
"The industry has adopted a lot of the discipline the real estate world has had for years, and I think that's been one of several reasons it has done so well," he added.
