U.S. DATA CENTER TRENDS REPORT H1 2018 · GTT’s fibernetwork footprint. 2. Iron Mountain’s acquisition of IO Data Centers for $1.3 $ Millionsbillion. The transaction included

Surging demand from large cloud users driving record absorption

U.S. DATA CENTER TRENDS REPORT H1 2018

CBRE Research` © 2018 CBRE, Inc. | 2


Contents

03 MarketFundamentals

07 CapitalInvestment

09 ThingstoWatch

11 PrimaryMarkets

14 SecondaryMarkets

16 Appendix

Executive SummaryDemandfromhyperscalecloudusersledtomorethan177megawatts(MW)ofnetabsorptioninthefirsthalfof2018.

Withnearlytwo-thirdsofthe2017netabsorption(anannualrecord)alreadyrecordedinH12018,themarketisonpaceforanotherrecordyear.

Stronginvestorinterestinthedatacentersectorcontinued,withmorethan$7billionofinvestmentinH12018,47%ofwhichwasinasset-leveltransactions.

DevelopmentpipelinesinlargeprimarymarketslikeNorthernVirginiaandSiliconValleyarerapidlybeingpreleasedtomeetthespeed-to-marketrequirementsofoccupiers.

NationalpricingtrendsdidnotkeeppacewithstrongmarketfundamentalsinH1,ascloudusersdemandedlowerpricesforthelargewholesalecolocationcapacitytransactionstheyrequire.



CBRE Research

TheNorthAmericanwholesaledatacentermarketcontinueditssubstantialgrowthofrecentyearsinH12018.Despitethedeliveryofnewsupply,positivenetabsorptionresultedfromstrongdemandfromhyperscalecloudusersfordeploymentsofteninexcessof3MW.InNorthernVirginia—theworld’slargestdatacentermarket—65%ofnetabsorptioncamefromhyperscalecloudusers.ThesevenprimaryU.S.datacentermarkets—Atlanta,Chicago,Dallas/Ft.Worth,NewYorkTri-State,NorthernVirginia,PhoenixandSiliconValley—recordedmorethan177MWofpositivenetabsorptioninH1.Withnearlytwo-thirdsoftheannualrecordabsorptiontotalin2017alreadyrecordedinH12018,themarketisonpaceforanotherrecordyear.

Market Fundamentals

*Vacancy Y-o-Y changes are calculated by comparing the difference between H1 2017 and H1 2018.**Rental rates are quoted asking rates for 250+ kW at N+1/Tier III requirements. Source: CBRE Research, CBRE Data Center Solutions, H1 2018.

Market InventoryY-o-Y

ChangeAvailable MW/ Vacancy Rate

Y-o-Y Change*

Net Absorption

Rental Rates (kW/mo)**

Northern Virginia 805.8 MW p 198.0 MW 53.3 MW / 6.6% p 80 bps 100.0 MW $120-$140

Phoenix 212.9 MW p 46.0 MW 25.8 MW / 12.1% p 320 bps 32.5 MW $120-$135

Dallas/Ft. Worth 267.8 MW p 33.4 MW 51.3 MW / 19.2% p 40 bps 19.1 MW $120-$140

Silicon Valley 234.6 MW p 40.0 MW 11.4 MW / 4.9% q 50 bps 10.6 MW $150-$170

Chicago 245.0 MW p 56.6 MW 27.6 MW / 11.2% p 870 bps 9.4 MW $130-$145

Atlanta 131.0 MW p 6.0 MW 19.2 MW / 14.7% u 0 bps 3.0 MW $120-$135

New York Tri-State 157.3 MW p 2.1 MW 22.4 MW / 14.2% q 400 bps 2.5 MW $130-$150

Figure 1: Primary Market Fundamentals

Figure 2: H1 2018 Wholesale Secondary Market Fundamentals

*Vacancy Y-o-Y changes are calculated by comparing the difference between H1 2017 and H1 2018.**Rental rates are quoted asking rates for 250+ kW at N+1/Tier III requirements. Source: CBRE Research, CBRE Data Center Solutions, H1 2018.

Market InventoryY-o-Y


Y-o-Y Change*

Net Absorption

Rental Rates (kW/mo)**

Austin/San Antonio 124.1 MW p 9.0 MW 10.1 MW / 8.1% q 130 bps 9.8 MW $140- $155

Seattle 95.5 MW p 2.0 MW 12.8 MW / 13.4% q 470 bps 6.1 MW $125-$150

Southern California 104.4 MW p 16.0 MW 19.6 MW / 18.8% p 250 bps 5.2 MW $130-$160

Denver 92.6 MW p 4.4 MW 21.7 MW / 23.4% p 70 bps 1.8 MW $130-$150

Houston 97.1 MW p 0.4 MW 22.0 MW / 22.7% q 230 bps 1.1 MW $140-$165

Charlotte/Raleigh 55.6 MW p 4.7 MW 14.1 MW / 25.3% p 300 bps -2.9 MW $130- $145



CBRE Research

Demandintheprimarymarketswasalsofueledbyenterprisedeploymentsrangingfrom250KWto500KW.LargerexpansionsandanincreaseinsmallerwholesaledeploymentsledtoactivityabovehistoricalaveragesinsecondarymarketssuchasAustin/SanAntonio,HoustonandSeattle.

Strongdemandfromdatacenterprovidersresultedinmorethan474MWofcapacityunderdevelopmentwithinU.S.primarymarketsinH1,nearly55%ofwhichispreleased.AlargeportionofthispreleasingactivitywasbyhyperscalecloudusersinNorthernVirginia.

Similartohyperscaleusers,enterpriseend-users’needforrapiddeploymentsremainedacrucialfactorforsite-selectiondecisions,withafocusonreadilyavailableturnkeydatacenterspace.Furthermore,manyenterpriseendusers’businessstrategiesinvolvedstrategicinfrastructuredeploymentsandconsolidationoftheirowned-portfolios.InsecondarymarketslikeSeattle,theincreaseddemandstemmingfromexpansionsandnewentrantsledtoannouncementsoffuturedevelopmentprojects.

Figure 3: Inventory Growth of Primary Data Center Markets Since 2015% Growth

*Tri-State Region; Source: CBRE Research, CBRE Data Center Solutions, H1 2018.

0%

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Figure 4: Primary Markets - Net Absorption & Pre-Leasing

Source: CBRE Research, CBRE Data Center Solutions, H1 2018.

Net Absorption (MW) Pre-leased (MW)Megawatts

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Figure 5: Net Absorption vs. Under Construction by Primary Market

*Tri-State; Source: CBRE Research, CBRE Data Center Solutions, H1 2018.

H1 2018 Net Absorption (MW) H1 2018 Under Construction (MW)Megawatts

Figure 6: Net Absorption vs. Under Construction by Secondary MarketH1 2018 Net Absorption (MW) H1 2018 Under Construction (MW)Megawatts


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Regardlessoftheusertype,vacancyratesforcommissioneddatacenterspaceinmostmarketsslightlyincreased,asdeveloperscontinuedtodeliverlargeblocksofcapacity.Forthefirsttime,theSiliconValleyvacancyratefellbelow5%,asfirst-generationavailablecapacityremainedscarce.Thesetightmarketconditionshaveforcedoccupierstoexpandintootherprimaryandsecondarymarkets.

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Figure 7: Construction Pipeline by Primary Market – Available & Pre-Leased Supply Under Construction

*Tri-State; Source: CBRE Research, CBRE Data Center Solutions, H1 2018.

H1 2018 Pre-Leased H1 2018 U/C AvailableMegawatts

Phoenix,withrecordlevelsofconstruction,isarecipientofthisexpansionbaseddemand.Landtransactionscompletedafewquartersagohaveledtonewprovidersandexpansionswithinthemarket.Tomatchthedemand,morethan60MWarecurrentlyunderconstructioninPhoenix,withmorethan120MWannouncedforfuturebuildout.

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CBRE Research

NorthAmericandatacenterinvestmentvolumereached$7billioninH1,inclusiveofsingle-asset,portfolioandentity-leveltransactions.Thislevelofinvestmentisonlyatnearly35%of2017’srecord-settingtotalvolumedrivenbylargeentity-leveltransactions.InvestmentvolumeinH1wasbalancedbetweentransactiontypes,asopposedto2017’sentity-levelheavyvolume.Thefor-saleinventoryiscompetitiveandincludesreadilyavailablecorporateassetstradingforcapitalizationratesrangingfrom5.5%to7.5%forstabilizedassets.

The three largest transactions in H1 2018 were:

1. GTTCommunications’acquisitionofInterouteandits15datacenters,17virtualdatacentersand51colocationfacilitiesfor$2.3billion.TheacquisitionprovidesasignificantincreaseinGTT’sfibernetworkfootprint.

2. IronMountain’sacquisitionofIODataCentersfor$1.3billion.ThetransactionincludedthelandandbuildingsoffourdatacentersintheU.S.andwilladdmorethan700,000sq.ft.ofcapacitytoIronMountain’sportfolio.

3. Equinix’sacquisitionoftheInfomartDataCenterfacilityinDallasfor$800million.Thiswasthelargestsingle-assettransactioninH12018.InfomartisasignificantinterconnectionhubintheU.SandprovidesEquinixwithadditionalcapacityfortheirofferings.

Singleandportfolioasset-levelsalescontinuedtogarneralargershareoftotalNorthAmericaninvestmentvolume,accountingfor48%ofthetotalinH1comparedto27%oftotalvolumeinallof2017.Significantasset-leveltransactionsincluded:

• Mapletree’sacquisitionof14datacentersfromCarterValidusfor$750million.Theportfolioisfocusedonlongerleaseswithestablishedtenants,spansninestatesandaddsmorethan2.0millionsq.ft.toMapletree’smanagement.

Capital InvestmentFigure 8: North American Investment


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Transaction Type Buyer Seller Sale Price (M)* Buyer Type Location

Entity GTT Communications Interoute $2,300.0 Occupier/Operator North America

Entity Iron Mountain IO Data Centers $1,315.0 Occupier/Operator North America

Asset Equinix (REIT) ASB Real Estate, DCI Technology Holdings $800.0 Occupier/Operator North America

Entity Equinix (REIT) Ontario Teachers' $792.0 Occupier/Operator APAC

Asset Mapletree Carter Validus $750.0 Investment North America

Asset IPI Data Center Partners Management ASB Real Estate Undisclosed Occupier/Operator North America

Asset Ensono Wipro $405.0 Occupier/Operator North America

Asset Keppel DC REIT Kingsland Development, Nylect Holdings $295.0 Occupier/Operator APAC

Asset Iron Mountain Evoswitch $235.0 Occupier/Operator EMEA

Entity InfraVia Green Data Centers $217.0 Occupier/Operator EMEA

Asset NextDC APDC $212.0 Occupier/Operator APAC

Managed Services Internap SingleHop $132.0 Occupier/Operator North America

Asset CBRE Global Investors Duke Realty $109.9 Occupier/Operator North America

*MillionsNote: includes closed deals over $100 million. Source: CBRE Research, CBRE Data Center Solutions, H1 2018.

Figure 10: H1 2018 Largest Global Transactions

• Ensono’sacquisitionofWipro’shosteddatacenterbusinessfor$405million,whichincludeseightdatacentersandmorethan900employees.

ManagedservicescontinuedtotradeinH1.Forexample,InternapboughtSingleHopfor$132milliontostrengthenitsmanagedhostingandprivatecloudofferings.Futuremanaged-serviceconsolidationsareexpectedascompaniesseekadditionalstrategicacquisitionstobolstertheproductstheycanprovidetotheircustomers.

While2018investmentvolumemaynotexceedtherecordvolumeof2017,theinvestmentmarketisexpectedtoproducestrongresultsdrivenbythefollowing:

• Sale-leaseback/partial-leasebackfromenterpriseusers.

• Hyperscaleuserslookingfordevelopmentpartnersandcreativewaystodeliverlow-costturnkeycapacity.

• Continuedinfluxofnewinvestorsinthedatacenterspace.



CBRE Research

Things to Watch

• Howwilltheappetiteforturnkeydatacenterspacecontinuewithtechnologicaladvances,including“bigdata,”edgecomputing,5GandtheInternetofThings(IoT)?

• Willhyperscalecloudactivityleadtoanotheryearofrecord-breakingabsorption?

• Willrelativelyhighlevelsofpreleasingleadtomorespeculativedevelopment?

• Willproviderscontinuetodeliversupplyinmarketstomatchdemandorwillactivecapacityrequirementsseeknewmarketopportunities?

• Whatwillbetheimpactofnewprovidersonmarketdynamics?

• WillthevolumeofenterprisedatacentersalesincreaseasmorecompaniesadoptaHybridITdeploymentstrategy?

• Willtherebeadditionalproviderconsolidationthroughmergersandacquisitions,whichhavehistoricallyaccountedformuchoftheannualinvestmentvolume?

• Areinvestorsstillattractedtofor-saleassetsthatneedupgrading?

TheEvolutionofDemand

CapitalInvestment



Market Profile

Denver

Mature/Primary Emerging/SecondaryDeveloping/Tertiary

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Moderate

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Northern Virginia

Atlanta

Seattle

Phoenix

Chicago

Dallas/Fort Worth

Silicon Valley

Southern California

Austin/San Antonio

New York Tri-State

Houston

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Northern Virginia

Phoenix

Silicon Valley

Southern New York Tri-State

Dallas/Ft. Worth

Atlanta


Market Growth

Figure 11: Data Center Market Cycle: Primary U.S. Markets


Figure 12: Data Center Market Maturity

*The Data Center Market Cycle Graph reflects the current wholesale market conditions, taking into consideration the following variables:

• Demand (leasing, absorption, requirements in the market)

• Supply (existing vacancy, future availabilities, construction pipeline)

• Rental rate trend

Distance from the horizontal market equilibrium line generally implies the relative strength and/or weakness of a market relative to each other and their historical trends. Arrows indicate most recent trend.

Categories typically represent the following conditions:

Expansion: landlord/provider-favorable conditions; under-supplied market, strong demand, declining vacancy and upward pressure on pricing

Balanced/Growth: landlord/provider-favorable conditions; new supply more evenly balanced, stable or slightly increasing vacancy, rent growth slowing or flat

Contraction: tenant-favorable conditions; over-supplied market, increasing vacancy, weak demand, downward pressure on pricing

Recovery: tenant-favorable conditions; stable or slightly declining vacancy, moderate but improved demand, rent growth flat or increasing

Demand: A Tale of Two Segments



Primary Market Insights

Atlanta’sdatacentermarketispositionedforgrowth,withanall-time-record21MWcurrentlyunderdevelopment.ExpansionsbySwitch,CyrusOne,zColo,T5andDatabankwillbringnewcapacitytothemarketinthecomingquarters.Morethan$5billionoffutureinvestmenthasbeenannouncedbymulti-tenantdatacenterprovidersandhyperscalecloudproviders.ThisincludesT5’s$100millionATLIIAtlantafacility.

Overall,thelimitedlargeblocksofavailabilityledtothecompletionofsmallertransactionsinthefirsthalfof2018.Upondeliveryofcapacityinthenextsixto18months,hyperscaleandenterpriseuserswith

activerequirementswillhavemoreoptionstofindavailabilityforadditionaldeployments.

Manyfactors,includingnationallycompetitiveincentives,cost-effectivelandandrelativelylowoperatingcosts,willcontinuetogrowdemandintheAtlantamarket.Noteworthychangestotax-incentivepolicyoccurredin2018,asthestateofGeorgiarolledoutnewlegislationtoaidinattractingdatacenterdevelopmentsofmorethan$250millionthroughreducedsalestaxondatacenterequipment.ThisspecificlegislativechangeisdesignedtohelpAtlantacompetefordatacenterbusinessbothregionallyandnationally.

Atlanta Net Absorption* 65.6%

Vacancy Rate* 14.7%

DeliveryofnewsupplyinChicagowelloutplaceddemandinH12018,asthevacancyrateincreasedbynearly9percentagepointsfromayearago.Forthefirsttimeinmultiplequarters,themarketfeaturedseveralimmediatelyavailablelarge,contiguousblocksofcommissionedcapacity.Whilethenewsupplyhasyettobeabsorbed,interestisnotlacking.Theinteresthasledtonew

providersenteringorplanningtoenterthemarket(RagingWire,Stream,CoreSiteandCloudHQ)andexpansionsbyexistingproviders(ServerFarmandT5).AsofQ22018,morethan140MWofnewcapacityisplannedinChicago.Allthingsconsidered,Chicagoremainsgeographicallyanddemographicallywell-positionedtocapturefuturedemandfrombothenterpriseandhyperscaleusers.

Chicago Net Absorption* 123.8%

Vacancy Rate* 11.2%

*Arrows indicate change from H1 2017 to H1 2018.



Dallas/Ft.Worthbegan2018withstrongleasingactivityfromtheenterprisesector,withapproximately25%comingfromnationalhyperscaleuserstaking1MWto4MWblocks.TheabsorptionwasdiversifiedacrossCyrusOne,Aligned,QTS,DigitalRealty,DataBankandRagingWirefacilities.ProvidersincludingDigitalRealtyandQTSaddedsupplytotalingmorethan20MWinH1tocapturesomeofthehighestdemandforwholesalecapacityinthecountry.

Dallashasbecomeoneofthefewdatacentermarketsintheworldtoprovidenumerouscontiguousavailabilitiesandoptionsforfutureon-siteexpansions.Thus,itiswell-positionedfor

largerhyperscaledeploymentscomparedtomanyothernationalmarketsthathavesub-8%vacancyrates.RecentlycompleteddevelopmentsincludeDataBank’sPlanocampusandCyrusOne’sAllencampus.NewdevelopmentsfromStream,QTSandEdgeCorewillbreakgroundthisyear.

Equinix’s$800millionacquisitionoftheInfomartDataCenterfacilityfromDCITechnologyHoldingsandASBRealEstatemarkedthelargestNorthAmericansingle-assetdatacentertransactioninH12018.Thepropertytradedfornearly$500persq.ft.andprovidesEquinixwithinterconnectionaccessunlikeanyproviderintheregion.

Dallas/Ft.Worth Net Absorption* 42.8%

Vacancy Rate* 19.2%

TheNewYorkTri-StatedatacentermarketremainedsteadyinH12018.Positivemomentumfromleasingactivitybroughtconstructionactivityto16.5MW,ledbyIronMountain,DigitalRealtyandQTS.Morethan23%ofthisunder-constructioncapacityispreleased—thehighestlevelofpreleasinginthreeyears.Additionalabsorptionshouldcomefromexistingrequirementsforin-marketexpansions,primarilyfromfinancialandhealth-carecompanies.

Traditionallydrivenbyretailcolocationactivity,theNewYorkTri-StatemarketcapturedbothsmallerwholesaleandretaildeploymentsinH1.Amideconomicandfinancialconstraints,providerscontinuetodiversifyofferingstoattractprimarilyretailwithsmallerwholesalecolocationdeployments.

NewYorkTri-State Net Absorption* 16.7%

Vacancy Rate* 14.2%

TheNorthernVirginiadatacentermarkethadthestrongeststartofanyU.Sdatacentermarketwithnetabsorptionof100MW.MoreabsorptionoccurredinNorthernVirginiainH1thaninalltheotherprimarymarketscombined.Despiteseveralnewlarge-scaledeliveries,therecorddemandhasresultedinlimitedlargeblocksofavailabilityandkeptthevacancyratetoatight6.6%.Newprojectstotaling297MWincapacityfromprovidersincludingCloudHQ,CyrusOne,DigitalRealty,VantageDataCenters,SentinelDataCenters,Sabey

DataCentersandQTSarealready79%preleased.Projectswithanother280MWofcapacityareplannedforthesecondhalfoftheyear.

Colocationdemandisforcinglocalgovernmentstocarefullyconsiderlegislationthatcouldaffectnewconstructionandgrowth.InPrinceWilliamCounty,theboardofsupervisorsrejectedlegislationthatwouldhaveraisedthetaxratefordatacenterequipment.

NorthernVirginia Net Absorption* 141%

Vacancy Rate* 6.6%




Phoenixrecorded32.5MWofpositivenetabsorptioninH1,makingitoneofthemostactivedatacentermarketsinthecountry.Wholesaleprovidersexpandedacrossthemarket,addingmorethan46MWofnewsupply.Withtheseadditions,thewholesalevacancyraterose320bpsto12.1%.Constructionactivitytotalledmorethan60MWofcapacity—thesecond-largestamountofallprimarymarkets.ExpansionsandnewfacilitiesareunderwaybyproviderssuchasCyrusOne,AlignedDataCenters,IronMountainandEdgeCore.

Withagrowingconstructionpipeline,Phoenixhasthepotentialforfuturegrowth.Therearenumerousmulti-megawattrequirementsduetoPhoenix’sstatusasanattractivemarketforWestCoastandnationalexpansion.Strongincentiveprogramsandloweroperatingcostsshouldcontinuetoattracthyperscaleandenterpriseusers.

Phoenix Net Absorption* 802.8%

Vacancy Rate*12.1%

SiliconValleyremainedthemostsupply-constrainedmarketintheU.S.,withasub-5%vacancyrateforthefirsttimesinceCBREbegantrackingthedatacenterindustryin2013.Thevacancyratehasdropped50bpssincethebeginningof2017,asfirst-generationwholesalecapacityisinextremedemand.NetabsorptioninH12018primarilyoccurredinCoreSite’snewSV7facilityduetolimitedavailabilityinotherfacilities.Someproviders,includingEquinix,areattemptingtocapturewholesalecapacityinthemarket,astheyhavecommitmentsfrommultipletechnology-focusedcompanies.

Newsupplytotaling29.5MWincapacityiscurrentlyunderwaybydevelopers,includingVantageDataCenters,CoreSiteandDigitalRealty.Additionalsupplyisexpectedfromnewentrantstothemarket,includingRagingWire.Demandhasledtopreleasinglevelsof45.1%ofnewcapacity.Wholesaledemandisexpectedtomatchpreviousyears’levels,asnewcapacitycomesonlineoverthenextsixto18months.

SiliconValley Net Absorption* 67.9%

Vacancy Rate* 4.9%




Secondary Market Insights

• Demandremainsstable,withactivityprimarilyinDataFoundry,CyrusOneandDigitalRealtyfacilities.

• ConstructionactivityisprimarilybyDigitalRealtyandDataFoundry.

• Enterpriseusershaveaccountedformuchof2018’sleasingactivity.Mostdealsareretailcolocation,withlargerdealsaveraging250KW.

• Muchofthemarketdemandisfromlargehyperscaleusersofferingamixtureofinternetcloudexchanges.

Austin/SanAntonio Net Absorption* 68.8%

Vacancy Rate* 8.1%

• Fundamentalshaveflattenedoverthepastfewquarters.Providersinthisemergingmarketareablendofsingle-tenantdatacentersandsmallerretailandwholesalecolocationfacilities.

• Activityisfromsmallerdeployments,average250KW,focusedongeographicaccess.

• Enterpriseusersareprimarilyinthefinancialandtechnologyindustries.

• TierpointandFlexentialwerethemostactiveprovidersinH12018.

• Whilethecurrentvacancyrateseemselevated,itrepresentsonly14.1MWofavailablecapacity.

• TheCharlotte-Raleighmarketisamongthefewinthenationwithcost-effectivelandavailableforadditionaldevelopment,aswellaslow-costpower.Thiscombinationbodeswellforfuturedemand.

Charlotte/Raleigh Net Absorption* 221.2%

Vacancy Rate* 25.3%

• H1absorptionlevelsmatchedhistoricalannualaverages,asprimarilyretailcolocationdealswerecompleted.

• Wholesaleoccupiersprimarilycamefromthehealth-careandtechnologyindustries.

• Constructionactivitytotallednearly12MW,withprojectsunderwaybyEdgeConnex,CoreSite,FlexentialandZayo.PlannedannouncementsincludeonefromIronMountain.

Denver Net Absorption* 55%

Vacancy Rate*23.4%





• AbsorptioninH12018wasmorethandoublethatofanyprevioushalfyear.

• Requirementsgreaterthan500KWcameprimarilyfromexpansionsbyhyperscalecloudprovidersandglobaltechnologycompanies.

• DigitalRealtyandSabeyDataCentershave2.5MWofcapacityunderconstruction.

Seattle Net Absorption* 177.3%

Vacancy Rate* 13.4%

• CoreSiterenewedits160,000-sq.-ft.leaseatOneWilshireandaddedanother17,000sq.ft.TherenewalextendedoptionsatCoresite’sLA1facilitythrough2044.

• CoreSitecommencedconstructionofa28,000sq.ft.turnkeydatacenteratLA2,whichis100%preleased.LA2nowisnearcapacity,andthecompanyhasplansforanLA3developmentthatwilldeliver18MWofcapacityin2019.

• Leasingactivityinthemarketwasprimarilyledbytechnology,entertainmentandhealth-carecompanies.

SouthernCalifornia Net Absorption* 173.7%

Vacancy Rate* 18.8%

• Houstonhadarelativelyslowstarttotheyear,asnewdevelopmentstalled.

• Primarilydependentontheoil&gassector,Houstonhasnewdemandfromhealth-care,transportationandcryptocurrencyoccupiers.

• CyrusOneremainsthelargestdatacenterproviderinthemarketwithmorethan48%oftheexistinginventory.

• DataFoundrycurrentlyhasalargeblockofavailablecapacity.

Houston Net Absorption* 257.1%

Vacancy Rate* 22.7%


H1 2018U.S. DATA CENTER TRENDS APPENDIX

Figure 13: Market Definitions

Term Definition

Powered Shells Purpose built or hardened shell; Power and Fiber to site; no equipment included.

Hyperscale Cloud Service Provider Multi-megawatt user, typically 5+ MW and larger.

Wholesale Colocation Building shell & infrastructure to PDU providing space, power & cooling; Generally in demised suites above 250 KW.

Retail Colocation Building shell & infrastructure in shared environment, space generally divided by racks or cages; may include IT hardware as well as a menu of services.

Hybrid IT A combination of cloud services, third-party colocation and owned, on-premise infrastructures.

Enterprise Data Centers Hardened data centers; houses "mission critical" operations of individual companies.

Data Center Net Absorption Net change in existing/commissioned wholesale power capacity.

Data Center Power Measured in kilowatts (kW) and megawatts (MW).

Appendix

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

Pat Lynch Senior Managing Director Data Center Solutions [email protected]

Michael Kane Senior Research Analyst Data Center Solutions [email protected]

Spencer G. LevyHead of Research and Senior Economic Advisor, [email protected]:@SpencerGLevy

TolearnmoreaboutCBREResearch,ortoaccessadditionalresearchreports,pleasevisittheGlobalResearchGatewayatwww.cbre.com/researchgateway.

AdditionalU.S.ResearchfromCBREcanbefoundhere.

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Hybrid IT Solutions Continue to Bring Opportunity to the Data Center Industry



Contents

05 Somewhere Up There: The Cloud

06 IT and Real Estate: A Vital Convergence

07 Pricing Paradox

08 Capital Investment

12 Market Overviews Atlanta Chicago Dallas/Ft. Worth New York Tri-State Region Northern Virginia Phoenix Silicon Valley

16 Appendix



CBRE Research

Executive Summary

• Providersdeliveringspeculativedatacentercapacityarepacingdeliveriestomatchuserdemandandabsorptiontrends.

• NorthAmericandatacenterinvestmentvolumetotaledmorethan$20billionin2017,asprovidersandusersmonetizedcertainassetsandmigratedtohybridITenvironments.

• Heighteneddemandfrommulti-megawatthyperscalecloudusersledtorecordannualwholesalepositivenetabsorptionin2017.

• Pricingmodelshavebecomemoreuser-centric,drivenbythecombinationoftraditionalrealestateandhybridITneeds.



CBRE Research

TheNorthAmericanwholesaledatacentermarketcontinuestothrive,evidencedbythreeconsecutiveyearsofmorethan190megawatts(MW)ofpositivenetabsorptionandelevatedlevelsofnewsupplyinsevenmajorU.S.datacentermarkets.

*Rental rates are quoted asking rates for 250+ kW at N+1/Tier III requirements.Source: CBRE Research, CBRE Data Center Solutions, H2 2017.

Figure 1: 2017 Wholesale Market Fundamentals

Market Inventory Y-o-Y


Y-o-YChange

2017Net Absorption

Rental Rates (kW/mo)*

Northern Virginia 692 MW 137 MW 39.9 MW / 5.8% 140 bps 121.4 MW $120-$150

Silicon Valley 224 MW 63 MW 11.5 MW / 5.1% 140 bps 61.5 MW $150-$170

Dallas/Ft. Worth 252 MW 54 MW 50.2 MW / 19.9% 90 bps 36.2 MW $120-$145

Chicago 230 MW 43 MW 20.0 MW / 8.7% 440 bps 31.0 MW $130-$145

New York Tri-State Region 156 MW 3 MW 23.8 MW / 15.2 % 410 bps 7.4 MW $130-$150

Phoenix 169 MW 14 MW 12.4 MW / 7.3% 430 bps 6.3 MW $120-$135

Atlanta 117 MW - MW 8.8 MW / 7.5% 310 bps 3.8 MW $120-$135

Southern California 95 MW 8 MW 15.8 MW / 16.6% 60 bps 8.4 MW $130-$160

Boston 63.4 MW 4 MW 15.6 MW / 24.6% 90 bps 3.8 MW $150-$180

Seattle 106 MW 2 MW 19.9 MW / 18.8% 50 bps 3.3 MW $125-$150

Source: CBRE Research, H2 2017.

Figure 2: Primary Markets - Net Absorption & Pre-Leasing

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2015 2016 2017 2018Pre-Leased

MegaWatts

AccordingtotheCiscoGlobalCloudIndex,datacenterprovidersandusersarestrategizingtocapitalizeontheestimatedthreefoldincreasesinannualglobaldatacenterIPtrafficoverthenextfiveyears,whichisprojectedatacompoundannualgrowthrate(CAGR)of25%from2016to2021.



CBRE Research

Companiesareincreasinglyturningtothecloudforagrowingpercentageoftheircomputingneeds.Industryexpectationsarethatby2020,cloudrevenueswillrangefrom$50billionto$60billion—a50%to60%increasefrom2017revenues.

DemanddriversinH22017betweentraditionalenterpriseend-usersandhyperscalecloudprovidersvariedastheyacclimatedtotherapidevolutionofthemarketplace.Enterpriseend-users(e.g.,financialservices,healthcare,retailindustryverticals,etc.)continuedanenduringgrowthpatternastheypivotedfromownershiptowardscalabledeploymentswhereITcapacityismigratedtothecloudandthird-partysolutions.Large-scaledatacenteroperatorsremainwellpositionedforhyperscaleuserdeploymentsastheystriveforfacilityflexibilitybyinstitutinghybridinfrastructuredesigns.End-usersacrosstheindustryapproachedthemarketwithincreasedsophisticationfocusedonhybridITenvironments,speedtomarketandfuture-proofingflexibility.

Somewhere Up There: The Cloud

Why?

How?



AcceleratingdataneedsfromprovidersandelevatedenterpriseITspendingtrendsaredrivingpublicandprivategrowth,astraditionalenterprisesmovetowardhybridcloudarchitectures.

Asthedatacentermarketmatures,successdependsonhowwellITplatformsintegratewithrealestateneeds.Thissymbioticrelationshiphasmanifesteditselfinvariousforms,fromupgradingon-premisearchitectureandphysicalfacilitiestocapitalpartnerships/investmentinmorethan15keyacquisitionsin2017.Thissuccessfulcoordinationenableddatacenterproviderstorapidlyrolloutnewservices(e.g.,network/connectivityofferings,private/publiccloudoptions)toattractnewusersandexpansionsbyexistingusers.

IT and Real Estate: A Vital Convergence

Why?

How?



Thetechnologicaladvances,introductionofnewservicesfromprovidersandincreasedinterestfromtheinvestmentcommunitycreateduncertaintyforpricingmodelsregardingservices,spaceandpowerrequirements.

Traditionalrealestatepricingstabilizedoverthepastthreeyears,averaging$125to$145perkilowattpermonth(modifiedgross)acrossprimaryandsecondarymarkets.Thepricingvariancewillremainmoredependentuponuserneeds,suchasredundancy,ITrequirementsandaccesstocloudon-ramps,alongwithtenantprofile(i.e.,tenanttypeandcredit)andgeographicalcosts(i.e.,taxes,incentivesandpowercosts).Slightnear-termincreasesinpricingareexpected,asprovidersbuildoutserviceofferingsthatmeshtherealestateandtechnologyneedsoftheusers.

Pricing Paradox

Why?

How?



Overallinvestmentactivityin2017washeavilyweightedbyseverallargeentity-leveltransactions:

• DigitalRealtyacquiredDuPontFabrosandits12assets,includingsitesinNorthernVirginia,ChicagoandSiliconValley,forapproximately$7.6billion.DigitalRealtywillusethisacquisitiontoexpanditshyperscaleandenterpriseproductofferings.

• BCPartners/MedinaCapital/CyxteraTechnologiespurchasedCenturyLink’sdatacenterportfolioof57assetsfor$2.3billion.Theportfoliototalsmorethan195MWofpoweracross2.6millionsq.ft.ofraisedfloor.

• GIPartners/Peak10purchasedViaWestandformedFlexentialfornearly$1.7billion.The24assetsincludedinthedealwillpositionthecompanyasanationalproviderofhybridITsolutions.

Capital Investment

Consolidationandrepositioningledtoastaggeringinvestmentvolumetotalingmorethan$20billionofsingle-asset,portfolioandentity-levelsalesinNorthAmericalastyear.Thistotalexceedsthetotaltransac-tionvolumeofthepreviousthreeyearscombined.


Figure 3: North American Investment

0

5,000

10,000

15,000

20,000

25,000

2011 2012 2013 2014 2015 2016 2017

$ (millions)



Note: includes closed deals over $100 million.Source: CBRE Research, H2 2017.

Figure 4a: 2017 Largest Completed North American Transactions

Date Transaction Type Buyer SellerSale Price

($ Millions)Buyer Type

Jun Entity-level Digital Realty DuPont Fabros $7,600 Occupier/Operator

Sep Managed Services Rackspace Datapipe $4,300 Occupier/Operator

May Asset Equinix Verizon $3,600 Occupier/Operator

Apr Entity-level BC Partners/Medina Capital/Cyxtera CenturyLink $2,300 Investment

Jun Entity-level Peak10 ViaWest $1,675 Occupier/Operator

Feb Entity-level Stonepeak Cologix $1,250 Investment

Jun Entity-level Digital Bridge Vantage Data Centers $1,200 Occupier/Operator

Feb Entity-level CyrusOne Sentinel $490 Occupier/Operator

Aug Managed Services Cisco Springpath $320 Occupier/Operator

Oct Asset Digital Realty Carter Validus $315 Occupier/Operator

Jan Asset GI Partners Hines $276 Investment

Jun Asset Carter Validus Cousins Properties $166 Investment

Jul Asset Iron Mountain Forttrust $128 Occupier/Operator

Jan Asset JDM Partners State Farm Insurance $125 Investment

Note: includes deals over $100 million. Source: CBRE Research, H2 2017.

Figure 4b: 2018 Announced Global Transactions

Transaction Type Buyer SellerSale Price

($ Millions)

Entity-level Iron Mountain IO $1,300

Asset-Level Equinix Infomart $800

Entity-level Equinix Ontario Teachers Pension Fund $792

Entity-level MapleTree Carter Validus $750

Asset-Level CyrusOne Zenium $440

Entity-level InfraVia Green Data Centers $216

Entity-level Internap Singlehop $132



Asset-leveltransactionsrepresentednearly22%oftotalNorthAmericadatacenterinvestmentvolumelastyear.Investorinterestgrewrapidly,asasset-levelvolumewasgreaterthantheaggregatetrailingthree-yeartotal.Noteworthyasset-leveltransactionsincluded:

• Equinix’sacquisitionofa29-data-centerportfoliofromVerizonfor$3.6billion.Theportfoliospans15marketsandbringsEquinix’stotalglobalfootprinttomorethan175InternationalBusinessExchangedatacenters.

• DigitalRealty’spurchaseofCarterValidus’Northlake,ILfacilityfor$315million.

Capitalinvestmenttrendsin2017followedsuitwithbroadnationaltrendsinthedatacenter

space.FurtherdemonstratingtheconvergenceofITandrealestate,theneedforfutureflexibilityviahybridITsolutionsandcostoptimizationfromend-usersdrovedemandforsale-leasebackopportunities.Multiplesale-leasebacktransactionsareslatedtoclosein2018,withtheexpectationforadditionalfor-saleinventory.

Managedservice-basedtransactionssetrecordvolumein2017,asproviderssoughttoaddhybridserviceofferingstotheirorganizations.Forexample,Rackspaceextendeditsmanagedcloud(publicandprivate)marketsharebyacquiringDatapipefor$4.3million.Inadditiontocloudandmanagedhostingservices,thetransactiongaveRackspaceaphysicalpresenceincolocationfacilitiesontheU.S.WestCoastandinBrazil,ChinaandRussia.


Figure 5: Global Asset-Level Sales History

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2011 2012 2013 2014 2015 2016 2017

Asset Sales ($ millions)



Enterpriseusersseekright-sizingthroughevaluationofsaleandpartialleasebackopportunities.CBREexpectsmorethan$300millionintransactionvolumefromthesedealsin2018,ascorporateclientsleveragetheircurrentportfoliosandalignwiththeirfutureneedsthroughimplementationofhybridITsolutions.Overall,industryexpectationsarestrongfor2018andbeyondforinvestmentfromoperators,investorsandend-usersastheysearchforopportunitiestomaximizeefficiencies,enternewmarketsandutilizenewserviceofferings.

Entity Level59%

Asset Level22%

Managed Services19%


Figure 6: 2017 North American Investment Profile



Market Overviews


Figure 7: Net Absorption Vs. Under Construction by Market

4

31 36

121

6

62

714 17

42

86

2821 20

0

20

40

60

80

100

120

140

Atlanta Chicago Dallas/Ft. Worth Northern VA Phoenix Silicon Valley New York Tri-State

MegaWatts

2017 Net Absorption Q4 Under Construction


Figure 8: Construction Pipeline – Available & Pre-Leased Supply Under Construction

010

20

30

4050

60

7080

90

100

Q4 Pre-Leased Q4 U/C Available

SouthernCA

ChicagoDallas/Ft. Worth

Northern VA

Phoenix SiliconValley

New York Tri-State

Atlanta Seattle Boston

MegaWatts



Atlanta’sdatacentermarketcontinueditspositivemomentuminH22017,emergingasoneofthemoreactivemarketsforfuturedevelopmentannouncements.NetabsorptioninH22017totaledroughly2MW,bringingthevacancyrateto7.5%—thelowestleveleverrecordedforthemarketbyCBRE.Whiletheconstructionpipelineremainedat13.5MW,marketexpansionsfromentrantsincludingSwitch,CyrusOne,DigitalRealtyandDataSitewillpositivelyimpactmarketfundamentalsgoingforward.

Diversificationofthewholesaleproviderprofilewillhelpcatertoamorevarieduserbase,whichisadeparturefromtraditionalenterprisedemandtocloudandhyperscaleproviders.Thistraction,alongwithcost-effectivelandprices,competitiveincentivesandfavorableoperatingcosts,allowsthemarkettocompeteonaregionalandlocallevelwithprimaryandsecondarymarkets,respectively.

AtlantaChicagoremainsasupply-constrainedmarketwithavailabilityat20MW,althoughH22017absorptionreached26MW.Themostnotabledeliveryinthesecondhalfoftheyearwas9MWatCyrusOne’sAurorafacility.Whileavailabilityisabovehistoricalaverages,expectationsforquickabsorptioninearly2018arehighduetolimitedoptionsforcontiguouswholesalespace.

Providerspeed-to-marketremainsaconcern,asdemandcontinuestooutpacesupplywith16.6MWcurrentlyunderconstructionatDigitalRealty,T5DataCentersandQTSfacilities.

DigitalRealty’sacquisitionoftheCarterValidussiteat505N.RailroadAve.for$315millionmarkedthelargestNorthAmericansingle-assettransactionin2017.Thesamepropertytradedhandsfor$212millionin2012,representinga48.6%appreciationinsaleprice.

Chicago



Dallas/Ft.Worth(DFW)ended2017with36.2MWofpositivenetabsorption,ofwhich3MWoccurredduringH22017,makingitoneofthemostactivedatacentermarketsinthecountry.Wholesaleandretailcolocationprovidersexpandedacrossthemarket,addingmorethan50MWofnewsupply.Despitetheseadditions,thewholesalevacancyratefell90basispoints(bps)year-over-yearto19.9%.

DFWhasnotseenthesamelevelofhyperscaleclouddemandthatothermajormarketshaveseeninthepastyear,andthedemandpipelinehasbeenlargelydrivenbyenterpriseusers.Asaresult,severalmulti-MWdealsbypassedDFWin2017duetoalackofcontiguousspace.However,withtheuptickinconstructionactivity,CBREanticipatesthistrendwillchange.Atyear-end,approximately40MWofcapacitywasunderconstruction,withnotableprojectsfromDigitalRealty,CyrusOne,DataBank,Infomart,RagingWireandQTS.

AllianceParkinFt.Worthhasseenrobustenterpriseactivity,asoneoftheworld’slargestsocialmediacompanieshasgrownitscampustomorethan50MWandcontinuestoexpand.Hillwood,T5DataCentersandIconiqrecentlyannouncedapartnershipthatwillresultinmorethan400acresoffuturedatacenterdevelopmentatAlliancePark.

Dallas/Ft. Worth New York Tri-State Region TheNewYorkTri-Statedatacentermarketcontinueditspositivemomentum,asitsdemanddynamictransitionsfromprimarilyawholesalemarkettoaretail/wholesale-orientedmarket.Nearly5MWofpositiveabsorptioninH22017—almostmatchingthetotalforallof2016—representsthefavorableincreaseinmarketdemandforsmallerretailcolocationrequirements.Thiswelcomedchangeindemanddynamicisnotable,sincelimitedincentivesandhigherpowercostshavehistoricallybeenaheadwindtousersconsideringthemarket.Theconstructionpipelinecurrentlystandsat20MW,withmorethan17MWavailable.Expectationsareforanuptickinretailcolocationactivitywiththenewdevelopment.Providerswithahybridofferingwillcontinuetoremainhighlycompetitiveinthischangingmarket.Duetogeographicdiversityandpopulationdensity,theNewYorkTri-Statemarketcouldeffectivelyservice“edge”computingrequirementswithintheregion.



TheNorthernVirginiadatacentermarketremainedthemostactiveintheworld,withannualabsorptiontotaling121MWin2017,ofwhich80MWoccurredinH2.Providersracedtomeetthisdemand,with85MWofsupplydeliveredinthesecondhalfoftheyear.Constructionhascontinuedatthesamerateseenoverthepast12months,with20%ofthe86MWcurrentlyunderwayalreadypre-leased.RagingWire,IronMountain,QTS,Infomart,CyrusOne,DigitalRealty,SabeyandCoreSiteareslatedtodeliveradditionalsupplyin2018.Amidalltheactivity,tightmarketconditionsprevailed.Vacancyremainedat5.8%,withavailablecommissionedcapacityat39.9MW.

Northern Virginia PhoenixStrongleasingmomentuminthePhoenixdatacentermarketinH22017wasreflectedbypositivenetabsorptionofnearly3MW,althoughthistotaldoesn’treflectthenearly8MWofleasingactivityoverthesameperiod.Inadditiontoleasingactivity,morethan28MWofwholesalecapacitywasunderconstruction,withbuildoutsfromAlignedDataCenters,CyrusOneandDigitalRealty.

ArizonaremainedanattractivedestinationmarketforWestCoastexpansion.Itsdiversityinprovidersandmarkets,strongincentivesprogramsandloweroperatingcostsshouldcontinuetoattractusersin2018.

Silicon ValleyTheSiliconValleydatacentermarkethashistoricallybeenconstrainedbylimitedwholesaleinventory,yetscarcityoffirst-generationwholesaledatacenterspacebegantoalleviatewiththedeliveryof29.5MWofnewsupplyinH22017.Year-endvacancyof5.1%,down140bpsyear-over-

year,represented11.5MWofexistingavailablewholesalecapacity.

NetabsorptioninH22017totaled28.5MW,primarilyattributabletothedeliveryofDigitalRealty’sphase4facilityandVantageV6.Whileannualnetabsorptionsoaredoverhistoricalaverages,netnewleasingactivityrepresentedconsistentdemandlevelsgiventhelackofexistingsupply.

Capacityunderconstructiontotaled21MWatyear-end,with100%ofthatinventoryavailable.Rapidabsorptionofthisnewsupplyisexpected.Themarket’sdevelopmentpipelineshouldfacilitateadditionalwholesaleoptionsinthefuturethatwilllikelyseesimilardemandcharacteristics.




Figure 9: Data Center Market Cycle: U.S. Primary Markets

*The Data Center Market Cycle chart reflects the current wholesale market conditions, taking into consideration the following variables:

Demand (leasing, absorption, requirements in the market)Supply (existing vacancy, future availabilities, construction pipeline)Rental rate trend

Distance from the horizontal market equilibrium line generally implies the relative strength and/or weakness of a market relative to others and their historical trends. Arrows indicate most recent trend.

Categories typically represent the following conditions:

Expansion: landlord/provider-favorable conditions; under-supplied market, strong demand, declining vacancy and upward pressure on pricingBalanced/Growth: landlord/provider-favorable conditions; new supply more evenly balanced, stable or slightly increasing vacancy, rent growth slowing or flatContraction: tenant-favorable conditions; over-supplied market, increasing vacancy, weak demand, downward pressure on pricingRecovery: tenant-favorable conditions; stable or slightly declining vacancy, moderate but improved demand, rent growth flat or increasing

Appendix

RECOVERY CONTRACTION

EXPANSION BALANCED/GROWTH

LAN

DLO

RD F

AVO

RABL

E

TEN

AN

T FA

VORA

BLE

VACANCY UNDER SUPPLY RENT

VACANCY OVER SUPPLY RENT

MARKET EQUILIBRIUM

Southern

Silicon Valley

Northern Virginia

Phoenix

Chicago

New York Tri-State

Dallas/Ft. Worth

Atlanta



Mature/PrimaryEmerging/SecondaryDeveloping/Tertiary

Northern VADallas/Ft. Worth

Atlanta

Phoenix

Chicago Silicon Valley

Southern California

Seattle/Pacific NW

Boston

New York Tri-State

Mar

ket G

row

th

Market Profile

HIGH

MODERATE

LOW


Figure 10: Data Center Market Maturity

POWERED SHELLS

Purpose built or hardened shell; power and fiber to site; no equipment included.

HYPERSCALE CLOUD SERVICE PROVIDER

Multi-megawatt user, typically 5+ MW and larger.

WHOLESALE COLOCATION

Building shell & infrastructure to PDU providing space, power & cooling; Generally in demised suites above 250 KW.

Market Definitions

RETAIL COLOCATION

Building shell & infrastructure in shared environment, space generally divided by racks or cages; may include IT hardware as well as a menu of services.

HYBRID IT

A combination of cloud services, third-party colocation and owned, on-premise infrastructures.

ENTERPRISE DATA CENTERS

Hardened data centers; houses “mission critical” operations of individual companies.

DATA CENTER NET ABSORPTION

Net change in existing/commissioned wholesale power capacity.

DATA CENTER POWER

Measured in kilowatts (kW) and megawatts (MW).

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

To learn more about CBRE Research, or to access additional research reports, please

visit the Global Research Gateway at www.cbre.com/researchgateway. Additional U.S.

Research from CBRE can be found here.

Pat LynchSenior Managing DirectorData Center Solutions

[email protected]

Spencer G. LevyHead of Research and Senior Economic Advisor, Americas

[email protected]:@SpencerGLevy

Jeff WestDirector of Research & AnalysisData Center Solutions

[email protected]:@JeffWestCBRE

Michael Kane Senior Research Analyst

Data Center Solutions

[email protected]

Contacts


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Documents

U.S. DATA CENTER TRENDS REPORT H1 2018 · GTT’s fibernetwork footprint. 2. Iron Mountain’s acquisition of IO Data Centers for $1.3 $ Millionsbillion. The transaction included