Data centre investment in new capacity construction and absorption is surging in North America.¹ With data centre vacancy rates at unprecedented lows, the meaningful uptick in new construction projects in 2023 comes at a critical point.² Data centre capacity and pricing for space are at a premium, and it is believed that demand is only likely to increase as cloud services adoption and generative AI-based products and services continue to gain traction. These dynamics could place the data centre ecosystem in a favourable position, including large cloud giants, colocation service providers, and suppliers of essential components such as chips, storage, and networking equipment.

Key Takeaways

• Data Centre construction in North America increased 25% year-over-year (YoY) in H1 2023, propelled by AI and capital expenditures from leading tech giants.³
• Constrained data centre capacity contributed to a 20–30% YoY asking price increase in the eight U.S. primary data centre markets for colocation services.⁴ Growing demand for computational power for AI, automation, and the internet of things (IoT) is projected to amplify this pricing trend.
• The potential to command a premium for emerging services could boost earnings for data centre companies in the near to midterm.

Hyperscalers Ramp Up Data Centre Investments

In the last year, capital expenditures from Microsoft, Amazon, Google, Meta Platforms, IBM, and Oracle collectively topped $154 billion.⁵ Spending for the group is down 2.1% relative to last year but remains up over 25% from 2021 levels.⁶ Currently, hyperscalers own and operate close to 900 data centres, accounting for 37% of worldwide data centre capacity, according to one estimate.⁷

Capacity expansion is a major target, and in 2023, hyperscalers and colocation service providers are expected to add a staggering 26 million square feet of data centre space.⁸ For hyperscalers, Microsoft leads the pack with 24 projects underway in eight countries, Google has 15 projects across seven countries, and Amazon has 15 projects in the works in nine countries.^9,10 Also, the trend of optimising data centres for AI is set to continue. Meta, for example, is reimagining its data centre architecture to cater to AI workloads and expects investments to accelerate in the coming quarters.¹¹ Meta is increasing the footprint of its custom in-house built AI accelerator chip in new data centres, building new dedicated AI training clusters, and is investing to deploy supercomputers designed to support augmented reality, content understanding systems, and real-time translation technology.¹²

Growing downstream applications of generative AI has demand for AI-first infrastructure rising, whether in the original designs of new buildouts or as part of infrastructure optimisation. These efforts create opportunities for chip vendors exposed to AI processing and data intensive hardware.¹³ A prime example is Nvidia, which supplies AI chips to data centres. The company reported total revenue growth of 60.3% YoY over the last 12 months.¹⁴ Also, spending on data centre accelerators is expected to grow at a nearly 30% annual growth rate to top $165 billion by 2030.¹⁵

Colocation Service Providers Positioned to Capitalise on Price Dynamics

Colocation data centre service providers, which serve multiple large enterprises out of a single facility, form another major part of the data centre market. Colocation providers manage 23% of total data centre capacity and another 18.5% on behalf of hyperscale giants globally.¹⁶

Colocation providers such as Digital Realty, Iron Mountain, Equinix, DataBank, and NextDC help stabilise the data centre market because they can bring capacity to market much faster than hyperscalers.¹⁷ In H2 2022, colocation providers added 4.6 million square feet of new capacity in the North American data centre market, a 9.5% YoY increase.¹⁸ In the eight primary data centre markets in the United States, total data centre supply increased 19.2% YoY in H1 2023, while data centre vacancy remained at just 3.3%.¹⁹

The surge in capacity might give rise to questions concerning potential oversupply and the intricacies of rental pricing. Yet, the limited availability of data centre capacity was a driving factor in the notable 20–30% YoY increase in rental prices across the primary U.S. data centre markets during the first half of 2023.²⁰ Across data centres of all sizes, average asking rental rates jumped 14.5% YoY in 2022 and another 7.2% YoY in H1 2023.²¹

Simultaneously, the global data explosion is expected to enter another phase—and keep data centre demand high—due to generative AI models creating data alongside humans, machines, and system-based data generation. Also, favourable pricing dynamics are expected, which allow colocation providers to monetise at healthy rates, to offset pressures of higher borrowing costs.²²

Two additional positive industry trends are high merger and acquisition (M&A) activity boosting the premiums for leaders in the space. Some of the largest deals in 2022 included the buyout of CyrusOne by a group of private equity investors for $15 billion, and the acquisition of Switch by DigitalBridge for $11 billion.^23,24

Conclusion: Data Centre Industry Has Palpable Momentum

Hyperscalers and colocation service providers are investing heavily to build infrastructure that can help them capitalise on the growing demand for nimble cloud computing and AI services. The recent surge in construction activity and data centre AI optimisation work, despite high borrowing costs and tight economic conditions, demonstrates the urgency for this infrastructure and the growth potential behind the services that it facilitates. With borrowing costs stabilising and data-heavy AI applications becoming mainstream, it is believed data centres and their broader ecosystem are likely poised for a multi-year secular growth run.