Phoenix ranks No. 2 in U.S. data center growth

Real Estate | 1 Oct |

COVID-19’s impact on public safety and stay-home orders drove significant demand for immediate digital connectivity around the world. JLL’s 2020 Mid-Year Data Center Outlook finds data centers’ resiliency and reliability established the sector as one of the few to perform strongly during the first half of the year.

According to the report, Phoenix ranks as a top location among all U.S. markets, performing second in the nation for year-over-year absorption, with 18.5 MW absorbed during the first half of the year. The amount of metro Phoenix data center projects under construction is also strong at 24 MW, representing a combination of speculative and build-to-suit space that ranks the market fifth in the U.S. for new build activity.

“These figures reflect Phoenix’s steady evolution as a national data center leader and a top pick for developers, investors and companies – including both cloud and hyper scale providers who continue to invest here,” said Mark Bauer, Managing Director of the JLL Data Center Solutions Group and based in the JLL Phoenix office. “It’s fortunate to see data centers thriving in Phoenix, which is impressive given the year we’ve had. It shows great promise for the future of this sector in the market.” 

Across the U.S., data center REITs produced higher returns in the first half of 2020 than office, industrial, retail, hospitality and healthcare. Additionally, three out of five data center REITs (CyrusOne, QTS, Digital Realty, Equinix and CoreSite) yielded at least 40 percent returns over the past year. 

In Phoenix, data center leasing momentum has also translated to investor confidence within the capital markets. Led by Bauer and JLL Director of Capital Markets Carl Beardsley, the Phoenix-based JLL Data Center Capital Markets team closed on a record-high sale-leaseback in the first half of 2020. The metro Phoenix transaction sold to an enterprise user for $122 million, at $675 per-square-foot. 

“There is an abundance of capital being deployed specifically from infrastructure funds, which target data center assets, said Beardsley. “The marketing process from this record-high sale attracted strong interest from funds and operators across the country as well as from international investors.” 

According to the Phoenix JLL team, national and international data center REITs during the first half of 2020 generated a 19.2 percent return to its investors, leading all property sectors by a wide margin. “In a world that is increasingly virtual, data centers have been the proven winner in a volatile market,” said Beardsley. 

However, despite an immediate need for capacity, especially for cloud services, users and operators paused and delayed deals, generating backlogs JLL experts expect will fuel growth toward year-end and into early 2021. Year-to-date nationwide data center absorption stands at 295.2 MW, with more than half of the leading domestic markets showing an increase year-over-year.

The pandemic and the overall surge in data center demand globally created short-term challenges for operators and REITs alike. Migration to the cloud and greater adoption across multiple industries, thanks in large part to greater convenience, is driving unprecedented activity. The stifled pace of development and absorption is expected to accelerate once again, as those in the field identify and create new adoption strategies and solutions, putting the sector in line for a strong performance to close out the year. 

Rent compression and increased competition within the U.S. has also pushed operators to expand into international markets, resulting in robust M&A activity globally to start the year. Experts anticipate operators will continue to expand services and increase capacity in favorable global regions including Western Europe, South America and Asia.

For more insights on data center industry performance, download JLL’s latest Data Center report.

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