Ashburn Virginia Data Center Supply and Demand Q2, 2013

The nation’s retail and wholesale data center capacity is in modest over-supply in a number of markets due to new capacity coming online as the industry has ramped up in light of changing business conditions and economic progress. The Virginia market, primarily focused around Ashburn, has also been growing rapidly with a little over 2 million gross square feet added from 2011 through 2013.

At face value this surely is an over-supply scenario, but when adjusted for some of the out of the ordinary speculative space that has been announced, our research indicates a 23% vacancy rate based on gross square feet. While by typical commercial real estate standards this sounds high, in the data center industry it is modest. The Ashburn data center market is rather unique in many respects based on its geographic proximity and dense communication and fiber infrastructure. The market is still seeing strong demand, and swings in Ashburn are natural and to be expected.

The Virginia market has also seen an approximate 50 megawatt year-over-year average absorption since 2010. Virginia Dominion Power estimated in 2010 a 1,200 MW growth through 2014. Our research indicates a 23.3% vacancy on a KW basis which translates to over a one-year supply. That said, the market is rather dynamic and that can change quickly.

The wholesale and retail sectors are divided relatively even with 57% in wholesale, 43% in retail, and availability/vacancy on a KW basis at 24.5% and 21.8% respectively.

Within the wholesale space our research shows that provider pricing is still feeling downward pressure. While most of the transactions being done today are in the $125 to $145 range, modified gross, starting at a few hundred KW and with terms of five to ten years, there have been some transactions with lower price points as providers compete for business.

On the retail side prices are also under pressure particularly in markets with a large supply of retail space that are catering to tenants that have the option to use any provider. Premium providers are ranging between $400 to $500 / KW, which second tier providers and more competitive at $300 to $400 / KW. These figures assume a contract of less than three years and an approximately 40 KW requirement.

We do not see any dramatic industry-wide price changes coming for the premium providers. The requirement for robust infrastructure by many tenants keep them in the market with premium providers. Smaller providers that can afford to discount dramatically will continue to be limited in the market they can serve.

Astute buyers will pay attention to optioning and the handoff between retail and wholesale, with the opportunity to obtain retail service at wholesale rates. Lastly, many tenants that signed shell leases about 10 years ago have fixed escalation clauses that may have escalated the shell rate ahead of the market. It’s important to do your homework around renewal rights and references for renewal rates.



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