Issue link: https://cp.revolio.com/i/141720
roring the uncertainty that was pervasive in the entire U.S. economy leading up to November's presidential election and the lingering "fiscal cliff " issues. While data center market fundamentals were generally strong, the result was increasingly competitive pricing and healthy supply levels that were often trending slightly ahead of demand. However that volatility is diminishing as tenant activity in major U.S. data center markets is showing renewed vigor in recent months: the San Francisco Bay Area and Northern Virginia – two of the largest data center markets in the U.S. – tallied strong absorption in both the wholesale and colocation segments in the fourth quarter. Leasing volume was headlined by large deployments by several Fortune 100 companies tied to supporting their cloud service offerings. The renewed velocity reversed a months-long trend of somewhat stagnant activity in these markets and dramatically shifted the supply and demand dynamics. Both regions face near-term supply constraints as a result of these transactions as well as the renewed level of tenant requirements that are active in the market. The increased activity seen in these two areas is a likely precursor to a trend that is expected to proliferate across most U.S. markets in 2013, namely a broad strengthening across all data center market segments as delayed requirements and pent-up tenant demand move from the sidelines and into the decision-making phase. Several markets currently sit at key inflection points, most notably New Jersey and Manhattan. Leasing activity in New Jersey was particularly slow in 2012 by historical standards, with the estimated 16 megawatts leased during the year representing only half of the historical annual average of the past five years. Hurricane Sandy had a dramatic impact on the data center market in the entire New York metro area, essentially putting all leasing transactions "on hold." Many customers are still sorting out the impact – both on their deployment decisions and on their operational needs – but several trends are beginning to emerge in the aftermath of the storm. For Manhattan tenants, locations in New Jersey and areas beyond the metro area are being given strong consideration as viable options for relocating servers outside 10 | THE DATA CENTER JOURNAL of Manhattan. More specifically, colocation demand from enterprise and corporate users who experienced significant downtime in their in-house data centers and server rooms is expected to rise significantly. All told, both wholesale and colocation is demand throughout the greater New York area is expected to bounce back sharply in 2013. According to Brady, "facilities that were unaffected by the storm should fare particularly well in the short-term, and the pipeline of new facilities – ranging from Digital Realty, CoreSite, Internap, Equinix and Telx in New Jersey and Sabey and DataGryd in Manhattan – are expected to be met with healthy levels of demand as these facilities are readied for customers. Underscoring the strong market fundamentals of data center real estate, the national construction pipeline continues to be robust, with nearly all established data center markets seeing variable levels of steady new supply. In fact, of the nearly twenty data center markets tracked by Cushman & Wakefield in the U.S., the supply pipeline is increasing in nearly three-fourths of the markets and more than half of these markets are considered currently undersupplied. Emerging data center markets in the U.S. have generally seen the highest level of new construction activity over the past 12 months, including Portland, Las Vegas and Phoenix. Oregon has been a high profile data center magnet, with giants like Facebook, Apple and Google all recently constructing data centers in the Columbia River Valley and central Oregon. Metro Portland is now seeing an influx of new national providers, including Digital Realty, T5 Partners and Telx all expanding into the suburban Hillsboro area, a hotbed of activity where operators are looking to leverage favorable tax incentives and proximity to three major cable landing stations to Asia. Southern California wholesale demand also continues to migrate to desert locales, spurring a swell of new supply in Phoenix and Las Vegas. "Aside from their close proximity to Los Angeles, both metros offer lower power costs and limited natural disaster risks and continue to see a steady stream of tenant requirements.", said Jeff West, Research Manager and Director of Data Center Research. With an active supply pipeline that has generally been one step ahead of de- mand over the past several years; national pricing is being pushed downward despite strong demand. This is particularly true in top-tier data center markets – on the average, wholesale rates decreased just over 5% nationally year-over-year and currently range between $140-$170 per kilowatt per month gross. Average colocation rates currently range at a multiple of 1.7 to 2.5 times wholesale rates, with a wide range of variability depending on a variety of factors, including the size of deployment, the tier rating and connectivity of the facility. The continued emergence of the "wholo" market – the blending of price bands in the wholesale and colocation segments that often involves wholesale providers lowering their size requirements and pricing to compete with colocation providers – has also undermined national pricing trends and continues to be an evolution of the multi-tenant data center market that is not strictly a function of traditional supply and demand dynamics. "Nearly all third party data center providers are swimming upstream to capture more lucrative revenues," Brady said. Europe: strong fundamentals prevail despite wider Euro Zone issues European economies continue to struggle through the financial and economic issues plaguing the region over the past several years – and these issues will weigh heavily on the regional economies throughout 2013. The result has been significant constraint on IT spending and capital investment that has contributed to a cautious but still healthy leasing environment. "Data center leasing activity has been largely confined to smaller colocation transactions with only a handful of notable wholesale deals occurring in the second half of 2012 – a function of both tenuous business confidence and supply constraints in major data center hubs", West said. While opportunities in emerging locations continue to see interest, the primary data center market in Europe remains concentrated in a handful of core cities: London, Frankfurt, Paris and Amsterdam. All of these markets are considered strong, landlord-favorable markets despite www.datacenterjournal.com