DFW Data Center Market Battles Supply Glut, But Still Ranks High Nationwide
Dallas-Fort Worth remains one of the nation’s most valuable data center markets even though excess supply is now suppressing Metroplex price points.
DFW ranks No. 3 nationally for strongest data center markets, according to a 2020 Cushman & Wakefield data center survey considering metrics like cloud availability, fiber connectivity, market size, development pipeline and government incentives.
This high ranking is tied to local tax exemptions on $200M-plus builds, lower comparative land costs and large enterprise business activity, Cushman & Wakefield Executive Managing Director Rich Hughes said in a press statement.
But DFW's data center industry was disrupted in 2019 by a supply/demand imbalance. Whether this is considered good or bad news depends on whether you are a data center end user or a provider — and whether you benefit or lose from declining co-location rates.
The health of the data center market and shifts in the construction pipeline will be discussed at Bisnow's DICE South — Data Center Investment Conference & Expo in DFW on April 9.
“In 2019, the Dallas-Fort Worth market had net absorption of co-location supply at 25.8 MW, which represents the market’s lowest net absorption since 2014,” CBRE Vice President of Data Center Solutions Haynes Strader wrote in a report he put out this month.
This absorption level was a game changer.
For about four years straight, the DFW data center market absorbed roughly 40 MW each year, while also delivering about 40 megawatts of new supply, Strader told Bisnow.
This led to a nice equilibrium that ended abruptly in 2019 when net absorption declined in DFW.
“While we had about 30 MW of new leases signed or expansions and new absorption [in 2019], we had some churn that resulted in some negative absorption,” Strader said. “So, that was a big drop in 2019 of almost 13 MW from the year prior net absorption.”
Meanwhile, development continued.
“Not only was it too much construction, but too many different players were coming into the market.”
Strader said there is about 60 MW of total vacancy in DFW, including Class-A and Class-B retail and wholesale data centers. Of that amount, roughly 40 MW is tied to Class-A wholesale co-location product.
“That is usually a year’s worth of absorption right there, but given our last year activity it’s starting to really become a glut of supply.”
With that oversupply comes two dynamics: On one hand, data providers are facing more competition for end users. On the other hand, users find themselves in an affordable buyer's market.
“We have the most competitive pricing in the country right now,” Strader said. “I think we are in a little of a supply glut that will hopefully breed opportunity for large tenants and small tenants.”
The market has started to correct: Construction activity began to slow last year, from 40 MW year-over-year to about 23 MW now underway.
But for every downside, there is an upside.
“Tenants that did transact in the market appeared to take advantage of the favorable conditions and secured longer-than-average terms, some beyond 10 years,” Strader wrote in his latest CBRE report.
“Additionally, there was a focus on securing favorable expansion and renewal rights, which co-location providers seemed willing to provide in hopes of securing long-term leasing opportunities.”
With all of these changes, the data market in 2020 and 2021 is in transition mode to see how demand and supply even out after a sudden absorption slowdown in 2019.