Huge Leasing Numbers For Dallas Data Centers Mark 'Quantum Shift'
Dallas-Fort Worth data centers shattered leasing records in the first half of 2022, with a flood of big tech companies rapidly transforming one of the country’s largest data center markets.
According to data released this week by CBRE, the Dallas-Fort Worth area recorded 210 megawatts of leasing activity through the first half of this year, an unprecedented pace of demand for a market that has never exceeded 81 megawatts for an entire year.
These massive new leasing numbers come amid what industry insiders describe as a dramatic change in the Dallas data center landscape over the past eight months.
The market was previously oriented around enterprise colocation — smaller, multitenant facilities — but it has now been flooded by larger hyperscalers and other as-a-service providers looking to sign leases at enormous scale. Hyperscalers, which are public cloud providers and social media companies like Amazon, Microsoft and Meta, typically require hundreds of megawatts, or millions of square feet, of server space in a given market.
This shift towards hyperscale is driving a wave of development as major colocation operators try to keep up with demand, a building boom that experts say is likely to continue in the months ahead.
“We’ve seen this quantum shift where the dynamics have changed and these very large-scale deployments are now very pronounced in the Dallas market,” said Ryan Mallory, chief operating officer of Flexential, which is adding 15 megawatts of new data center space in Plano to its existing Dallas-area footprint. “Eight months ago, it just wasn’t a large-scale wholesale market — it was just a steady-Eddy enterprise market.”
Of the 210 megawatts of leasing in Dallas since the start of the year, according to CBRE, just 30 megawatts were leased to companies other than hyperscale social media, cloud or as-a-service providers. These numbers were previously unheard of in Dallas, which hadn’t seen the kind of hyperscale boom seen in markets like Phoenix or Atlanta.
While a company looking for a single megawatt of data center space near Dallas might have had around 20 different options a year ago, now those options have dwindled to three or four as larger hyperscale tenants snap up space, said CBRE Senior Vice President Brant Bernet, who leads the brokerage’s Dallas data center practice.
“We're all looking at that and scratching our heads and trying to get to the bottom of exactly what this is, how sustainable it is and whether or not the second half is going to have those same tailwinds,” Bernet said.
So why are hyperscalers suddenly hungry for big leases near Dallas?
Companies like Google, Meta and AWS have been in a race for data center space to keep up with unprecedented demand for cloud and social media products, often either self-building their largest campuses or working with a provider on a so-called build-to-suit facility. Yet as the need to get these data centers online as fast as possible has grown, supply chain constraints have increasingly extended development timelines.
As supply chain woes worsened for data center builders in the fourth quarter of last year, hyperscalers began looking for opportunities to deploy vast amounts of IT infrastructure as quickly as possible.
Hyperscalers began looking to Dallas, which had high vacancy rates due to a decline in enterprise colocation demand. In what Bernet calls a “perfect storm,” the loss of enterprise tenants across the market meant that Dallas offered rates at an all-time low and available space in big blocks. Flexential’s Mallory agrees.
“As supply chain started to become tight and as demand for the as-a-service providers really started to get aggressive across the entire United States, Dallas was a market that had a bit of excess capacity over the past several years due to Covid and the subsequent slowdown of large-scale enterprise consumption,” he said. “So, we saw this very large influx of capacity.”
With the influx of hyperscalers, the market's data center vacancy rate has dropped 11.6 percentage points from a year ago to 6.86%, according to CBRE, a sudden scarcity of space that is driving a wave of development as colocation operators build out massive blocks of largely pre-leased capacity.
There are 240 megawatts of data center development currently underway within a 30-mile radius of Dallas, a striking figure in a market that currently has 545 megawatts of total inventory. Compass, CyrusOne, Flexential, Equinix, QTS Data Centers and Stream Data Centers all have significant projects underway, with 91% of that new space already pre-leased. Experts say the numbers show that while hyperscalers may have initially flocked to the market for its available space, constrained supply hasn’t pushed them away because operators have been able to build them new space quickly.
“There were a lot of available build-to-suit land parcels that operators already controlled, so the path to development was quicker than in some other markets,” said Mikey Jaillet, an associate in CBRE’s Dallas data center practice. “Right now, with some of your cloud service providers with some of your other large social media users, the amount of capacity that they need to plan for is just something unprecedented, so being able to leverage some of these land parcels and build-to-suit opportunities that these operators have already slotted was important for them.”
Jaillet says that while the kind of leasing numbers posted over the past six months may be an outlier, demand from hyperscalers isn’t going anywhere soon. He said that in anticipation of this future demand, it’s likely that data center operators will launch speculative data center development in the months ahead on land they already own in the market. This development will largely be campus-scale projects exceeding 100 acres and 100 megawatts.
At this scale, the hyperscale giants like Google, Meta and Microsoft that would occupy these facilities generally prefer to build their own campuses rather than lease. Google recently opened a $600M data center campus in the town of Midlothian 25 miles south of Dallas. But while there’s a lot of open space within a 30-mile radius of the Dallas metroplex, there is little available land appropriate for data centers that hasn’t already been snapped up by the major colocation developers.
“You look at Dallas and you see a lot of — not green space because we live in Texas — but a lot of brown dirt, but Dallas is actually land-constrained at a very high level,” Jaillet said.
With a shortage of buildable land, CBRE’s Bernet said hyperscalers will continue to sign big leases to meet their data center needs in the Dallas-Fort Worth market, with the bulk of new development to meet this demand occurring in a wedge framed by highways 67 and 45 and extending roughly 30 miles south of the city.
Growing competition over the remaining developable plots is likely to drive up land values in this area in the coming months, experts say. But it’s a market that Flexential’s Mallory says his company is eager to get involved in.
“We're certainly actively looking for more land in the market right now,” he said. “It’s just about finding the right parcel to purchase and build out on.”
CORRECTION, JULY 18, 2:27 P.M. ET: An earlier version of this story misstated the previous annual leasing record for the Dallas-Fort Worth market, and it misstated the number of megawatts Flexential is adding to its Plano facility. This story has been updated.