Contact Us

Record Demand Overcomes Headwinds To Give Data Center REITs Strong First Quarter

Despite an increasingly turbulent economic landscape, data center REITs had a strong first quarter as near-record demand helped overcome blustery headwinds. 


The seemingly insatiable demand for server space from cloud and social media giants helped major U.S. data center providers post strong first-quarter numbers this week despite rising interest rates and energy costs, continued supply chain disruptions and other inflationary pressures.

Data center REITs Digital Realty Trust and Equinix reported healthy growth, as did Iron Mountain. Digital infrastructure REIT American Tower also provided positive performance indicators for data center operator CoreSite, which it acquired for just over $10B late last year. Even as economic pressures facing the industry drove up asking rents across the board, providers reported leasing at or near record levels and robust development pipelines as hyperscale tenants like Amazon Web Services, Microsoft and Meta continue aggressive infrastructure rollouts. 

“You're seeing this digital transformation wave, and the cloud customers — despite the volatility, the uncertainty of an economic backdrop or the war in Ukraine — leaning in and securing their infrastructure,” said Andy Power, president and chief financial officer at Digital Realty, which reported record leasing ahead of its first-quarter earnings call Thursday. 

“One record quarter after another is a little bit of an unusual outcome, but it doesn't feel like the pace of demand is slowing on the hyperscale front," Power added.

Colocation giants Equinix and Digital Realty both recorded earnings numbers at or near projections. Equinix reported revenue up 10% from the same quarter last year at $1.7B, with the company projecting similar growth for the rest of 2022. The company reported a quarterly net operating income of $267M for the quarter, a 7% increase year-over-year. Digital Realty posted revenues of $1.13B, up from $1.09B a year ago, with NOI at $505M.  

Data center and records storage firm Iron Mountain reported record quarterly revenue at $1.24B, exceeding projections. Its data center business registered 36% year-over-year growth, with leasing outpacing expectations. Those numbers don’t include an enormous 72-megawatt lease in Northern Virginia, signed in March, that will go on the books in the second quarter.

American Tower reported that CoreSite also saw record retail colocation leasing, contributing more than $180M in growth to the company’s overall balance sheet. Company officials say revenue from CoreSite and American Tower’s other new acquisition, European telecom firm Telxius, were up a combined 17%. 

Beyond the numbers, here are some of the big takeaways from Q1 earnings season for data centers:

Soaring Demand Grom Cloud Giants Means More Development Ahead

Rapid growth in demand for data center space, driven largely by hyperscale cloud providers and social media companies, isn’t slowing down. Data center providers are planning their development pipelines accordingly.

Hyperscale giants AWS, Google, Microsoft and Meta also reported earnings this week, and the numbers suggest that their combined hunger for server space won’t be sated anytime soon. According to a report by Synergy Research Group released Thursday, the cloud market’s growth rate has hardly slowed at all despite the enormous scale the market has achieved. Global cloud revenues grew 34% year-over-year, reaching an aggregate total of $53B in the first quarter. Revenue growth over the past four quarters has averaged 36%, driven mainly by the big three of Amazon, Microsoft and Google, which together account for around 65% of all cloud spending. 

Meta's proposed data center in Kuna, Idaho

Although some hyperscalers will occasionally self-build, it is providers like Equinix and Digital Realty who have to meet the infrastructure needs to maintain this pace of growth. Digital Realty, Iron Mountain and American Tower’s CoreSite all reported leasing records last quarter, particularly in U.S. markets. Fifty-eight percent of Digital Realty’s development pipeline has already been pre-leased, and the company reported a leasing backlog that grew by 15% last quarter year-over-year. 

And if there was any doubt it is hyperscalers driving demand, large leases — those larger than 1 MW — accounted for the lion’s share of bookings. For Digital Realty, more than 70% of its leases last quarter fell into this category.  

“Growth in the sizing of customer requirements on the hyperscale front has been building for some time. It’s not necessarily a completely overnight phenomenon,” Digital Realty’s Power said. “I think you witnessed it last year and the year prior, and I think you're just seeing this continued.”

The development pipeline and capital expenditure numbers released by data center providers this week suggest that they don’t see this trend dissipating in the coming months. Equinix has 43 projects underway in 29 different metro areas, including Atlanta and D.C. Digital Realty has 44 development projects in 28 markets, with particularly large build-outs in New York, Virginia and Toronto. Surging demand also led Iron Mountain to increase its planned capital expenditures for data center development by around $100M, bringing the figure to $625M for the year. 

One outlier on this front, at least on paper, has been Equinix, which dramatically cut capital expenditure this quarter and indicates it will maintain those lower levels for the rest of 2022. While the company spent $732M on capital costs in the fourth quarter of 2021, spending in Q1 this year totaled just $389M.

Speaking on the company’s earnings call Wednesday, Equinix officials suggested that this isn't due to expectations that demand will slow. Rather, CEO Charles Meyers indicated the slowed pace of development follows an aggressive build-out and land banking push in key markets over the past two years that has left the company with excess capacity, particularly in North America, that the company expects to be leased over the next 24 months. He said it also reflects a business model that differs from its peer colocation REITs. 

“We have a fair amount of headroom in a lot of markets in the Americas. …. There’s plenty of opportunity to grow into the capacity that is there and drive utilization up,” Meyers said, speaking on the company’s earnings call Wednesday. “We're not sort of trying to chase every bit of hyperscale that's out there. We've got an aggressive but an appropriate plan that we think delivers strategic value to the overall platform, focused on a relatively small number of global hyperscalers that we think are critical to how the overall cloud macro plays out.”

Data Centers Are Weathering Headwinds, But Rents Are Going Up 

Inflationary pressures are driving up data center rents, executives from major providers acknowledged on earnings calls this week. Indeed, the surging demand for server space means that data center operators have been able to have tenants take on added cost from a range of headwinds facing the industry, from growing labor costs and supply chain disruptions to rising interest rates and spiking land costs in constrained markets like Northern Virginia. And these higher rents generally don’t take into account climbing energy prices, which leases typically dictate are passed through to tenants.

“We have increased list pricing meaningfully,” Meyers said. “That's partially increasing unit costs and other effects in the business beyond power — like labor, for example.”

The increases have been dramatic. Digital Realty, for example, reported rents increasing by an average of 3.3% in the first quarter. For leases over a megawatt, this average climbed to 5.9%. Yet industry leaders say there has been little to no impact on leasing or renewals, as these increases have been relatively uniform across the industry and tenants need the infrastructure. 

Still, industry leaders told investors this week that they are employing a range of tactics to counteract these headwinds in order to compete for tenants on price. Equinix outlined an energy hedge that it says offers tenants a more predictable power pricing environment, while Digital Realty outlined a strategy to mitigate interest rate risk by proactively turning out short-term, variable-rate debt with longer-term, fixed-rate financing.

While global economic headwinds are driving up rents, some data center providers are finding ways to turn them into a competitive advantage. As supply chain chaos continues to create havoc for a variety of industries, Digital Realty and other large data center operators have begun providing their enormous purchasing power, vendor relationships and supply chain sophistication as a kind of value-add service for tenants who are struggling to procure IT equipment. 

Similarly, Digital Realty’s Power acknowledged that increased volatility across the economic landscape has pushed hyperscalers toward leasing from companies like Digital Realty, Equinix and others, rather than building their own data centers. 

“I don't think the pendulum is swung to a point where the self-build is off the table, but I would say things in times like today when there's increased volatility, supply chain issues and a war in Eastern Europe, having a global platform to support hyperscale growth across now 50 metropolitan areas and in 26 countries is a tremendous value add," Power said.