AI partly to blame for spike in data center costs

With the supply of floor space dwindling further and increased demand for colocation services, analysts are reporting a 15% increase in the asking rates at North American data centers compared to a year ago.

DatacenterHawk in its third-quarter Data Center Market Recap found that data centers added more than 1.4 GW of power worldwide. Roughly 650 MW of that came from the United States, where major markets such as Atlanta, Phoenix, Dallas, and Northern Virginia led the way.

The research firm attributes the year-over-year jump in absorption to the impact of AI requirements, as well as the growth of traditional cloud computing needs across the region. However, the industry is facing challenges, not the least of which is securing enough power.

“Securing power continues to be a challenge for developers, pushing some to the outskirts of primary markets, as well as fueling growth in secondary and tertiary markets. This has led to an uptick in land-banking by companies hoping to secure space and power for future growth,” DatacenterHawk said in its report.

Meanwhile, demand continues to grow, and availability continues to decline. DatacenterHawk found that average vacancy rates across North America have dropped from already low levels, declining from 3.2% in the second quarter to 2.7% in the third quarter.

Vacancy rate is important because that’s the amount of space available for colocation. If a nearby data center has no free space, an enterprise may have to host their equipment further from their office or headquarters than they planned.

“Prices continue to increase across the board. Low vacancies and limited optionality have created a landlord-favorable market, and with demand outpacing supply, asking rates continue to rise. Prices have risen 15% on average, year over year,” the report stated.

Cloud providers continue to consume most of the capacity in North America. AI and machine learning also continue to drive activity across US and Canadian markets, though the full impact of these rapidly growing industries has yet to be seen, the report noted.

Submarkets within major markets will continue to grow from hyperscale users and data center operators, DatacenterHawk predicts. Older, enterprise data centers will be targets for AI companies that need bridge power quickly, providing an environment that allows them to grow larger over time.

Positive outcome for Cyxtera

Cyxtera was facing an uncertain future last June when it declared bankruptcy, but now there’s a plan for the data center provider. Brookfield Infrastructure Partners and its institutional partners have announced that they will acquire substantially all of Cyxtera’s assets for $775 million.

The deal with Brookfield is expected to close in the first quarter of 2024.

Brookfield will purchase from several landlords the real estate at which seven of Cyxtera’s U.S. data centers are located. That includes an agreement with Digital Realty Trust, a giant in the data center world, for Brookfield to acquire the real estate supporting several of Cyxtera’s U.S. data centers.

Separately, Cyxtera has entered into an agreement with DRT to amend the terms of its current leases at three U.S. sites and three international sites that will allow Cyxtera to exit those sites in 2024 while providing a transition for customers.

Finally, Cyxtera has signed an agreement to sell its business in its Montreal and Vancouver data centers to Cologix, a data center provider based in Cincinnati with 40 locations in the US and Canada.

Although Cyxtera will cease to exist as an independent company, it is a positive outcome overall. It gets out from the onerous burden of its deals with DRT and puts ownership of its data center properties in its hands. This in turn gives it more control over its cost structure.

“The announcement showcases a few key points. First, the level of resiliency in this industry is such that even a situation [such as this] could turn positive. And second, this is a fairly positive outcome for everyone. Given the circumstances, of course,” said Bill Kleyman, independent analyst and program chair, AFCOM, Data Center World.

“I think the company can survive with a bit of restructuring and optimization of the business,” Kleyman added.