American multinational investment bank and financial services business TD Cowen has posted a glowing report on data centers, saying that the US market was set for a record year for leasing due to artificial intelligence demand.
TD Cowen's channel checks indicate ~2.1GW of data center leases were signed in the last 90 days driven by AI requirements.
As part of that, the checks reveal that in the past three months Google signed a 600MW deal in Texas, while Microsoft signed a 420MW deal in Leesburg, VA, a 360MW deal in Dallas, and a 300MW deal in Chicago.
To put the last 90 days in perspective, the group believes that the third-party US data center market currently stands at ~10GW.
"Furthermore, our checks indicate that there are multiple +500MW requirements from hyperscalers on the market as well as at least one +500MW requirement from the US government," TD Cowen analysts state. One large private data center operator told the investment bank that its qualified leasing pipeline stands at +1GW vs. ~500MW just 90 days ago, highlighting the speed at which incremental AI requirements have come to market.
Hyperscalers have also begun to pre-lease capacity 24-36 months in advance of facility delivery, up from the 12-18 month pre-leasing window seen last year. Those with capacity coming online in less than 24 months are now able to charge a premium.
"This in our view reflects the growing scarcity of data center capacity as hyperscalers look to secure their access to future compute," TD Cowen said. It has also led to enterprises pre-leasing capacity up to six months ahead of facility delivery as they compete with hyperscalers for limited space.
The leasing market was already relatively tight in 2022, but has tightened drastically in 2023. With AI workloads less latency sensitive, they can also be located virtually anywhere in the country. TD Cowen notes that Nvidia was looking to place 50MW in Hillsboro, but when it realized that that was impossible, it communicated to operators that it would go anywhere.
In 2022, leasing prices increased due to the increased cost of building data centers. Now they are higher simply due to limited supply and high demand.
Supply chains will equally continue to suffer. The bank says that one operator recently placed an order for 3MW of Caterpillar generators for which the lead time was 130 weeks (~2.5 years), with transformers having a similar lead time.
The huge wave of data center leases signed in the past few months has yet to translate into equipment orders, so when they come in those lead times are expected to increase further still.
"We view the step-up in AI leasing as encouraging for both Equinix and Digital Realty (Digital), albeit to different degrees," TD Cowen continued.
Equinix will benefit in the medium term from a large build out of inference workloads, the bank believes. For Digital, its higher price compared to the market will limit some of its gains, but TD Cowen expects it to find success by leasing pockets of existing data centers as well as the remainder of its development pipeline.
However, in the report's disclosure section, it is important to note that Cowen and Company received compensation for investment banking services from Digital Realty Trust in the past 12 months, and are expected to do so again in the next three months.