Supply and Power Constraints Drive Strong Data Center Rent Growth in Silicon Valley
Silicon Valley's data center market can be defined as one that's seeing modest improvement with limited supply, according to CBRE's North American Data Center Trend Report.
The region had 144 MW under construction in the second half of last year, 84% of which was preleased. This is less than the 167.8 MW under construction in H2 2024.
Nationally, construction activity declined for the first time since 2020 due to extended timelines tied to permitting, zoning approvals and sourcing adequate power.
Rental rates continued to rise due to limited availability of powered land, capacity constraints and rising costs of capital, land values, construction and tariffs. As a result, rent growth is expected to continue outpacing inflation for the next two to five years, according to Jerry Inguagiato, senior vice president with CBRE's Data Center Group in the Bay Area
"The price increase isn't surprising, as California's power grid is at capacity, and power providers have been increasing their rates over the last few years," he told GlobeSt.com.
"California has been experiencing severe power constraints for some time, so developers and users must queue for power several years in advance."
That comes as vacancy increased slightly to 4.7%, up from 4.5% in H1 2025 in Silicon Valley. This is well above the national vacancy rate of 1.4%, which reached a historic low even amid a 36% increase in total capacity, according to the report.
A Competitive Start to the Year
Inguagiato said the Silicon Valley data center market has been competitive to start 2026.
"There is very little availability of colocation space, which has driven a premium due to the market's tight supply, with a 4.7% premium in the wholesale market," he said.
California's data center market will steadily grow, but the state's power constraints and high construction costs pose barriers to gains, which is why there's been exponential growth in other states that have more tax incentives and fewer restrictions on power.
Inguagiato said that several projects under construction have been preleased in Silicon Valley and are scheduled to be delivered in the first half of this year.
Volume-Based Pricing Discounts Eliminated
Meanwhile, Inguagiato noted volume-based pricing discounts for large tenants have been significantly reduced or eliminated amid strong demand, intensifying pricing pressures with a surge in high-density AI and GPU workloads, amplifying demand for advanced infrastructure.
"This allowed operators with AI-optimized facilities (including liquid cooling and high-power density racks) to capture rent premiums over conventional colocation space," he said.
Source: GlobeSt/ALM