Data-center sector sees growth in 2021. But developers are frequently battling industrial players for land.
By Ashley Fahey
Tampa Bay Business Journal
Published: Sep 16, 2021

The U.S. data center market started off 2021 on a strong foot, momentum that's expected to keep up for the foreseeable future.

Data-center construction increased from 611.8 megawatts at the end of 2020 to 680.8 megawatts in the first half of 2021, according to recent research by Jones Lang Lasalle Inc. That's still below the record set in the first half of 2020, when the construction pipeline was nearly 695 megawatts across 14 markets.

Northern Virginia continues to be far and away the biggest data-center market, given that some 70% of internet traffic flows through the area, said Andy Cvengros, managing director with JLL's data-center team. Northern Virginia had 339 megawatts under construction in H1, followed by 181 megawatts in northern California, 32 megawatts in Phoenix, 31 megawatts in Salt Lake City and 30 megawatts in Atlanta.

Cvengros said Southwest markets like Phoenix may continue to benefit from data-center growth, as power rates, a lack of tax incentives and California land prices are having some groups look at other, nearby states.

States like Illinois have also passed data-center incentives legislation, which has helped spur large developments and investments there.

John Hatem, executive vice president and chief operating officer at Dallas data-center real estate investment trust CyrusOne Inc., said in an email the company's strategy is focused on development in digital gateway markets. That's typically high-GDP centers with high connectivity and demand from large companies and hyperscale customers.

"Demand remains strong in both the United States and Europe, with some of our strongest markets being Northern Virginia, Phoenix, Texas, Frankfurt and London," Hatem said.

Cvengros said JLL expects demand to continue in the next two years. More off-the-beaten-path markets, such as Minneapolis, Las Vegas and Nashville, Tennessee, could stand to benefit, he continued.

Data-center absorption was 276.6 megawatts in H1 across 14 markets analyzed by JLL. That figure was also shy of the record set in H1 2020 of 294.6 megawatts. But data-center demand tends to be lumpy in nature, Cvengros said.

One particular hurdle facing data-center developers: They're frequently competing with industrial real estate groups on land.

Cvengros said traditional industrial developers know land and local players in a market very well, and can very quickly put properties under contract without a lengthy due-diligence process. Data-center developers, on the other hand, aren't as intimately familiar with local markets and have specific requirements for power and fiber. Frequently, land has to be rezoned or requires some type of variance to accommodate a data center.

A data-center developer will frequently try to buy land from an industrial group but nearly always at a premium, given the insatiable demand for warehouse space across the United States. It's especially prevalent in markets like Phoenix, Las Vegas and Utah, JLL found.

The JLL report notes limited land availability and increased competition with industrial players could hinder expansion plans for data-center users and operators. But it's not clear to what extent.

Cvengros said data-center developers are oftentimes squeezing the toothpaste at both ends because of land prices, cost increases for materials and up to 40% price compression in the past two years. Owners are more frequently developing centers at scale, including two-story centers and substations on sites.

Hatem said despite not being able to make firm predictions about what's next for data centers, underlying trends in technology, artificial intelligence, 5G and quantum computing are progressing at a rapid pace, and the data-center industry is at the epicenter of the new digital era.

"As goes technology, so go data centers," he said.