Search for power pushes emerging data center markets into the spotlight

CHICAGO, Feb. 28, 2024 – Society is rapidly accelerating the volume of data we create, which is foundationally important to the way we work, live and play. If data centers are the bricks holding modern society together, then the power that operates them are the mortar. According to JLL’s new H2 2023 North American Data Center Report, data center demand remained strong throughout the year, but the search for power and land among limited supply is forcing a shift toward secondary and new, emerging markets.

As data center demand shows no sign of deceleration, power availability and delivery timelines continue to damper absorption. For primary markets, most of the net leasing in H2 2023 occurred in under-construction or planned product, rather than existing inventory. JLL expects pre-leasing will continue to accelerate as construction and power delivery timelines are not likely to slow over the next 12 months.

“Demand continues to be at all-time highs, and data center growth is rapidly expanding from core markets in search of power,” said Andy Cvengros, Managing Director, Data Center Markets, JLL. “Given almost all of the capacity coming online this year is already pre-leased, data center users must plan further ahead in their IT strategy and commit to space and power on accelerated timelines to find capacity to fit their requirements.”

Though secondary and emerging markets are critical to countering supply challenges, primary data center markets are still king, with 3.4GW of transactions signed, bringing the full year total to a record 4.3GW. Northern Virginia ruled all as the largest data center market, with 1.6GW of transactions, of which 884 was preleased for deliveries dependent on power availability over the next few years. Phoenix followed with 748MW of new capacity signed. Led by the Northwest, secondary markets added 554MW for the year.

AI drives data center and power demands

AI and Large Language Models (LLM) like ChatGPT require tremendous amounts of power, and its popularity is soaring. ChatGPT had just over 100 million monthly users in January 2023. By November, it had over 100 million active users weekly. Additionally, training of ChatGPT-3 consumed over 1,287 MWh of power. With hundreds of millions of daily queries, ChatGPT uses about as much power as 33,000 households.

“More and more companies and governments are exploring AI to do everything from customer service chatbots to advanced data analytics to operations management in order to achieve corporate objectives,” said Matt Landek, Managing Director, Data Center & Telecom, Work Dynamics, JLL. “All of this not only requires a tremendous amount of power but the need for additional infrastructure to handle the capacity.”

Cloud and hyperscale users are also driving demand. As these users dominate in the larger markets, smaller enterprise users are pressed to find colocation space and power to meet their needs. Some enterprise users are evaluating the shift from enterprise to cloud due to rising costs, latency and information security concerns and are moving toward a “distributed cloud” environment or outsourcing enterprise data center operations. Additionally, proximity to interconnection points is driving site selection for data center demand, but these edge deployments tend to be smaller.

Secondary and emerging markets gain ground

Data center capacity under construction in primary and secondary markets exceeds 5.3GW, which is enough energy to power all the households in the San Francisco metro area for one year. Lack of availability is leading users to secondary markets, which now comprise almost 20% of capacity under construction.

Almost all markets are seeing an uptick in construction in response to accelerating demand. Salt Lake City is experiencing the fastest acceleration in construction set to more than double its existing capacity, and Atlanta’s pipeline will boost its capacity and national profile significantly. Additionally, data center movements in up-and-coming areas like Columbus, Minneapolis, Reno, Mississippi and Indiana are opening up new territories, and foreign investors and users are expanding into Latin and South American markets.

“Data center developments will expand to wherever there is enough power and available land,” said Kari Beets, Senior Manager, Data Centers and Industries Research, JLL. “As capacity becomes limited in major markets, developers will seek stranded power, especially for AI uses for which latency is less of a concern. New tertiary markets and outposts will open, focused on reusing power capacity developed for other uses.”

Innovative design is crucial

Ground-up construction is just a portion of new data center capacity. Owners are expanding existing data centers both horizontally and vertically. Upgrades in existing power infrastructure or onsite power generation can also add capacity – making data centers denser in megawatts per square foot. Developers and enterprises realize their existing design does not support AI’s power-hungry demands, and traditional air-cooling technologies are no longer effective, ushering in an alternative method such as liquid cooling and greater change to design and operations.

“While data center campuses have been around for decades, we’ve really seen innovation in design over the past five years due to increased investor interest, land constraints, occupiers prioritizing sustainability measures and new technology like AI that require increased capacity,” said Priya Velamakanni, National Data Centers Lead, Project & Development Service, JLL. “This lack of available land has led to the development of multi-story data centers, and technological advancements have given way to announcements for new developments now commonly exceeding 100MW.

More opportunities with capital markets

Alternative investment segments such as data centers are gaining interest from investors. Data centers are seeing increasing investor allocations – with the sector seeing a 9% CAGR in transactions since 2013 – the highest of any sector other than life sciences.

“The size of data center user requirements continues to increase at a rapid rate, which has condensed data center development timeframes and increased the need for capital,” said Carl Beardsley, Senior Managing Director, Data Center Leader, Capital Markets, JLL. “Previously, a data center operator could ramp into a multi-billion-dollar development over a five-to seven-year period. The pre-leasing dynamic has caused private equity firms to deploy capital at a faster rate, which opens an opportunity up for more entrants in the capital stack.”

Companies with backing from these funds are expanding rapidly but often don’t have the framework for the talent and processes to run these data centers. These companies are turning to facilities and property management experts with a deep bench of engineers trained for critical environments. Data centers are a unique asset class, requiring specific skills to operate at their best, and, with labor shortages for trained engineers, investors seeking to capitalize on this opportunity will need to partner with seasoned operators.

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