Power Struggles, Emerging Hubs And New Investors: Data Center Leaders Make 2024 Predictions

Artificial intelligence supercharged the data center industry last year, and it isn't expected to slow down anytime soon. But the demand boom this year is running headlong into a supply shortage and power crises in many markets, and industry leaders anticipate it will lead to major shifts in how and where data centers are built. 

Thirteen leaders from across the data center industry spoke with Bisnow about their predictions for the trends, changes and challenges that will shape the data center landscape in the year ahead. While the details revealed in their crystal balls varied, some common themes emerged. 

Those who spoke with Bisnow all said they expect that AI will continue to drive demand for data center capacity beyond developers’ ability to supply it, with shortages of available power hitting more markets amid a host of lingering development challenges. 

An influx of new capital is expected to pour into the data center industry this year as investors shift away from other struggling sectors. This will create heightened competition to fund data center development, but the issues constricting supply in many markets could limit the opportunities and force investors to take bigger risks.  

“The data center market is a great place to be in 2024, but the challenges are becoming global,” said Alessandro Lombardi, CEO of data center operator Elea Digital. 

Here are the trends and dynamics that experts predict will shape the data center market in 2024.

Power Shortages Will Make It Hard To Keep Up With AI Boom

The AI demand wave isn’t crashing anytime soon. 

Over the past year, the data center industry was hit with what Lombardi called “a tsunami of artificial intelligence deployment.” Big Tech’s AI arms race drove record leasing numbers, as Microsoft, Google and Amazon Web Services spent billions in a scramble to secure the infrastructure to support the AI tools and products they have bet their futures on. Hyperscalers needed more capacity than ever, and the data centers needed to be bigger, with the average facility tripling in size. 

Not a single industry leader who spoke with Bisnow said they expect to see demand slow in the year ahead. The industry consensus is that tech giants and a rising number of large enterprises investing in AI will continue snapping up new capacity as fast as it can be built. 

“We’re going to see that same trajectory, and we don’t see it slowing down. They need space, they need it immediately, and they want a runway to continue to grow,” said Karlton Holston, executive vice president for digital infrastructure at Landmark Dividend. “If there’s available capacity, even if it’s not perfect for them, they’re going to gobble it up.”

There is evidence that the pace of demand will increase in the year ahead. Flexential Chief Innovation Officer Jason Carolan pointed to the nearly 2 million Nvidia processors for AI — chips that will require up to 3 gigawatts of data center capacity — set to be delivered to U.S. markets in the coming months. 

“All those things need homes, and that's really what’s powering a lot of the demand cycle,” Carolan said. 

Supply of new data center space already trails demand, but that imbalance will be exacerbated in the coming year as developers face lengthening timelines to bring new data centers to the market, experts said.

The most significant factor: an increasing scarcity of available power, with utilities in a growing number of markets unable to deliver power to development sites, sometimes for years. Almost always, the cause is insufficient transmission infrastructure capable of handling the surging power demand in established data center hubs. Upgrading this infrastructure can take the better part of a decade. 

While Northern Virginia and Silicon Valley have faced high-profile power constraints for the past 24 months, industry insiders told Bisnow the coming year will see critical power problems across multiple markets as large-scale campuses push local grids to their limits. 

“Solving power availability complications from a supply standpoint has become increasingly challenging,” said Gordon Dolven, director of Americas data center research at CBRE. “Many utility companies in primary markets are tapped out on their ability to deliver power in 12, 24, 36, 48-plus months.”

But it isn't just power scarcity that will hinder development in the year ahead. Dolven and others pointed to rising construction costs and labor shortages as key factors that will slow the creation of new supply, in addition to continued supply chain challenges.

“The physical bottlenecks present a nearer-term concern, as AI innovations may stall if capacity can’t be delivered to enable AI hardware to operate,” said Tom Traugott, senior vice president of strategy at EdgeCore Digital Infrastructure

Challenges In Top Markets Will Spawn New Data Center Hubs

A growing share of new development will happen outside of traditional data center markets, industry leaders said.

“We're going to see a cycle going from consolidated locations to decentralization,” said Jeffrey Moerdler, a longtime data center and telecom attorney and a member at Mintz. “We're going to see growth at a faster rate in smaller locations, places like Toronto, Wyoming or Montana.”

Power shortages will be the primary factor driving the shift away from traditional markets in the coming year, experts told Bisnow. The need for new capacity is so great that developers and end users are increasingly willing to accept locations that would have been unacceptable months ago due to insufficient connectivity or latency. All that matters now is that local utilities can deliver power quickly. 

“It’s all about chasing power. You’re going to see a lot of folks building in areas that have not traditionally been data center hubs at all,” said Andy Cvengros, a managing director at JLL and the firm’s U.S. data center lead. “Traditionally, we've focused on core markets like Chicago, Dallas, Ashburn or Phoenix as growth markets, but a lot of that has shifted to new areas.”

This flight to power will drive growth in markets like Reno, Nevada, and Columbus, Ohio, that have already seen an influx of data center development over the past year, Cvengros said. But he and other industry leaders also said they expect new hubs to emerge in the coming months, pointing to potential growth in places like Charlotte, Richmond, Virginia, and Oklahoma City. 

“These new markets … can’t be constructed just anywhere, as they will need to be able to support the scale of the industry,” Traugott said. “Data center providers will follow the availability of power and, more importantly, where investments in power are being made to support long-term capacity and availability for their buildings.”

But it isn't just power shortages that are driving the decentralization of the data center landscape. AI has played a role as well. 

The past year already saw hyperscalers willing to build data centers for training large language in nontraditional locations with poor connectivity and far from major data center hubs. Now, the AI adoption curve is shifting toward inference, meaning that hyperscalers will start looking to locate AI computing close to end users in major population centers. Experts said this will drive a more scattered leasing picture in the year ahead as hyperscalers deploy smaller “edge” inference nodes across multiple markets. 

“AI deployments are now spread across the country to do inference, so I think that's where the demand curve is going to be,” Flexential's Carolan said. “It's going to be distributed.”

Influx Of New Investors Will Accelerate Transaction Volume 

Data centers have been one of the few bright spots in the commercial real estate landscape in recent months, and experts said they anticipate a growing number of institutional investors looking for opportunities to deploy capital in the sector this year. 

“More conservative investors who’ve been on the sidelines and have been hurting with other product types will be investing in 2024. I’ve talked to a couple of them that are incredibly sophisticated but don’t know the industry well and have major FOMO,” said Michael Rechtin, a partner in the data center practice at DLA Piper. “Some of them have a mandate to place hundreds of millions of dollars in the industry this year. They don’t have any exposure to the industry and feel like they need it.”

Much of the new capital flowing into the sector is looking to fund development, unsurprising in a sector where vacancy rates sit well below 5%. Yet the data center industry is small compared to other asset classes, and there is significant competition for a limited number of investment opportunities — particularly as asset management giants like Blackstone, Brookfield and KKR increase their presence in the space.

Investors looking to gain a foothold in the sector will be forced to take risks and operate out of their comfort zone to find opportunities to deploy capital, relying on development partners that have long track records in the space. 

“These funds that were looking at 100% triple-net-leased assets only now are asking how to get into speculative development in a safe way,” JLL’s Cvengros said. “You're seeing big funds like Harrison Street partner with companies like Lincoln Rackhouse or AREP, and you're going to see more of that.”

In an increasingly competitive and specialized data center development landscape, this degree of reliance on development partners carries significant risk for investors, Rechtin said.

“But there's so much competition for these deals and there's a lot of people out there who can write big checks who want to do this. I think some of those bets will be made with developers who just aren't able to pull these things off,” Rechtin said. “There probably will be a bit of fallout from that.” 

Experts also said they anticipate a significantly higher volume of transactions for existing assets in the year ahead after a slow 2023. Landmark Dividend’s Holston pointed to an expected dip in interest rates as a driving force, as well as growing comfort among both buyers and sellers with valuations that shifted last year. 

“2023 was one of the slowest years recently with the number of transactions that occurred, so there’s a hunger for deals, and I think there will be much more activity in 2024,” Holston said. “We don't anticipate anything dramatic, but we do anticipate that people are getting comfortable with a bit more stability in the market and being able to underwrite and do deals.”