Lagging Data Center Construction In Canada May Be A Missed Opportunity

Canada isn't building enough data centers, raising concerns that the market may not be able to take advantage of soaring demand.  

The United States is experiencing an unprecedented wave of data center development that is set to nearly double the country’s total data center inventory by the end of the decade. But that building boom hasn't extended north of the border. As data center buildout surged in the U.S. throughout 2023 and early 2024, Canada instead experienced a precipitous drop in new construction — a slowdown that saw the total new capacity across the entire country dwarfed by individual data center projects in the U.S. 

Canada’s sluggish supply growth has emerged despite attractive market fundamentals for developers and soaring demand for data center inventory that is expected to grow significantly in the years ahead.

While a larger pipeline of new construction is expected starting next year, industry leaders speaking at Bisnow's DICE Canada event, held at the Sheraton Centre Toronto Hotel, expressed concern that it won’t be enough to avoid stymieing the long-term growth of Canada’s data center market and squandering the country’s potential as a global artificial intelligence leader. 

“In Canada, 2024 scares me a little bit. We don't have nearly as much supply coming to market as what is necessary,” said Michael Borron, a Toronto-based associate vice president in Cushman & Wakefield’s Global Data Center Advisory Group. “Demand is strong, and our pipeline for development is still not enough. We need more investment and more operators coming to the market to fill the supply gap.”

Cloud and social media giants like Amazon, Microsoft, Google and Meta are driving data center development in the U.S. at a record clip that is only accelerating with Big Tech’s massive investments in AI. The new data center capacity added last year alone was roughly equivalent to adding a second New York City to the nation’s power grids. The first quarter of 2024 saw inventory jump an additional 24.4% year-over-year, with 807.5 megawatts added in just the four largest U.S. markets, according to CBRE. 

Yet in Canada, there hasn’t been anything close to a corresponding surge in new data center development. 

Fewer than 80 megawatts of new capacity came to market in 2023 across the entire country, down more than 50% from the year prior, according to Cushman & Wakefield data shared with Bisnow. A similar total is expected this year. Ontario and Quebec, Canada’s two largest data center markets, have a combined long-term development pipeline of close to a gigawatt — less capacity than some individual projects and lease deals underway in the U.S. 

Although Canada has always been a much smaller data center market than the U.S., that gap is widening significantly.

Cushman & Wakefield’s Borron points to Toronto and Chicago: two markets that grew at nearly identical trajectories from 2010 until 2020, according to data provided by the firm. While Toronto’s data center inventory had been roughly half of Chicago’s for a decade, the past three years have seen Chicago rapidly add inventory while Toronto remained stagnant. Today, Toronto’s data center market is one-third the size of Chicago's.

The anemic pace of new data center development across Canada isn't due to a lack of tenant demand. In 2023, capacity demand was close to double the new supply delivered that year, according to Cushman & Wakefield. Subsequently, the capacity coming to market is being leased nearly as fast as it can be built, with the vast majority of capacity scheduled to come online through 2025 already preleased. 

“The demand pipeline is full right now with not a lot of supply to put that in and close that business,” said Sean Maskell, president of colocation provider Cologix Canada. “We’re going to have to figure out how we manage that demand and how we can build into it.”

The lack of investment in Canadian data center markets has frustrated Maskell and others in the industry, who point to strong demand projections and attractive market fundamentals.

Within Canada, domestic demand growth is expected to accelerate nationwide as the AI innovation economy gains a foothold, building on a robust research and development landscape that places Canada near the top in an influential analysis of global AI leadership. 

But experts say demand is also poised to grow as Canada becomes an extension of U.S. data center markets. 

As the data center industry faces well-documented power constraints across every major U.S. hub, developers desperate for cheap, available power are increasingly pushing beyond the industry’s traditional borders. The boundaries of each market are expanding as large-scale projects are being built at sites far from major metro areas or longtime digital infrastructure hubs — locations that never would have been considered just two years ago. 

Just as the Chicago market now extends across Indiana and the Northern California market has pushed into Reno, Nevada, and Oregon, experts say there is an opportunity for Canadian markets like Vancouver, Toronto and the Quebec province to effectively become submarkets of major American population centers like Chicago, Seattle and the Northeast corridor. 

“This diversification geographically presents opportunities to take a little piece of the demand from the Northern Virginias of the world, which will have a huge impact on places like Toronto and Vancouver,” said Jeffrey Moerdler, a longtime data center and telecom attorney and a member at Mintz.  “This is going to lead to growth in secondary and tertiary markets around North America, but I think it will particularly affect Canadian markets.”

Beyond just proximity to major U.S. markets, one of Canada’s most appealing characteristics for U.S.-based developers is its power grid.

While Canada’s power supply landscape varies significantly between provinces, some regional grids offer power that is both cheaper and cleaner than that of most U.S. markets, DICE panelists said. Quebec, in particular, has among the cheapest power rates in North America, with almost all of it generated through emissions-free hydroelectric plants. 

This presents a growth opportunity for AI-focused data centers. These facilities require more power per square foot than traditional data centers yet can be located in remote locations far from populations centers and with little fiber infrastructure. 

Developers are simply looking for an abundant supply of cheap, ideally green, energy, which is available in non-traditional markets like Manitoba. 

“It's going to grow in Canada. What we see in the U.S. today tends to be a crystal ball for what we’re going to see in 18 months in the Canadian market,” Maskell said. “We see a lot of U.S. companies today trying to get into Quebec for the power price as they look for deployments anywhere in North America with low power cost.”

But if demand projections across Canada are so bright, why has development been so underfunded and growth so sluggish compared to the U.S.? 

Some of this, DICE panelists said, is simply due to the larger size of U.S. markets and the subsequent “network effect” in which data center development clusters around large hyperscale projects. The earlier emergence of AI demand in the U.S. has also skewed the numbers, they say, particularly since high-performance computing for AI has made newer data centers bigger.

But panelists also said that some of the most desirable regions for data center developers in Canada are experiencing similar issues to major U.S. data center hubs. Subsequently, there is little low-hanging fruit when it comes to finding sites for large-scale campuses.

Most notably, Quebec, with its low-cost green power, had seen an influx of investment in large-scale data center projects through the first half of 2023. But that subsequently led to power constraints that drove the Quebec provincial government in October to limit the number of data centers it can power. Companies that want to build large-scale data centers must now get approval through a provincial government selection process.

These new restrictions have actively reduced the province's development pipeline. Vantage had planned more than a billion dollars of development in the province but had to cancel those plans after having its application rejected. While companies like Microsoft have since advanced projects in Quebec, the additional red tape limits the province’s appeal as a market where power can be acquired faster than American alternatives.

Cushman & Wakefield’s Borron said a Canadian development opportunity needs to have a clear advantage over its alternatives in U.S. markets — particularly on power price or speed to market — in order for developers to opt for the Canadian site, if only because of the additional complications and red tape that come with operating and making deals across international borders. All things being equal, U.S. developers will always choose the U.S. site, so Canadian markets will need to win on price and speed. 

“Growth in these markets is dependent on the utility providers continuing to funnel in that power,” said Strahan McCarten, senior vice president for product and strategy at eStruxture Data Centers. “The regions that do well will be the areas where you can get power in a five-year time frame without having to do the heavy lifting.”

Despite significant optimism around demand growth, there is also growing concern that an insufficient supply of new inventory, unless rectified quickly, could do more than limit the growth of Canada’s data center industry: It threatens the nation’s ability to turn its significant investment in AI into economic growth. 

For the past decade, Canada’s government has pumped millions into programs to promote AI research and bring top AI talent to the country. But while Canada is highly regarded as a center of AI scholarship, its AI infrastructure ranks just 23rd in the world. That ranking is expected to fall further if enough new data center capacity doesn’t emerge quickly. Without more data center investment, experts say, Canada may miss an opportunity to take a leading role in the coming AI-led digital economy.

“The bottom line is we need investment,” Borron said. “Right now, Canada is underfunded, but we do have a great opportunity for AI.”

“Even if we get a fraction of the U.S.'s AI market, that’s significant growth for Canada.”