Development Slowdown Will Make Data Center Supply Fall Further Behind Demand, JLL Predicts

The data center industry is struggling to keep up with demand and may be about to fall even further behind, according to a new market report. 

Data center leasing and construction exploded in the first half of 2022, with already unprecedented levels of demand expected to grow exponentially in the months ahead, according to the Global Data Center Outlook report JLL released Monday. 

Yet this skyrocketing demand, driven by cloud service providers and social media, is running headlong into shortages of developable land and power in key markets, along with worsening supply chain disruptions. JLL's report said this will lead to slowdowns in new construction and to developers pushing into new markets as available data center inventory becomes increasingly scarce. 

“Macroeconomic challenges like power and land availability in primary markets could slow data center construction this year, leading to even tighter supply side conditions than in 2021. This may force developers to look outside of traditional markets,” JLL Managing Director Andy Cvengros said in a release. “While data center construction activity has dramatically increased to catch the current and future market requirements in the post-pandemic digital world, the challenge now is how to support future development in key areas moving forward.” 

The numbers from JLL paint a picture of an increasingly insatiable appetite for data center space led by hyperscale cloud providers like Amazon Web Services, Google and Microsoft and social media giants like Meta.

Leasing activity in the U.S. for the first half of 2022 almost exceeded the full-year total in 2021, driven by historically high volumes of pre-leasing. Year-over-year absorption numbers grew more than 400% in the Phoenix, Dallas, Chicago, Atlanta and Pacific Northwest markets. 

And for now, the development of new inventory is blazing forward at record pace, even if it’s not fully keeping up with demand. The data center construction pipeline in the U.S. for the first half of the year already exceeded last year’s total and has grown nearly three times on a year-over-year basis.

Key markets saw inventory under construction leap dramatically from last year, with Northern Virginia jumping from 339 megawatts to 1,010 megawatts. Phoenix has seen 278 megawatts of new construction this year after having nothing under development a year ago. 

These enormous leaps in future inventory in a handful of hub markets also reflect the degree to which massive hyperscale campuses of single-tenant data centers are driving the industry’s growth. According to JLL, there are 314 new hyperscale data center campuses in the development pipeline globally. Five years ago, there were only 500 hyperscale campuses in the world. 

But despite investors hungry to underwrite data center development projects, JLL projects that new data center build-outs will slow in the months ahead, with vacancy rates expected to plummet amidst a scarcity of available space across most major markets. As the largest operators increasingly focus on building large-scale campuses hundreds of megawatts at a time, this development pattern is already running into severe land and power constraints in the industry’s most important hubs like Loudoun County and Silicon Valley. 

JLL predicts these constraints will push developers and investors to look at new markets where land and power are more plentiful. But new markets mean a slower pace of development, and power shortages may continue to be an issue that plagues development even in emerging markets where land is more plentiful. 

“The biggest problem around the corner is how to generate enough power for these newly developed sites,” the report said. 

Further exacerbating development delays are supply chain disruptions and labor shortages that are expected to persist for at least the next 24 months, the report said. The fact that demand for data centers has grown faster than anyone in the industry anticipated has made matters worse, especially when it comes to items with long lead times. 

According to JLL, these factors will increasingly drive enterprises toward cloud infrastructure, further driving hyperscale demand. Spending on cloud infrastructure jumped 24% year-on-year in the first half of 2022, and JLL projects that growth to continue at 10% to 30% annually through 2027.