New Submarkets Competing To Cash In On Data Center Boom

U.S. communities hoping to attract data centers need to bring more to the table than available land.

As demand for capacity continues to grow — and a steady stream of investor capital floods into the industry — the pandemic-stimulated data center boom shows few signs of slowing, industry leaders said at a Bisnow webinar this week on emerging data center submarkets in the mid-Atlantic. 

While large data centers have traditionally been clustered in hubs such as the so-called Data Center Alley in Northern Virginia’s Loudoun County, advances in network technology and a shortage of available land in these hubs are driving colocation operators into nearby markets that, until recently, had little large-scale internet infrastructure.

At the same time, communities near new hyperscale facilities for Google, Facebook and Amazon have suddenly become viable locations for large data centers. 

But longtime industry leaders caution that luring data center capital development requires more than fortunate geography, and local officials need to be armed with incentives, reduced red tape and industry-specific knowledge if they want to attract large-scale providers in an increasingly competitive market.

“I think what you’re seeing, at least in the Virginia market, is that although the state does have incentives, you’re seeing local communities focusing on being a low-cost place to operate,” said Jeff Green, information technology communications manager for the Department of Economic Development in Virginia’s Prince William County.

Prince William County, just south of Loudoun County, has made data infrastructure a centerpiece of its economic development strategy. The county has 1,200 acres of data centers underway or planned, with another 16 to 20 buildings in the pipeline, which represents more than $2B in capital investment in the data center market in 2020 alone.

At the heart of this strategy is a tax incentive focused on data hubs — an aggressive 50% depreciation schedule for certain computer equipment. Such incentives are now practically a prerequisite for investment, said Daniel English, president and founder of Legacy Investing, which focuses on tech-centered real estate assets.  

“We’re seeing that tenants will avoid markets that don’t have significant incentives," English said. “We won’t invest in data center assets that don’t have them.”

Firms are looking for more than just tax breaks from counties and municipalities. Local governments now pitch themselves as development partners with sector-specific expertise and programs targeting the industry’s unique needs. 

Recognizing that colocation providers often need to build quickly to meet unexpected tenant demand, Prince William County established data center zoning districts and an expedited permitting process to reduce time to construction. The county also partnered with the industry on workforce training to help mitigate the ongoing data center labor shortage. 

By contrast, English said that government officials and planners in some potentially competitive markets need to be told what a data center is. 

“There are markets like Prince William County and some other markets where people are very aware and they want to facilitate and make it easy from a permitting and incentive perspective,” he said. “Not all government representatives are that savvy.”

Providers are also looking for local governments to demonstrate a long-term commitment to developing the infrastructure needed to accommodate the evolving needs of data centers in the future, English said, citing the need for fast access to multiple sources of power. Data mecca Loudon County established an independent water system to accommodate the cooling needs of data centers without adding risk to residents’ drinking water. 

Access to renewable energy is increasingly a primary consideration for siting data facilities as companies across a range of sectors identify more sustainable data solutions as a key element of their carbon reduction goals. 

“ESG has become a huge factor in everything that we do,” said Justin Puccio, executive vice president of corporate development at DataBank. “From hyperscalers, but from enterprise as well, that aspect of how you operate is becoming a key driver in the decision-making around site selection.”

Centering a community’s economic development strategy around data centers has its detractors. Bisnow reported last month that even Loudon County is seeing pushback on planned data center development by residents and officials worried the facilities put a damper on mixed-use development. 

Yet officials in Prince William County say their efforts to cater to data centers have more than paid off in the tax revenue received from the industry.  

“Our tax revenues from data centers in 2012 was around $4M. Now it’s around $64M,” Green said. “It might not have the jobs everyone is looking for, but it does bring significant benefit.”