Power-Hungry Data Center Developers Push Into Uncharted Markets To Avoid Shortages

As utilities in major data center markets struggle to keep up with the industry’s energy consumption, data center developers are increasingly building far beyond the borders of the sector’s traditional hubs.

The rapid growth of the data center sector in North America has largely been concentrated in just a handful of markets: Northern Virginia, Silicon Valley, Dallas, Atlanta, Chicago and Phoenix.

But experts say a growing share of new development is happening outside the industry’s traditional boundaries, with second- and third-tier markets accounting for an increasingly large share of growth. Developers are launching a growing number of large-scale data center build-outs, often on spec, in markets like Reno, Nevada; Des Moines, Iowa; Austin, Texas; and Columbus, Ohio — and they’re finding tenants eager to snap up this new capacity.

Driving this surge in demand in secondary and tertiary markets is the sector’s voracious appetite for power, which is significantly outpacing the ability of utilities in the industry’s largest markets to provide it. Data center providers and their tenants are looking for readily available power anywhere they can find it, and that increasingly means going to markets that may not have been in the conversation just two years ago.

“Clearly, the demand conversation is becoming much more geographically diverse than it ever has been before,” said Chris Downie, CEO of colocation data center provider Flexential, speaking at Bisnow’s DICE East event last week at The Ritz-Carlton in Tysons, Virginia. “We're seeing large-scale demand sets across markets like Hillsboro, Oregon, and Atlanta and Denver and then a ripple effect on Raleigh and Charlotte and in Nashville.”

This shift toward secondary and tertiary markets was reflected in first-quarter leasing numbers. A report released last month by industry analyst group Data Center Hawk showed absorption in North America increasingly spread over multiple markets instead of being concentrated almost entirely in the traditional hubs. 

“Demand has spread out with multiple markets representing a substantial portion of overall absorption,” the report states. “Some companies that were considering Northern Virginia for their requirements are now opting for alternative locations such as Atlanta or Columbus. Similarly, requirements in California are shifting towards cities like Las Vegas, Salt Lake City, or Denver.”

Experts attribute the trend to the fact that primary data center markets are running out of power.

In Northern Virginia, utility Dominion Energy had to delay power delivery to multiple projects in the heart of the industry’s largest market last year due to insufficient transmission infrastructure, while California’s Silicon Valley Power may not be able to energize new data center substations until 2029. Similar constraints are suddenly on the horizon even in newer data center hubs like Phoenix and Atlanta, while a recent CBRE report pointed to looming transmission problems across multiple markets, from Dallas to Central Washington. 

“Available capacity in all of these major Tier 1 markets is becoming strained: look at the Bay Area and Virginia,” said Dean Nelson, CEO of Cato Digital, speaking at DICE East. “There's just constraints everywhere — and by the way, it's about to get worse.”

One year ago, a lack of robust fiber connectivity or concerns about the local labor force in a smaller market might have been disqualifying. Now, as long as low-cost power is available, developers and their investors are increasingly willing to shoulder the added costs of addressing these issues to build new inventory on spec, confident the demand will be there.

“It's just all about availability of power. That's the first criteria before you go down to whether there is fiber nearby or if there’s a good pool of labor resources and all the other things that used to be higher up on the list from a site selection perspective,” said Ali Greenwood, executive director in Cushman & Wakefield's data center group. “You hear about flight quality in office — you’re seeing flight to power here.” 

Although noncore markets are likely to see a growing share of development and demand, experts say that the industry’s central hubs aren’t going anywhere. Indeed, Northern Virginia added five times more inventory in 2022 than the fastest-growing secondary market, according to CBRE. 

Hyperscale tenants, in particular, will continue to place enormous value on clustering at least some of their computing infrastructure in dense primary markets, where closer proximity allows faster processing times needed for certain applications. So even as the data center landscape decentralizes, experts say these core markets will continue to grow as fast as the supply of power allows. 

“If you're talking about cloud or very scaled customers, they probably really care about Tier 1 markets — those concentrations or densities, but if you're talking about enterprise customers, they probably would like to be a bit more distributed in nature and they don't need these very sensitive epicenters to do what they need to do with their workloads,” Credit Suisse Managing Director Sami Badri said at DICE East. “The significance of Northern Virginia obviously is going to be maintained, but the level of openness to expand to other markets has never been better."