Record Leasing Is Expanding The Data Center Map

Data center leasing is surging to record levels, with a growing share of newly leased capacity located outside of the industry’s traditional hubs.

The first half of 2023 finished with record absorption across the North American data center market, according to a JLL report released Thursday. This unprecedented leasing activity shows no signs of slowing, with almost all the new inventory set to be delivered this year already pre-leased or under agreement.

JLL expects more of the same through 2024, with cloud and artificial intelligence-fueled demand stoking the race for hyperscalers and enterprises to secure data center space years in advance. 

The growth in new data center leasing comes despite continued constraints on development, with many of the industry’s core markets' available power fully tapped. Tenants are now snapping up huge chunks of capacity wherever power is available, driving a higher percentage of absorption to secondary and tertiary markets that were previously off their radar. Northern Virginia — by far the largest data center market — ranked just third in new leasing in the first half of this year, trailing the Phoenix and Pacific Northwest markets. 

“The data center industry is continuing to experience explosive growth in demand, which is leading to completely sold-out primary markets, secondary market expansion and the development of newer tertiary markets,” said Andy Cvengros, a managing director at JLL and the firm’s U.S. data center lead. “Major markets and most secondary markets have reached a state of supply and demand imbalance. … We don’t see any sign of this demand slowing or the power situation getting any better.”

North American data center markets added 1,263 megawatts of new leasing in the first half of the year, topping the previous high of 1,200 MW set in the first half of 2022. Much of the record volume emerged in the last 60 days of the second quarter, and experts said that accelerated absorption has continued, with momentum likely remaining elevated well into 2024.

More than 3,000 MW of data center capacity are under construction across U.S. markets, according to JLL, and the firm expects almost all of it to be pre-leased or under some form of exclusivity in advance of delivery.

As demand for data center space continues to outpace supply, some tenants say they have been forced to negotiate for future data center space that is still early in the development process, often years before they may actually occupy it. Waiting means risking being shut out of key markets. 

“Everything has changed — as recently as a year ago, there was inventory everywhere, but those days are over,” said John Hawkins, IBM’s global cloud data center real estate lead, speaking at Bisnow’s DICE South event in Dallas earlier this month. “We’re making commitments to take capacity two or three years out because, otherwise, you’re losing out. You just can’t operate the way we had been in the past.” 

Rising demand for data center space has been driven primarily by the continued growth of cloud providers, but it was put into overdrive during the last year by the emergence of the artificial intelligence arms race, experts say.  

The cloud services industry dominated by Amazon Web Services, Microsoft, Google and Oracle has continued the steady growth that has helped the market more than double in size since 2018. Cloud continues to be the backbone of the data center sector, accounting for the largest share of leased capacity in most major markets, according to JLL. 

While there were fears early this year that macroeconomic headwinds would slow cloud growth and curb data center demand, any such slowdown was quickly overshadowed by a wave of demand from Big Tech tenants scrambling to build out the infrastructure to support generative AI. Big Tech’s pivot toward AI has added fuel to an already-heated demand environment that experts say is just beginning to be reflected in leasing numbers.

“This whole phenomenon is literally 90 days old. ... In Q2, it was just an explosion,” DataBank CEO Raul Martynek said at DICE South. “This is very new, and what’s happening now is that wherever space is available, it’s being taken.”

The emergence of generative AI has also dramatically increased the scale of the leases that the industry’s largest tenants are looking for. The enormous amounts of power needed for AI computing have hyperscalers searching for hundreds of megawatts of capacity anywhere they can find it. Data centers themselves are getting larger as a result, with individual lease deals exceeding the volume of many markets in previous years. 

“All of these [hyperscalers] have expressed being behind the eight ball in a big way in terms of meeting demand and needing gigawatts of power over the next 24 months that doesn’t exist,” JLL’s Cvengros said. “Everybody's clamoring for whatever is available.”

But more and more, what is available for data center tenants isn’t in the markets that have traditionally accounted for the bulk of the industry’s capacity. 

A growing percentage of the industry’s new leasing is coming outside of major markets, according to JLL data — a trend driven by constraints on power in established data center markets that are making new capacity extremely difficult to deliver quickly. The growing scale of individual data center projects means markets are being sapped of power faster than ever, with even some newer markets rapidly approaching the carrying capacity of their energy infrastructure. 

With timelines for utilities to expand a market’s power availability often measured in years, tenants hungry for new capacity at greater scale than ever before are hunting for power in any market where it is available. 

“Primary markets are tapped out on power: Chicago, Ashburn, even Phoenix — any major market where there’s been large development is largely tapped out,” Cvengros said. “All this cloud demand is pushing development that just can’t be sustained in some of these markets, so they’ve looked at new areas like Columbus, Ohio, Salt Lake City, Denver — secondary and tertiary markets.”

This shift away from primary markets can be seen in the industry mecca of Northern Virginia, where high-profile constraints on available power have made headlines for the past year.

While Northern Virginia has more data center capacity than the next seven markets combined, the region's 184 MW of new leasing over the first half of the year was behind Phoenix's 194.5 MW and the far smaller Pacific Northwest market's 185.9 MW, according to JLL. Markets like Atlanta and even Salt Lake City, with 120 MW and 114 MW of absorption, respectively, weren't far behind Northern Virginia’s new leasing totals.

For now, experts say the largest data center users still want to be in primary markets. Indeed, Northern Virginia’s planned development pipeline is triple that of any other market, although the delivery of much of that capacity may be years down the line. But as users hunt for whatever capacity can be occupied as quickly as possible, they’re expanding their maps and changing their calculus when it comes to where their IT workloads need to be located, even if it means going to markets they would never have considered a year ago due to high latency or less-than-optimal existing connectivity. 

“This has opened up more locations,” Chris Curtis, co-founder and senior vice president for development and acquisitions at Compass Datacenters, said at DICE South. “A lot of our customers used to be much more location-sensitive, and now there are more users that don't care as much about location as they care about where they can find power.”