Rising Land Prices Spell Trouble For Some Data Center Developers

The cost of land is starting to become a problem for some data center developers, with smaller players increasingly priced out of the industry’s most important markets.

Land cost hasn't traditionally been a determining factor in where data center developers look to build. It has represented a relatively tiny sliver of the cost and profitability equation compared to other commercial real estate sectors, and data center providers have been willing to pay whatever price is required for sites in critical hubs like Northern Virginia, Silicon Valley and Chicago. 

But now, soaring prices in these markets are changing the math during site selection, several industry executives said last month at Bisnow’s National DICE Construction, Design and Development West event, held at the Hyatt Place San Jose. 

Record demand for new data center capacity and a dwindling supply of buildable sites in prime locations have caused land prices to skyrocket. For the first time, land cost has become a barrier to entry into primary markets for smaller operators with less access to capital than industry giants. These shifting economics are forcing firms to rethink their site selection strategies to focus on cost-effective locations over established development hotbeds. 

“Prices per acre have started to climb to the point where it’s going to impact smaller developers,” Will Hedin, senior site selection manager at Iron Mountain Data Centers, said at the DICE event.

“Companies are in a position where they have to prioritize markets based on cost. Finding the balance of available power and customer demand and land prices that aren't going to blow up your economics is going to be more of a priority, especially in the markets where customers really want to be.”

Developable land in major U.S. data center markets has become much more expensive over the past year. In Northern Virginia, the world’s largest data center market, 2024 has seen multiple data center land deals shatter price records. Chief among them was developer Chuck Kuhn’s sale of 124 acres in Prince William County to Microsoft for $465.5M, a per-acre price of more than $3.75M, which experts say may be the highest in the region’s history. 

Data center developers also drove new pricing highs in neighboring Fauquier County, where the $2M-per-acre purchase price for a planned campus was close to double the previous record. In the industry epicenter of Loudoun County, data center real estate values have jumped 60% from last year, according to a government assessment.

Virginia isn’t alone. Chicago, a market where CBRE says “affordable development land is scarce,” has seen several high-value land deals in recent months from firms like T5 and Aligned. Land cost is also on the rise in places like Silicon Valley and Dallas, according to CBRE. 

This jump in land prices for data center sites comes down to a simple matter of supply and demand.

Developers are scrambling to build new data centers to meet an unprecedented wave of demand led by major cloud providers and social media giants like Amazon, Microsoft, Google and Meta, a trend that is only expected to accelerate as these companies invest billions in artificial intelligence. 

At the same time, the massive amount of electricity used by data centers is already straining transmission systems in every major market, resulting in a dwindling supply of developable land where utilities can deliver power as quickly as data center providers and their tenants need it. Wait times for new grid connections from utilities are now routinely as long as five to seven years in key hubs like Northern Virginia and Columbus, Ohio.

As power problems limit land availability, tech giants and some third-party data center developers with use cases that require data centers in major digital infrastructure hubs have been willing to do whatever it takes — and pay ever higher prices — to acquire land with a clear pathway to power. Land cost has skyrocketed as a result. 

“It comes down to demand. If you want power in Santa Clara, you’ll be paying a premium of $5M or $6M an acre here because there's just not a lot of land,” said Howard Berry, principal and data center specialist at Avison Young. “Same in Virginia. Demand is up, so if you want to be there or need to be there, you’re going to pay a premium to be there.” 

If these rising land prices for data centers have flown under the radar, it is because land cost hasn't typically been a significant consideration in where developers look to build new data centers compared to other CRE asset classes.

Land acquisition has typically represented less than 10% of the overall development cost of a data center, dwarfed by construction costs and electrical and cooling equipment that routinely accounts for close to 65% of total spending on a project. A multifamily project can see land costs take up as much as 20% of the overall budget. 

Beyond initial development costs, the price of land is vastly overshadowed by the price of power when it comes to determining the long-term viability and profitability of a given site. At facilities that will use hundreds of megawatts of electricity to power information technology equipment, end users generally care far more about how much they will pay for every electron over the lifetime of the facility than any aspect of initial development cost. 

But soaring land prices have become a key site selection consideration for some firms. 

While tech titans and the largest developers stockpile land in prime locations, many smaller players are beginning to shift their development strategies to steer clear of those hotbeds and avoid tying up too much capital in individual land deals. 

“All the talk is about power, but what you see in the more popular markets is that the price of land is becoming a barrier to entry for certain profiles,” said Oisín Ó Murchú, vice president of development at Stream Data Centers.

Higher land prices mean higher development risk, Murchú said, and that risk is elevated further by growing uncertainty around power. There is a risk of a developer sinking considerable capital into a site only to find out later that electricity won't be available as quickly as expected, delaying the project by years.

While this might be a smart gamble for major third-party providers or hyperscale giants like Amazon Web Services, it often isn't the right play for smaller operators, Murchú said. It often makes more sense to acquire land in secondary markets or emerging submarkets where land costs are lower and power is more plentiful.

“It’s a lot of commitment, and you could redeploy that capital into other markets and probably pick up two to three different sites and spread your risk around a little bit more,” he said.

For a growing number of data center providers, entering high-cost primary markets like Silicon Valley or Northern Virginia will only make sense for specific use cases, industry insiders say. Instead of investing in land and looking for tenants, third-party providers will need to have tenants already lined up that need their IT equipment deployed in that specific premium market to mitigate the risk that comes with higher upfront land costs. 

“The question of the use case of the data center needs to be addressed a lot earlier in the process as these land prices become barriers to entry in certain markets,” said Satej Desai, a data center engineer with chipmaker Nvidia. “If you really want to have, for example, an AI inferencing data center in Virginia, you’ve got to make sure you have the right people at the table before you pull that trigger.”