CBRE, JLL Say Data Center Industry May Be On Verge Of Significant Transformation

The geography of the data center industry throughout North America may be on the verge of significant transformation, according to a pair of state-of-the-market reports issued by industry giants CBRE and JLL.

While near-record growth for the data center industry throughout the first half of 2021 centered around the traditional data center hubs of Northern Virginia and Silicon Valley, analysts at both JLL and CBRE suggest that a more decentralized data ecosystem may be right around the corner — with future growth focused on regional hubs and secondary markets.

There are signs that longtime hot spots like Data Center Alley are facing new headwinds, and are now competing against the emergence of new data center boomtowns like Phoenix and Atlanta. Market forces may also be pushing data center operators and investors toward smaller secondary markets, a trend accelerated by a shift toward so-called edge infrastructure and growing fiber rollout across the country.

“These markets should attract more users seeking available space and power in the coming years as supply in primary markets tightens. This is evidenced by the growing construction pipeline in markets like Central Washington,” CBRE predicts in its North American Data Center Trends Report for the first half of 2021.

“Secondary markets will continue to benefit from constrained supply in primary markets as well as more affordable land prices, edge deployments, regional network connectivity needs and access to cloud on-ramps.”

The semi-annual reports released last week by CBRE and JLL  show an industry continuing to grow at or near a record pace. And at first glance, it may appear that growth is centered around the same locations it always has: hubs like Loudoun County, Virginia, and California’s Silicon Valley.

Data center construction in 2021 is up 42% over last year, and Northern Virginia accounts for more than half of it. There is an additional 290 megawatts of data center space currently under construction in Data Center Alley.

But there are signs that data center development is heading toward a more decentralized footprint.

In Northern Virginia, net absorption is down from last year, and Loudoun County failed to hit its data center tax revenue target for the first time ever. More alarmingly, the area is running out of both space and power. According to CBRE, power constraints and delays in substation deliveries may interfere with future development in the region. Higher rents caused by a lack of supply in places like Virginia and Northern California may open up opportunities for other markets, analysts say. 

Accordingly, 2021 has been marked by the continued emergence of Phoenix and Atlanta as data center boomtowns, largely driven by investment from hyperscalers like Facebook, Microsoft and Google.

Phoenix saw the highest percentage growth among primary markets, with 28.7 megawatts of new inventory coming online since the start of the year. Atlanta brought around 15 megawatts online, with more in the pipeline as several large cloud providers have snapped up hundreds of acres of land with future development of multiple data centers in mind. In Canada, hyperscalers have similarly been snapping up land in and around Toronto. 

Both CBRE and JLL point to the potential for a more dramatic industry shift to what are now secondary markets, perhaps sooner than later. Areas like Hillsboro, Oregon, Columbus, Ohio, Miami and Salt Lake City are all seeing significant data center development, offering affordable land and power and, increasingly, tax benefits.

It’s more than just cheap land and power pushing the industry toward these new markets, however. Digital infrastructure is gradually decentralizing, with data processing and storage increasingly located at the so-called edge — closer to the end user. This means both colocation providers and hyperscalers aren’t just building massive data center campuses; they’re building smaller data centers in smaller markets close to major business hubs, allowing them to offer low latency and high performance for clusters of enterprise clients.

Development in Hillsboro, for example, has been driven largely by its proximity to Silicon Valley and the Bay Area in general, where both land and power are expensive. Hillsboro has the largest net absorption total among secondary markets, with 14.7 megawatts of wholesale colocation space snapped up since the start of the year, according to CBRE. 

This trend toward the edge and toward secondary markets is likely to accelerate further due to improving fiber networks across the county boosted by government investment, which will make data center construction feasible in new areas. 

“As the edge nears, successful distribution of content and information from core data centers outward is vitally impacted by the associated fiber network backbone,” said Michael Murphy, executive vice president, CBRE Network Advisory Services.

Secondary markets may also benefit from increased competition for land in existing data center hubs. According to JLL, land suitable for data center development in places like Phoenix has been snapped up by industrial developers. This is pushing up land prices and could hinder data center development in major markets as soon as this year.

The JLL report also points to concerns about water usage in places like Phoenix and Utah pushing developers to look for new ground.