Pandemic Has ‘Dramatically’ Increased Northern Virginia Data Center Demand

Several months of people staying at home has depressed demand for many types of real estate, from office to retail to hotel, but one sector that has benefited from the shift to virtual platforms is the data center market.

Demand for data centers increased across the country during the first half of the year, but the majority of that growth was gobbled up by the world's dominant data center market: Northern Virginia.

Northern Virginia recorded a net absorption of 93.2 megawatts of data center capacity during the first half of 2020, accounting for 70% of all net absorption across primary U.S. markets, according to a CBRE report released last week. The Northern Virginia market's total data center inventory of 1,276 MW amounts to 47% of the U.S. data center market.

"The data center industry, which was already doing incredibly well, has actually been elevated even further by the pandemic as everybody has gone to a virtual existence," Loudoun County Economic Development Executive Director Buddy Rizer said. "We always thought 2018 was going to be the biggest year we could have, and it looks like this year is going to be bigger as far as new construction, deliveries and absorption."

The Northern Virginia market has 239 MW, of data center capacity — equal to roughly 19% of its existing inventory — currently under construction, according to CBRE. Among those under-construction projects is a 513K SF data center development from Aligned that will add 120 MW of capacity to its existing campus in Ashburn.

Aligned last year completed a 370K SF data center with 60 MW of capacity. It quickly secured users for all of that capacity, and has several companies looking at its new building, including multiple large users that could lease the entire facility, Aligned Chief Innovation Officer Phill Lawson-Shanks said. 

"People are working from home, social media is more in use, and the companies behind those platforms have ramped up their need dramatically," Lawson-Shanks said. "We've benefited from that, and this whole market has. We're moving fast to accommodate the current need, let alone the predicted need."

The developer's second building is slated to deliver by Q1, and it is already looking for other sites in Northern Virginia to build more capacity, Lawson-Shanks said. Aligned is backed by a subsidiary of Sydney, Australia-based investment bank Macquarie Group. Lawson-Shanks said this financial backing gives it the ability to scale up its capacity to meet demand. 

He said Aligned is looking throughout Northern Virginia, adding that the data center market has grown beyond its Ashburn epicenter as fiber connectivity has increased.

"Historically it was limited by network availability, but there's so much fiber in the ground now it makes it very easy to pick a spot," Lawson-Shanks said. "The whole region is under consideration."

Prince William County, the neighbor of data center hub Loudoun County, has emerged as a major market, surpassing 5M SF of data center projects last year. Peterson Cos. in January announced plans to build a 4M SF data center campus in Manassas in partnership with data center compay Stack Infrastructure.

Peterson's entrance into the data center market coincides with its new effort to build industrial projects, as it has acquired a host of land along I-95 in Maryland and Virginia for the two booming development types.

"There is no question that the e-commerce industry is taking off, as well as the data center industry," Peterson Cos. President of Development Taylor Chess said. "In acquiring industrial land, we were able to set ourselves up for e-commerce distribution as well as data centers."

Digital Realty, the world's largest data center developer, in 2018 acquired a 424-acre site near Dulles International Airport, and the company this year unveiled plans to build 7.5M SF of data center space on the site over the next 15 years, Data Center Frontier reported. 

The data center boom has been driven by some of the biggest names in technology. Amazon Web Services, Google and Microsoft, the three largest providers of cloud computing services, have all been expanding their Northern Virginia data center presence this year, Data Center Frontier reported. 

CBRE First Vice President Jamie Jelinek, who represents data center tenants, said the demand has predominantly been coming from these large cloud providers, but other companies have gotten into the mix.

"Overall, there's a wide variety of end users that will be in the market for data center space in any given year," Jelinek said. "It could be financial groups or biotech or pharma groups, but consistently there is technology and cloud."

The Northern Virginia market experienced a roughly nine-month period last year when a surge of new data center deliveries outpaced the demand on the market, and developers were waiting to lease projects, Jelinek said, but that dynamic has now flipped. 

"Given the demand we've seen in the last 12 months, we're back in the situation where providers are pushing to keep up with the demand in the market," Jelinek said. 

He expects demand will continue to outpace supply through the end of this year and into next year, leading developers to more aggressively build new facilities.

"Demand will exceed new deliveries this year in Northern Virginia, that's very likely, and that will certainly offset the interesting year we had last year where construction exceeded demand," Jelinek said. "The market consistently has strong demand, and that's going to continue."

Northern Virginia's domination of the data center market dates back to the 1990s, when AOL located its corporate headquarters in Loudoun County and became the hub of the country's fiber network. It has also benefited from proximity to federal agencies, plus local tax policies and power utilities that have supported the industry, Jelinek said.

Other markets have tried to implement industry-friendly policies to compete with Northern Virginia for data center demand, but they still have a long way to go to catch up, Jelinek said. Northern Virginia's data center market is four times the size of the largest competitor, Dallas-Fort Worth, according to CBRE.

"Certainly for the foreseeable future, we see Northern Virginia continuing its prominence in the market," Jelinek said. "Other markets, at least most of them, are trying to do the right thing in the way of tax incentives and accelerating approvals for new development, but just given what already exists in Northern Virginia, that is going to contribute to continued growth."

Data center users tend to prefer growing in markets where they already have a presence, especially during the coronavirus pandemic as they have sought to quickly expand capacity, Lawson-Shanks said. 

"Where they can grow in place to add capacity to a location, that's ideal for them, they already have network infrastructure set up," Lawson-Shanks said. "This whole region is just the place where most people need to have a footprint."

Loudoun County is currently evaluating its available land to determine how much more it wants to allow for data centers, Rizer said, but he estimated it has space for another 10M to 16M SF of data center development. 

"That's going to be plenty," Rizer said. "What we'd like to do is make sure we're getting the right partners, companies and doing the deals that make sense for Loudoun."

He said Loudoun is looking to balance its data center footprint with other types of real estate, especially as it prepares to welcome new Metro stations. The Silver Line's second phase had been scheduled to open this year, but its projected opening has been pushed back to next spring. 

"Those are off the table, and the data center operators know that," Rizer said of Metro-adjacent sites. "I've been clear where we want data centers and where we wouldn't. We're not going to jeopardize any future success at Metro for other uses."