Cloud computing and artificial intelligence (AI) are driving unprecedented demand for data centers. Enterprises are scaling up their cloud services, and AI workloads are consuming more server resources than ever.
Such a surge has led to a booming market for data centers, but also significant challenges. Despite new data centers being built at a record pace, power shortages and high pre-leasing rates are creating bottlenecks. Fierce competition among major players and regional disparities are shaping the future of data center locations.
Why data centers are expanding faster than ever
A rapid growth in cloud computing and AI is creating an extraordinary demand for data center capacity. Enterprises are increasingly adopting cloud services for scalability, flexibility, and cost-efficiency, which requires more data center space for the servers that support these environments.
At the same time, AI models demand substantial computational power and storage, especially those used for machine learning and deep learning. A need for powerful GPUs and specialized hardware to support these models is driving further expansion in data center capacity.
The combined surge in cloud and AI usage has made data centers a critical component of enterprise IT strategies.
Data centers are filling up faster than they can be built
Even with an increase in construction, data centers are experiencing historically low vacancy rates. In primary markets like Northern Virginia, Silicon Valley, and the New York tri-state area, vacancy rates have dropped to 2.8%, down from 3.3% a year ago.
There has been a decrease in available space despite a 24% year-over-year increase in supply, up from a 19% growth the previous year.
Such rapid pace of demand has outstripped supply, making available space a key issue. Companies are continuously seeking additional data center capacity to support their growing cloud and AI needs, but the current supply is insufficient to meet this demand.
Data centers are going up everywhere
Data center construction has surged significantly. Since 2020, there has been a 69% year-over-year increase in building activity, driven by efforts to meet rising demand. A construction boom is evident across the United States, particularly in established data center markets.
New facilities are being built rapidly to accommodate the needs of cloud providers, AI applications, and other data-intensive operations.
The speed of construction is still not enough to keep up with accelerating demand, leading to continued pressure on available resources.
Why building data centers isn’t as easy as it looks
Power shortages are a major challenge in data center construction, causing delays in getting new facilities operational. Without adequate power, even completed data centers cannot function, creating a bottleneck in the industry.
Delays, caused by the time needed to secure and install the necessary electrical infrastructure, exacerbate the scarcity of available space and pose difficulties for companies looking to expand their data center footprint quickly.
More data centers, yet still no room
In key data center markets, space is nearing depletion. In Northern Virginia, vacancy rates fell below 1% during the first quarter of the year, despite an 18% increase in inventory year-over-year.
Additionally, nearly 80% of the data center space currently under construction in primary markets has already been leased.
A high pre-leasing rate further intensifies the competition for available capacity.
How cloud titans are shaping the market
Major cloud providers like AWS, Microsoft, and Google Cloud are aggressively competing for data center capacity. These companies are not only targeting enterprise customers but also consuming large amounts of data center inventory to support their expanding cloud and AI services.
This aggressive expansion contributes to the scarcity of space, driving up costs and limiting options for smaller companies that also need data center capacity.
The availability of data center space is often in flux. Much of the available space comes from customers relocating between data centers, similar to job switching in a tight labor market. As new space becomes available, it is quickly occupied by companies shifting locations or expanding their operations.
When vacancy rates drop below 3% or 4%, most available space is transitional, with few clients leaving due to limited alternatives. This creates challenges for companies looking for new space without lead time or strategic planning.
The new hotspots for data centers
Northern Virginia is a global leader in data center capacity, with the largest concentration of compute resources worldwide, accounting for 7% of global data center capacity. This region is a key hub for internet infrastructure and data center operations.
A high demand for space in Northern Virginia has driven up colocation and rental costs, with prices increasing by up to 50% year-over-year, compared to a national average increase of 7%. Cost surges show the intense competition for space in this major market.
Surprising places leading the data center charge
As traditional data center hubs reach capacity, new regions are emerging as significant players in the market. Areas like Oregon, Iowa, Ohio, Nebraska, Arizona, and Southern Virginia are becoming important suppliers of hyperscale data center capacity.
These regions offer more space and often lower costs, attracting companies looking to expand without facing the high costs and space constraints of primary markets.
Proximity to customers remains a key factor in the location of new data centers. While established regions with high concentrations of companies are still popular, new areas with growing economic activity are becoming viable alternatives for data center expansion.
The upside and downside of choosing secondary data center markets
Secondary data center markets offer higher vacancy rates and lower costs compared to primary markets, with a vacancy rate of 9.7%. Secondary markets provide more options for companies needing data center space and can be a cost-effective alternative for businesses looking to manage expenses while expanding capacity.
However, while secondary markets offer more space and cost benefits, they may not provide the same level of service or infrastructure as primary markets. Companies must carefully consider these factors when deciding whether to move to a secondary market.
The real risks of cheaper data center locations
Choosing a secondary market for data center needs involves trade-offs. While these markets provide more space and lower costs, they often come with potential drawbacks in latency, security, and overall performance.
Companies must assess the risks when determining if the cost savings outweigh the potential compromises in service quality and operational efficiency.
Latency can be a concern for companies needing real-time data processing and high-speed connectivity, and security might be less robust than in primary markets..
Why companies are heading to secondary markets
Due to the lack of space in primary data center markets, companies with smaller capacity needs, such as some Fortune 100 firms, are increasingly turning to secondary markets. These companies can benefit from lower costs and greater availability without needing the extensive infrastructure of primary markets.
As primary markets become saturated, this migration to secondary markets is likely to continue. Companies must navigate this shift strategically, balancing the benefits of cost savings and space availability with the potential challenges of less established markets.
Planning for the future
Large cloud and social media companies are securing large amounts of data center capacity long before construction is complete. It is a strategy that makes sure they have the necessary infrastructure to support their growth but also limits the availability of space for other companies.
Smaller entities with modest power needs, such as two megawatts, often struggle to secure space in primary markets due to this aggressive acquisition by larger players, forcing them to seek alternatives in secondary markets.
To work through the ongoing constraints in the data center market, companies must engage in strategic planning. Organizations need to consider availability, cost, and performance trade-offs across different regions to make informed decisions about their data center needs.
With the continuous growth of cloud services and AI workloads expected to maintain pressure on data center capacity, even with increased construction and supply efforts, companies that plan ahead and diversify their strategies will be better positioned to manage these challenges and scale effectively.
