Jacob Albers, Head of Alternatives Insights, Cushman & Wakefield, reflects on the data centre market in Northern Virginia and the issues set to face the landscape in the new year.
While demand is continuing to grow voraciously for data centre space, the supply of new facilities has barely been able to keep pace – creating one of the most significant challenges facing data-driven companies looking to grow and expand.
While absorption during the first quarter of the year was moderate by recent standards, take-up of available space substantially grew as the year progressed. Many markets across North America continued to see strong pre-leasing and built-to-suit projects move forward, driven both by continued robust cloud growth as well as emergent demand for the training and inference of artificial intelligence models.
Meanwhile, development continued to be constrained by limited power availability, rising land costs and the higher cost of capital. Various markets and utility providers across the country are facing hurdles to satisfy the sizeable demands of large data centre campuses. Major players have correspondingly adjusted their strategies, opting for larger site acreages (often hundreds of acres) and power purchase agreements far earlier in the development process. With larger upfront commitments, data centre developers will have greater leeway to phase the development of campuses at their own pace without constrictions from either unavailable power or searches for additional sites.
The Northern Virginia market – the largest data centre market in North America – is a good illustration of this point.
Despite growing headwinds for land and power availability, Northern Virginia continues to rank as the preeminent data centre market. Absorption for the first half of 2023 reached almost 450MW, on a similar scale to previous periods. Vacancy remains at an all-time low of under 1% in the market, as pre-leasing of space has remained rapid among new projects.
Any available land of sufficient size, with power and fibre availability, is heavily contested for either colocation or self-build purposes. In 2022, it became apparent that the power distribution infrastructure for a key utility in Ashburn would not be able to support continued data centre development and would require a pause on new projects through at least 2024, if not 2025-2026.
As infrastructure in Loudoun County is upgraded to enable the distribution of sufficient power, new projects have increasingly been announced at greater distances from traditional data clusters. While data centres had previously been concentrated in Loudoun County (Ashburn and Leesburg specifically), developments have spread in recent years to Manassas, Sterling, Herndon and Prince William County. Over the past year, developments have been announced increasingly farther afield as developers are in search of available power and larger land sites. Projects have been announced in Warrenton, Culpeper, Spotsylvania, Caroline County and as far South as Richmond. Despite these headwinds, the market surpassed 4.5GW in size between self-perform and colocation builds, with continued activity in surrounding counties expected in 2024 as any land availability is quickly utilised.
The high competition within the Northern Virginia market has pushed greater interest in other established markets as well as a class of rapidly rising secondary markets. The other North American primary markets (Atlanta, Chicago, Dallas, Phoenix, Silicon Valley) have all seen vacancies fall to record lows of 5% or below. Secondary markets like Austin, Columbus, Denver, Salt Lake City and others have also seen a compression in vacancy, though opportunities for space remain.
While other factors such as digitisation of rural areas and continuing 5G rollouts are spurring some demand, the growing use of cloud remains the top factor for growth in the sector. By 2027, almost 50% of revenue in the space will be captured by hyperscalers – cloud providers such as Amazon AWS, Google Cloud, Microsoft Azure, Oracle and other large data users such as Meta. Many of these platforms are increasingly doing site sourcing and development in-house, leading to longer-term questions on the opportunities that developers and landlords will see from this significant tenant base over the next decade. In the meantime, the demand for space from these users outstrips both available colocation space as well as their self-perform programmes.
Market interest in Artificial Intelligence (AI) and Machine Learning (ML) deployments is now adding to and augmenting the demand for data centre space. With all the major hyperscalers, as well as independent enterprise tech and start-up users, rushing into the space, demand for compute and data storage capabilities has skyrocketed dramatically as a result.
Rumours have suggested that cloud platforms have already leased multiple gigawatts of capacity for the purposes of their AI platforms across North America in 2023. This demand will be bifurcated between training and inference facilities. While inference facilities will likely continue to be closely located to cloud regions, training facilities will likely not have as stringent latency requirements – opening up more markets with available power for evaluation. AI facilities will often require higher rack densities and therefore more intensive liquid cooling technologies.
In terms of sales of facilities, as many owners in the space are long-term operators with committed capital or, increasingly, hyperscalers through self-performance operations, transactions in the sector are limited. While transaction volumes have tempered somewhat from the past several years, sales of existing assets that do occur are most often part of a portfolio disposition, merger or acquisition.
In other cases, certain operators have sold or diluted their control of assets to help fund the development of new data centres. Given the relatively high cost of development, operators require significant capital to redeploy and expand their pipelines, particularly in the current high-demand environment.
A significant amount of capital activity in the space goes toward purchasing land, which has faced rising costs in recent years. As local land markets have reacted quickly to the arrival of new data centres, construction of these assets is often capital intensive, with development budgets often running into the billions of dollars for data centres sized for hyperscale use.
As the demand for data centres continues to rise, fuelled by booming interest in AI and substantial funding, the sector grapples with highly constrained power availability and rising land costs. The challenges and opportunities in this evolving landscape underscore the importance of strategic planning, collaboration and adaptation for stakeholders in the data centre industry.
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