Power challenges not dampening record demand for U.S. data centers

CHICAGO, Aug. 27, 2024 – Demand for data centers has never been higher, evidenced by a record breaking first half of 2024. These facilities are foundational to how modern society functions, placing increasing importance on ensuring land, power and talent are available for continued operations. According to JLL’s new U.S. Data Center Report – Midyear 2024, the colocation data center market doubled in size in the last four years amid growing concerns that this rapid growth is straining an already-taxed U.S. power grid and an impending talent cliff.

This booming demand shows no sign of slowing down at mid-year. Vacancy set a record low of 3%, and occupancy has increased at a 30% compound annual growth rate (CAGR) since 2020. Asking rents increased between 13% and 37% year-over-year, depending on the lease size.

“There appears to be no ceiling for how high this data center demand is going to reach,” said Andy Cvengros, Managing Director, Co-Lead of U.S. Data Center Markets, JLL. “Nearly all existing data center capacity is leased up, and pre-leasing currently stands at 84%. We anticipate vacancy will continue to trend to 0% over the next few years. This level of demand is currently unmatched by any other property type, and I cannot stress enough the importance of planning and being proactive about your IT needs years in advance.”

Insatiable demand translates to record-breaking first half

At midyear, the U.S. has 12 GW of existing colocation data center capacity, which doubled since 2020. ​Northern Virginia continues to reign supreme as the largest U.S. market by a factor of four and accounts for nearly half of the capacity growth in the last four years. Southern and western markets like Austin/San Antonio (309% growth), Salt Lake City (218% growth), Atlanta (119% growth) and Las Vegas/Reno (137% growth) were the fastest growing on percentage basis.

Colocation completions increased to a record 1.3 GW in the first half of 2024. The Northern Virginia delivered 519 MW, leading in completions again. Additionally, the Northwest and Austin/San Antonio markets delivered six and four times their traditional levels, respectfully.

Absorption in the first half of 2024 reached a record of nearly 2.8 GW, a ninefold increase over 2020 levels. Absorption was concentrated in four markets, Atlanta, Northern Virginia, Chicago and Phoenix. This is the first time Atlanta took the top spot (815 MW), surpassing Northern Virginia (603 MW).

Atlanta is also the top market for colocation capacity under construction for the first time following several years of heightened investor interest, while Northern Virginia slipped to 5th place amid power grid constraints.

“Colocation capacity under construction in the first half of 2024 has nearly levelled off at 5.3 GW, which still equates to an astonishing $53 billion-plus in asset value,” Matt Landek, Managing Director, U.S. Data Center Work Dynamics and Project Development and Services Lead, JLL. “While leveling off may speak to concerns about power loads, construction is still at extraordinary levels, having increased more than seven times in just two years, and both primary and second markets continue to expand despite a perception of limited power capacity.”

Is the U.S. power grid tapped out?

Data center power loads are increasing, with new projects regularly requiring 100 MW and some new developments eclipsing 1 GW. The data center sector is not alone in its increasing power appetite. Manufacturing reshoring and electric vehicle adoption also challenge the grid. While data center power demand has been growing at a 21% CAGR recently, the sector only accounted for about 3% of total U.S. power in 2023; however, if trendlines hold, that percentage is projected surpass 11% in the next decade.

“In the near term, the U.S. power grid is not in danger of running out of capacity, but investments need to be made in expanding the existing and adding new substations in critical areas for data center development,” added Cvengros. “The process of power procurement needs to be greatly improved administratively and in the field. Egregious power load requests and significant transformer delays are curtailing future data center growth.”

The process of establishing a power connection to the grid currently can take three to five years. As a temporary measure, developers are resorting to interim energy solutions like fuel cells or supplemental natural gas turbines to kickstart projects within shorter timeframes. Furthermore, development is now spreading to secondary markets and rural regions, where power capacity is more accessible. In certain instances, hyperscalers have acquired power plants to secure long-term and reliable power sources.

AI represents large share of demand

AI and Large Language Models (LLM) like ChatGPT have the potential to revolutionize many aspects of our lives. AI capital expenditures in recent years are estimated to be more than $300 billion, with investment levels accelerating in 2024. Industry estimates for current AI data center demand vary widely, from 10% to 40% of overall absorption, with most estimates suggesting that AI represents roughly 20% of new data center demand.

“The growing investment in AI is translating into significant data center demand and revolutionizing the way data centers are designed,” said Andrew Batson, Head of U.S. Data Center Research for JLL. “AI runs on the latest generation GPUs, which require more power to operate and emit more heat, so newer data centers require specialized cooling methods like rear door heat exchangers or direct-to-chip liquid cooling.”

Labor challenges are a growing focus

Finding the right talent remains a challenge for operators, a key issue amid rapid sector growth. An estimated 10% of data center roles at existing facilities are unfilled, more than twice the national average across all industries. Given the technical nature of data centers, only about 15% of applicants meet the minimum job qualifications, and positions can take 60 days or more to fill. Data center development is also expanding into rural areas with limited labor pools, presenting a unique set of staffing challenges. Attrition rates, especially among younger workers, also remain an issue, and 33% of the technical workforce is at or nearing retirement age, a number likely to double due to demographic trends.

“Data centers are a distinctive asset class that demand specific skill sets to ensure optimal performance,” Landek added. “The industry cannot grow for the future if it cannot retain current employees and attract new ones. Employers must focus on providing positive experiences for employees and implement new approaches to solving staffing challenges while also navigating fierce competition for talent and employee burnout. At the same time, the industry needs to expand the labor pool through secondary education exposure, technical development programs and outreach to underrepresented population segments.”

More opportunities with capital markets

Investor appetite, investment sales activity, and the number of assets on the market are all up from last year’s levels. Cap rates for core transactions remain in the low-to-mid 6% range, subject to debt markets. Assets with a value-add component of existing capacity available remain in strong demand. Additionally, longer-term leased data centers and portfolios have been garnering attention from real estate investors shifting focus from other asset classes.

Debt markets continue to be liquid and active, and data centers are seeing an increase in the lender pool for construction loans and stabilized assets from the banks and life companies at moderate leverage. There has also been a surge in land/predevelopment loan requests due to construction lead times and increased capital requirements. Alternative sources of capital raising are also being considered.

“One of the biggest volume opportunities for data center investors in the next few years will be via core funds,” said Carl Beardsley, Senior Managing Director, Data Center Leader, JLL Capital Markets. “With a compressed development cycle due to preleasing activity, a growing trend of operators recapping stabilized assets to recycle their capital into other developments is expected. There are many upsides to these core investments, such as having a mission-critical investment with a tenant of high renewal probability and a residual asset with power, which is increasingly difficult to procure. The residual value of data center assets is much different than other real estate asset classes and should be analyzed based on amount of power allocated to the site.”

Your data has never been more critical, and neither has your data center partner. From site selection and land acquisition to upgrades and facilities and energy management, JLL’s team of dedicated technical experts are trained and experienced in every phase of the data center lifecycle to help you scale, optimize and maintain efficiencies in your data center strategy. Our solutions enable your business to make higher-quality decisions and enter new markets with reduced friction through local market expertise, business intelligence, proprietary data and cutting-edge technology tools. To learn more, visit us.jll.com/data-centers.

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