Northern Virginia, a key hub for data center markets in the United States, has experienced exponential growth in demand for data center capacity over the past decade. This growth was further accelerated by the impact of COVID-19, which disrupted global supply chains, leading to a strain on land availability, power supply, and overall demand in top markets. The surge in demand caused vacancy rates to plummet, while development timelines for new data centers stretched out, with some taking up to six years to complete.
Across the U.S., stories have emerged about power shortages in top markets, along with reports of hyperscale companies constructing large facilities in remote areas. Despite this, data centers tend to cluster in specific locations known as top markets due to factors like critical mass, connectivity, occupancy costs, and policy environments that benefit end users and developers alike. These fundamentals are the reason why Northern Virginia maintains its position as the number one U.S. market, despite challenges in power and land availability.
The landscape of top data center markets is dynamic, with shifts occurring based on changing fundamentals in different regions. For example, Northern California dropped out of the top five markets due to constraints in power and real estate, while Atlanta entered the list due to favorable data center tax incentives and power availability. This evolution highlights how market dynamics can impact the ranking of top data center markets over time.
In a case study comparing Phoenix to Silicon Valley, it becomes evident how market fundamentals can drive growth in one region while slowing down development in another. The once-dominant Silicon Valley has faced challenges with power and land availability, leading to a slowdown in new capacity development, while Phoenix has emerged as a top market with advantages in power and land availability, lower occupancy costs, and a business-friendly environment.
Europe has seen a shift towards Tier 2 markets, with locations like Madrid and Milan experiencing rapid growth in data center capacity. While the core markets of Frankfurt, London, Amsterdam, Paris, and Dublin (FLAP-D) remain significant, other regions are gaining traction due to specific factors like data sovereignty regulations. This trend highlights the nuanced growth patterns in European data center markets.
Investors looking to capitalize on data center markets must consider factors such as end user demand, investment horizon, liquidity, and market concentration. By overlaying these considerations with market fundamentals, investors can make informed decisions about where to allocate capital for long-term viability. Despite shifts in market dynamics, most new data center capacity continues to concentrate in primary markets, demonstrating the resilience and growth potential of these hubs.
