Real estate
Real estate

Most new data center capacity is still in primary markets

April 15, 2024
Sebastian Dooley, CFA
Senior Fund Manager
Ben Wobschall
Managing Director, Portfolio Manager, Principal Real Estate Investors
Casey Miller
Managing Director, Portfolio Management

AT-A-GLANCE

  • The U.S. has not experienced an exodus from primary markets into secondary markets. It is true that the list of top data center markets is dynamic, and over the last decade there have been notable entrances and exits.
  • In Europe, the demand continues to spread and Tier 2 markets are taking an increasingly large share of new capacity to encompass those new markets.
  • Data centers cluster in top markets because those locations have the fundamentals that benefit end users—critical mass, connectivity, power and land availability, among others.
  • Inertia is a powerful force and markets with significant critical mass will continue to attract new capacity. And even as the top five list evolves, there will likely always be demand in former top markets.

Demand, supply, and the top data center markets

Demand for data center capacity has been rising exponentially for well over a decade. COVID-19 caused a significant acceleration in that growth, at the same time as it upended global supply chains. Add increasingly scarce land, and power and demand began to outstrip supply in many top markets. Vacancy rates plummeted (see Exhibit 1) and timelines for new data center development ballooned, in some cases by as many as six years1.

Commissioned power and vacancy rates in the top 10 U.S. markets2

This exhibit demonstrates the increase in commissioned power and the decrease in vacancy rate in the top 10 U.S. markets.

Source: datacenterHawk, 31 December 2023

Stories about top markets being ‘out of power’ have made headlines, as have stories of hyperscalers building massive new facilities in far-flung locations. One could see these headlines as demonstration of movement away from primary markets into secondary markets, but that would be inaccurate.

The idea that a data center can be anywhere belies the reality that data centers cluster in certain locations—top markets—because those locations have the fundamentals that benefit end users (and therefore, developers). These fundamentals are factors like critical mass (the presence of other data centers), connectivity, occupancy cost, and the policy environment.

Fundamentals are why Northern Virginia remains the #1 U.S. market, even as power and land are increasingly hard to come by. They’re also why—despite the fact that some hyperscalers are building huge data centers in far-flung locations for AI model training—there’s no indication of a widespread trend set to unseat the top markets.

It is true, however, that the list of top data center markets is dynamic. As Exhibit 2 demonstrates, there is movement into and out of the top five as fundamentals in a particular area change and as clusters form in new markets. For example, in Northern California, power and real estate constraints along with high cost of doing business have caused that market to drop out of the top five. Meanwhile, power availability and favorable data center tax abatements in Atlanta have pulled it onto the list.

1 CBRE, High Demand, Power Availability Delays Lead to Record Data Center Construction, 14 September 2023.
2 As of 3Q 2023, the top 10 U.S. markets were Northern Virginia, Phoenix, Dallas/Fort Worth, Atlanta, Chicago, Northern California, Portland, Northern New Jersey, Salt Lake City, and Los Angeles.

It’s true that the list of top data center markets is not static. In the last five years alone, there have been several entrances and exits. But it’s not true that there is a widespread move out of primary markets to Tier 2 markets. Read our full perspective in the latest bulletin.

Disclosure

For Public Distribution in the United States. For Institutional, Professional, Qualified, and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations.

Risk Considerations
Investing involves risk, including possible loss of Principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate.

Important information
This material covers general information only and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice. The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that the investment manager or its affiliates has recommended a specific security for any client account.

Subject to any contrary provisions of applicable law, the investment manager and its affiliates, and their officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in the information or data provided. All figures shown in this document are in U.S. dollars unless otherwise noted.

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

This material is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

This document is issued in:

  • The United States by Principal Global Investors, LLC, which is regulated by the U.S. Securities and Exchange Commission.
  • Europe by Principal Global Investors (Ireland) Limited, 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland. Principal Global Investors (Ireland) Limited is regulated by the Central Bank of Ireland. Clients that do not directly contract with Principal Global Investors (Europe) Limited (“PGIE”) or Principal Global Investors (Ireland) Limited (“PGII”) will not benefit from the protections offered by the rules and regulations of the Financial Conduct Authority or the Central Bank of Ireland, including those enacted under MiFID II. Further, where clients do contract with PGIE or PGII, PGIE or PGII may delegate management authority to affiliates that are not authorised and regulated within Europe and in any such case, the client may not benefit from all protections offered by the rules and regulations of the Financial Conduct Authority, or the Central Bank of Ireland. In Europe, this document is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by the MiFID).
  • United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered in England, No. 03819986, which is authorized and regulated by the Financial Conduct Authority (“FCA”).
  • This document is marketing material and is issued in Switzerland by Principal Global Investors (Switzerland) GmbH.
  • United Arab Emirates by Principal Global Investors LLC, a branch registered in the Dubai International Financial Centre and authorized by the Dubai Financial Services Authority as a representative office and is delivered on an individual basis to the recipient and should not be passed on or otherwise distributed by the recipient to any other person or organisation.
  • Singapore by Principal Global Investors (Singapore) Limited (ACRA Reg. No. 199603735H), which is regulated by the Monetary Authority of Singapore and is directed exclusively at institutional investors as defined by the Securities and Futures Act 2001. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
  • Australia by Principal Global Investors (Australia) Limited (ABN 45 102 488 068, AFS Licence No. 225385), which is regulated by the Australian Securities and Investments Commission and is only directed at wholesale clients as defined under Corporations Act 2001.
  • Hong Kong SAR (China) by Principal Asset Management Company (Asia) Limited, which is regulated by the Securities and Futures Commission. This document has not been reviewed by the Securities and Futures Commission.
  • Other APAC Countries/Jurisdictions, this material is issued for institutional investors only (or professional/sophisticated/qualified investors, as such term may apply in local jurisdictions) and is delivered on an individual basis to the recipient and should not be passed on, used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

Principal Global Investors, LLC (PGI) is registered with the U.S. Commodity Futures Trading Commission (CFTC) as a commodity trading advisor (CTA), a commodity pool operator (CPO) and is a member of the National Futures Association (NFA). PGI advises qualified eligible persons (QEPs) under CFTC Regulation 4.7.

Principal Funds are distributed by Principal Funds Distributor, Inc.

© 2024 Principal Financial Services, Inc. Principal® , Principal Financial Group® , Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc. Principal Asset Management℠ is a trade name of Principal Global Investors, LLC. Principal Real Estate is a trade name of Principal Real Estate Investors, LLC, an affiliate of Principal Global Investors.

MM13933 | 03/2024 | 3441602-032025

Related Insights

About the author