Home Insights Real estate Data center development opportunities in secondary markets
A cityscape view of many skyscrapers.

Data center development opportunities in secondary markets

With primary markets increasingly constrained, more new development opportunities are in secondary markets—but not all are equal.

September 24, 2025
Casey Miller
Managing Director, Portfolio Management
Paul Lewis
Director - European Data Centres
Sebastian Dooley, CFA
Senior Fund Manager
Matt Hackman
Portfolio Manager
Download PDF
linkedin icon link icon

At-a-glance

  • In many primary markets, suitable data center sites with a clear path to permitting and access to utility power are increasingly scarce.
  • To meet the demand for data center capacity in the next 3-5 years, we now have to also seek development opportunities outside of primary markets.
  • In this paper we share what we look for in a market and which secondary markets we see having the potential for strong investment opportunities.

Demand for data centers is booming. In primary markets, available capacity is minimal, driving vacancy rates to historic lows, less than 2% in most markets. At the same time, new development has been increasingly constrained. Lead times for critical equipment such as transformers, switches and generators and long delays for permitting and power interconnection have doubled timelines in many cases.

Now, with exponentially more demand from the AI revolution, power and land itself is in short supply in many primary markets. Suitable sites with a clear path to permitting and access to utility power are increasingly scarce (as Exhibit 1 demonstrates). In some, Dublin and Amsterdam for example, regulators have imposed moratoriums on new data center builds due to a lack of power infrastructure.

Availability of suitable sites with a clear path to permitting and access to utility power

Availability of suitable sites in U.S. with a clear path to permitting and access to utility power
Availability of suitable sites in Europe with a clear path to permitting and access to utility power

Source: Principal Real Estate, as of June 30, 2025.

As we noted last year, the majority of data center capacity remains concentrated in primary markets. This is true in both the U.S. and Europe, though in Europe the share of capacity concentrated in primary markets has been declining since Q1 2021. We continue to invest in primary markets when appropriate sites are available for development or existing facilities become available. However, to meet the growing demand for capacity expected over the next 3-5 years, we must also explore development opportunities beyond the primary markets.

The factors we look for in a market

The fundamental factors determining data center market attractiveness have remained largely consistent throughout time. However, a market’s performance against these fundamentals may evolve over time, along with the comparative significance of individual factors. (For example, as data centers expand in scale, land and power availability become more important.)

Availability of power and land

The availability of suitable sites with a clear path to power is fundamentally critical. Permitting and access to utility power is indispensable, particularly as data center campuses expand and become more power intensive. This factor has constrained development in some markets before; New York/New Jersey and Silicon Valley are examples where power and land constraints have been an inhibiting factor for many years. Until recently, most primary markets had many suitable sites with a clear path to permitting and access to utility power. Now, power and land are constrained in many primary markets, as Exhibit 1 makes clear, and thus is the first (though not only) consideration factor for data center developers.

Cost of reliable power

Power reliability is table stakes; data center developers will not build where power is not reliable. (Although in highly power-constrained markets, we are seeing some developers willing to rely on other sources of power generation for the short term while waiting for reliable utility power interconnection.) Beyond reliability, cost is an important factor because power is the single largest operating expense in a data center—about 20% of the total operating cost. Even a relatively small difference in cost per kilowatt hour can make a significant difference in the total operating cost of a data center.

Power cost by market

Power cost by market for U.S.
Power cost by market for Europe

Source: Upper: CBRE, as of December 31, 2024. Lower: Ember, as of December 31, 2024.

Tax incentives

In Europe, tax incentives to entice data center development are not prevalent. In the U.S., in the early days of the data center boom, many states offered sales tax exemptions or other tax incentives to entice data center development. Many primary markets still do, though some have pulled back, or attempted to. (In Georgia, for example, the legislature suspended the state’s data center sales tax exemption, though the governor vetoed the bill.)

Following the pattern set by primary U.S. markets 10-15 years ago, many secondary U.S. markets are now offering tax incentives to entice data center development. Tax incentives can be a substantial benefit for developers, in many cases reducing data center deployment cost significantly.

In the U.S., even if a market may otherwise be a good candidate for data center development, a lack of tax incentives is a significant deterrent. This is one of the principal reasons Denver is not on our list of secondary markets, though that may change, as the Colorado legislature recently began discussions of implementing a tax incentive.

Low risk of natural disasters

Over time, cloud providers have developed data center availability zones and designed their applications to failover automatically to another data center in the event of downtime. Nevertheless, in leased facilities most tenants still expect high uptime, therefore selecting a location with minimal natural disaster risk continues to remain a key consideration.

Data center climate risk factors include but are not limited to flood zones, hurricane paths, wildfire threats, drought patterns, sea-level rise, and extreme temperature trends. Data centers are especially vulnerable to climate risks due to the disruption of operations through power outages, flooding, or cooling system failures. Additionally, rising temperatures increase cooling costs and energy consumption, directly impacting operational expenses and reliability.

Conclusion

The data center development strategies that worked in the past no longer work. Meeting the demand for capacity that will come online in the next 3-5 years requires seeking development opportunities outside of primary markets. But which secondary markets are the best candidates? Identifying which new markets represent the best investment opportunities requires experience and expertise to know what factors end users care most about and which markets best meet those criteria.

For more on factors we look for in a data center market, fiber connectivity across the U.S. and Europe, and which secondary data center markets make the cut, access the full report here.
Real estate

Footnotes

Learn more in our recent paper How data center developers are powering AI.

Learn more in Most new data center capacity is still in primary markets.
Disclosure

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.

Data center properties and will only be attractive to a unique type of tenant. A limited tenant base increases the risk of vacancy. Additionally, a property designed to be a data center property, may be difficult to relet to another type of tenant or convert to another use and will be more likely to become functionally obsolete when compared to other properties. For example, if converted to industrial use, the expected rents would be lower than that projected for data centers. Thus, if operating a data center were to become unprofitable, the liquidation value of properties may be substantially less than would be the case if the properties were readily adaptable to other uses.

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 Investor Management (DIFC) Limited, an entity registered in the Dubai International Financial Centre and authorized by the Dubai Financial Services Authority as an Authorised Firm, in its capacity as distributor / promoter of the products and services of Principal Asset Management. This document 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 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. This document may only be distributed, circulated or issued to persons who are Professional Investors under the Securities and Futures Ordinance and any rules made under that Ordinance or as otherwise permitted by that Ordinance.
  • 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.

© 2025 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.

MM14678 | 09/2025 | 4794646-092026
About the author