Data center demand was strong in the second half of 2023, but limited supply – in terms of energy, compute capacity and physical space – has given the figurative power to the data center providers, according to new research from data center real estate and investment management company JLL.

Global demand for data centers shows few signs of slowing down. Power availability and lengthy delivery timelines, however, are negatively impacting adoption. As a result, data center development is shifting to secondary and tertiary markets to secure adequate power supply, according to the JLL data center research team.

The primary data center markets in North America signed 3.4 GW of transactions in H2 2023, putting the full year at a record-breaking 4.3 GW. Northern Virginia, the largest data center market, added 1.6 GW of transaction volume, and Phoenix, Arizona added 784 MW of new capacity in 2023. That additional capacity isn’t expected to come online for a few years, however, based on power availability.

“Demand continues to be at all-time highs, and data center growth is rapidly expanding from core markets in search of power,” JLL Managing Director of Data Center Markets Andy Cvengros said.

Secondary markets can be more cost-effective and often have shorter power delivery timelines.  For example, Salt Lake City, Utah is in a period of data center construction acceleration, with more than double the capacity under construction as is currently existing.

Due to Northern Virginia’s record demand, however, secondary markets did decline significantly in share of overall demand.

The lack of energy availability and growth in data center demand has resulted in “extremely limited” data center availability and an increase in preleasing. For example, IT teams are extending their planning timelines and committing to space and power earlier than they might otherwise.

In primary markets, data center leasing in H2 2023 was in relation to under construction or planned products, not existing inventory. Pre-leasing will gain more traction as construction and power availability timelines continue to drag on in the next 12 months.

The report also found that energy costs increase in tandem with utility infrastructure investments. The average power rates rose in primary and secondary data center markets from 2022 to 2023, with a 15.6% average increase for the former and a 9% average increase for the latter.

But to upgrade the increasingly stressed energy generation and transmission infrastructure, more funding is needed and will likely come with utility rate increases for the end user.

JLL expects energy costs will remain stable in most markets in 2024.

The research identified generative artificial intelligence (AI), hyperscale demand and proximity to interconnection points as the main drivers of data center demand.

Generative AI (genAI) requires incredible amounts of power compared to general purpose computing, with some use cases demanding between 300 and 500 MW of electricity. New York and New Jersey saw the most substantial AI deployments in H2 2023. “The proximity to financial services firms and the network of AI talent have driven demand in those markets,” according to the report.

In the larger markets, cloud providers and hyperscalers are driving demand and making it harder for smaller enterprises to secure colocation space and power to meet their needs. Distributed cloud environments and outsourcing data center operations have both become more popular as a result.

Geographic proximity to interconnection points is driving data center site selection, though these edge deployments are often smaller. In Los Angeles, California, for example, “connectivity to One Wilshire, which provides access to overseas cables and telecommunications antennas, is key, and drives activity at connected data centers,” the report noted.