Demand for data centers in the United States has reached unprecedented levels, with the first half of 2024 expected to set new records for growth and development.
The colocation data center market has doubled in size over the past four years, according to JLL’s U.S. Data Center Report – Mid-2024. This rapid expansion highlights the vital role these facilities play in modern society, but also raises concerns about strains on the U.S. power grid and a looming shortage of skilled talent.
Unstoppable demand drives record occupancy rates
Demand for data centers is booming and shows no signs of slowing as we move into 2024. Vacancy rates have hit an all-time low of 3%, but occupancy rates have increased at a compound annual growth rate (CAGR) of 30% since 2020. This surge has led to a significant increase in asking rents, which are up 13% to 37% year-over-year depending on the size of the lease.
“There doesn’t appear to be a cap on how high demand for data centers can grow,” said Andy Kvengros, managing director and co-leader of the U.S. data center market at JLL. With leasing rates at 84 percent, and almost all existing capacity already leased, Kvengros expects vacancy rates to approach 0 percent over the next few years.
Pressure on the power grid and growing energy demand
The explosion of data centers is placing unprecedented demands on the U.S. power grid. The sector’s power demand is growing at a compound annual growth rate of 21%, with some new data center projects requiring more than 1 gigawatt (GW) of power. In 2023, data centers accounted for just 3% of total U.S. electricity use, but projections suggest that could exceed 11% within the next decade.
Connecting a new data center to the power grid can take up to five years, forcing developers to explore temporary energy solutions like fuel cells and natural gas turbines. These delays are shifting development to secondary markets and rural areas where power capacity is more readily available. Additionally, some hyperscalers have begun acquiring power plants to ensure a steady energy supply.
The rapid expansion of data centers has also highlighted the significant challenge of finding and retaining skilled talent. Currently, 10% of existing data center positions remain unfilled, more than double the national average. Due to the technical nature of these jobs, very few applicants meet the necessary qualifications, resulting in a lengthy hiring process.
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Further complicating this issue is the fact that 33% of tech workers are nearing retirement age, a figure expected to double in the next few years. As data centers continue to expand into rural areas, local labor shortages create additional talent retention challenges.
Despite these challenges, the data center sector remains a hotbed of investment activity. Investor interest in data centers is soaring, with cap rates for core transactions remaining in the low to mid 6% range. The increasing trend for operators to recapitalize stabilized assets to fund new developments is expected to create significant opportunities for investors over the next few years.
“Data center investments offer a unique value proposition,” notes Carl Beardsley, senior managing director at JLL Capital Markets. “The residual value of data center assets is closely tied to power allocation, making these investments stand out from other real estate asset classes.”
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