Metro Phoenix prevails as the second-largest data center market in the nation, according to JLL’s new H2 2023 North American Data Center Report. Bolstered by its availability and affordability of power, and its available land for new development, the market during the second half of 2023 completed leases for 748MW of new data center capacity and has 2.8 million square feet (703MW) of capacity under construction. This ranks second only to national data center leader Northern Virginia, with 1.6GW of transactions completed during the same time period and more than 13 million square feet (1,339MW) under construction.
As with other primary U.S. data center markets, most of the net leasing in metro Phoenix is occurring in under-construction or planned product, rather than existing inventory. Across the nation, JLL expects this pre-leasing trend will continue to accelerate as construction and power delivery timelines are not likely to slow over the next 12 months.
“The availability of power and land remain primary factors in data center market success, and Phoenix fares extremely well in both of these categories,” said Mark Bauer, Senior Managing Director and Data Center Solutions Group Co-Leader, JLL. “That has kept local demand on a steady uptick, creating exponential absorption and positioning Phoenix top-of-mind for a wide spectrum of users as they continue to search for capacity.”
According to Bauer, this requires users and operators eyeing metro Phoenix to plan ahead, thinking about their needs for the next several years and pursuing opportunities to satisfy those requirements based on current and planned new development.
The metro Phoenix data center inventory currently totals just over 6.9 million square feet (740.2MW). At present, only 156,556 square feet (24.5MW) of that is vacant. More than 2.8 million square feet (703MW) is under construction and another 2.7 million square feet (634MW) is planned.
Due to strong demand, data center rental rates nationally have risen 5% for small requirements under 250 kw and 11% for large requirements of 5MW plus from H1 2023 to H2 2023. Prices rose highest in markets with rapidly diminishing availability. Phoenix, as an example, saw rates rise 17% to 30%, depending on capacity tranche.
Cost of power in metro Phoenix also rose by 17.3% last year, reflecting an increase from 6.5 per kilowatt hour to 7.5 cents per kilowatt hour. This keeps Phoenix still highly competitive among leading and emerging markets. It is significantly lower than California, where average rates exceed 14.0 cents per kilowatt hour, and Northern Virginia, where power rates jumped 34% between 2022 and 2023.
“Rents and power rates are a primary part of the all-in costs for users, making Phoenix’s cost competitiveness a major operational advantage,” said Bauer. “They also drive the market’s attractiveness among developers, ensuring our pipeline of space and capacity will continue to expand. This is critical as AI evolves, pushing our requirements larger and larger.”
According to the JLL report, AI and Large Language Models (LLM) like ChatGPT require tremendous amounts of power, and its popularity is soaring. ChatGPT had just over 100 million monthly users in January 2023. By November, it had over 100 million active users weekly. Additionally, training of ChatGPT-3 consumed over 1,287 MWh of power. With hundreds of millions of daily queries, ChatGPT uses about as much power as 33,000 households.
Cloud and hyperscale users are also driving demand. As these users dominate in the larger markets, smaller enterprise users are pressed to find colocation space and power to meet their needs. Some enterprise users are evaluating the shift from enterprise to cloud due to rising costs, latency and information security concerns and are moving toward a “distributed cloud” environment or outsourcing enterprise data center operations. Additionally, proximity to interconnection points is driving site selection for data center demand, but these edge deployments tend to be smaller.
From a capital markets perspective, data centers are seeing increasing investor allocations, with the sector enjoying a 9% CAGR in transactions since 2013 – the highest of any sector other than life sciences.
“The size of data center user requirements continues to increase at a rapid rate, which has condensed data center development timeframes and increased the need for capital,” said Carl Beardsley, Senior Managing Director, Data Center Leader, Capital Markets, JLL. “Previously, a data center operator could ramp into a multi-billion-dollar development over a five-to seven-year period. The pre-leasing dynamic has caused private equity firms to deploy capital at a faster rate, which opens an opportunity up for more entrants in the capital stack.”
Companies with backing from these funds are expanding rapidly but often don’t have the framework for the talent and processes to run these data centers. These companies are turning to facilities and property management experts with a deep bench of engineers trained for critical environments. Data centers are a unique asset class, requiring specific skills to operate at their best, and, with labor shortages for trained engineers, investors seeking to capitalize on this opportunity will need to partner with seasoned operators.
