On February 4, ULI Boston/New England held a panel discussion on the increasingly hot topic of data centers. The program, entitled “Strategic Insights: Navigating Investment, Trends and Opportunities in Data Centers & Digital Infrastructure” and hosted by Goodwin in their Seaport offices, explored cutting-edge investment strategies, key pricing trends, and the latest market shifts. 

The panel was moderated by Jim Tribble, Executive Managing Director, Capital Markets, Newmark and included expert panelists Mark Cochrane, Director, Portfolio Management Group, Digital Realty Trust; Luke Marchand, Vice President, TA Realty; and Leyla Sadigh, Associate, Arup. 

Data centers 

Data centers are facilities providing interconnections with customers and their workload, a place for storage for the modeling and algorithms that facilitate what their customers do and achieve, in a dedicated facility that has redundancy to meet their needs.  

“Most important is resiliency and redundancy to ensure reliability, 24/7/365,” said Leyla Sadigh. 

“As more and more data is created and used, the centers change. They are very different now than 10 years ago,” noted Luke Marchand. 

End users 

There are three categories of data center end users. The first are hyperscalers, the cloud service providers who demand hundreds of megawatts of electricity. They either self-build their data centers or contract with a third party. The second are enterprise, tenants like financial institutions and healthcare systems, that don’t need an entire campus but instead may require dedicated data center suites. The third are retail collocation, or carrier hotels in urban areas, where tenants take small cages and or cabinets.  

Market demand  

The spectrum for demand falls across all categories.  

“The cloud is living somewhere- and that somewhere is in real estate in a data center,” said Mark Cochrane. 

Marchand noted that if you consider all the data that exists in the world today, in 5 years’ time, today’s amount of data will be less than 5% of all data. Data generation and computing power are driving demand. In 2024, data center development was up about 20% from 2023. The data center market is limited by supply and not demand. There is exponential growth in the space, and hyperscale tenants are taking most of this space- including Amazon, Oracle, Microsoft, Alphabet, and Google. Cloud services are still bigger than AI, but this dynamic is shifting. In terms of AI GPUs, Nvidia had 75% market share. 

There are other notable shifts in client demands affecting the data center market. Sadigh noted that government clients used to have data centers within their buildings, especially at the federal level in Washington, DC. However, as their work moved to the cloud, they most often shut down local data centers in favor of cloud service providers.  

The role of power 

Jim Tribble noted that data centers require a massive amount of power and cited some startling statistics about the scale of the requirement: a single prompt of AI uses 10 times the power of google search. An image search in ChatGPT uses enough power to charge a cell phone.  

Marchand noted that power is key: “Every data center represents essentially enough power to power a town.”  

Power demand was once relatively flat, but now there is a huge issue with how to meet demand, with challenges at each level: 

• Generation- we’re not making enough power. Alternative energy sources are becoming very interesting, including nuclear.  

• Transmission- how do we get power to markets? There is a 5–7-year timeline for getting a data center connected.  

• Distribution- How do we get power to the end user? 

Cochrane agreed, noting that the timeline for bringing on additional power is long. In major markets with constrained power, you need to manufacture substation equipment, which itself is a 2–3-year timeline.  

Sadigh noted that the size of data center matters. Many require 30-100 megawatts, but the data center tenant does not need that much power day one, their utilization is phased over a period of time. Colocation data centers are generally smaller in size and sometimes modular. 

Other challenges 

Power is one puzzle piece, and then there is construction, operation, entitlements. All go together in major markets that are constrained. 

Cochrane noted that when evaluating a site, there are issues to consider beyond power, including fiber connectivity and infrastructure. AOL was founded in Northern Virginia, which created a foundation of infrastructure that supports the market in Virginia. Latency, or time of transmitting data over a network, is important to some clients but not others.  

There are also zoning issues with municipalities. Historically, data centers were not interesting to municipalities but that has been changing, with attached requirements around aesthetics. Facilities are robust with equipment and generators for redundancy purposes, making them challenging to locate near residential neighborhoods. Heavy industrial locations have less challenges in converting; adaptive reuse is sometimes welcomed for data centers to bring in tax revenue. 

Sadigh noted that the data centers include sensitive IT equipment and multiple devices. Depending on the cooling system, water usage may be significant. Residents may be concerned about usage and waste, and there is a need to consider sustainability. 

Constrained supply 

Cochrane shared that Digital Realty Trust has 644 megawatts under construction globally, and their development pipeline has expanded 50% with 3 gigawatts of land and power shell in the pipeline. A power shell is an industrial building with large power capability. The developer gets power to the site; the end user builds out the rest of infrastructure. If building turnkey, the developer brings in all equipment like generators and mechanical. The end user installs racks and their own critical infrastructure. 

Demand is very robust and expected to continue, and Digital is doing speculative building in primary markets. Lack of supply adds to pricing pressure, and processes can take years.  

Marchand noted that supply constraints are huge with high barriers for entry. Only Digital builds spec; no one is building all cash, and no one is lending until there’s a lease.  

Boston prospects 

The primary reason why Massachusetts has not taken off as a market for data center development is because utility rates are approximately 16 cents/kilowatt hour. In Northern Virginia, they are 8 cents/kilowatt hour. Tenants pay the electric bill making this a huge barrier to entry for Massachusetts.  

Second is demand. There are not a lot of enterprise customers looking to Massachusetts for their needs. The economy has a healthcare and education focus; it hasn’t broken into robust demand for digital transformation. There are edge nodes, but hyperscalers are not deploying massive loads in Massachusetts, according to Cochrane. 

“There is a lot of crossover with industrial markets… How quickly can you reach customers?” Marchand asked, noting that 75% of internet activity flows through Northern Virginia. Customers aren’t necessarily here. 

The state policy of carbon neutrality by 2030 is a barrier; data centers must have generators so meeting requirements is difficult, Sadigh explained. 

Green initiatives  

ESG is important to customers, stakeholders, and investors. Digital has a target commitment to reduce global emission by 68% by 2030 with a multi-faceted approach, according to Cochrane. 

Sadigh noted that most clients have ESG goals. They can purchase green power, use solar panels, deploy wind turbines if the area matches. There is a circular economy- IT equipment can be reused, and water can be reused. Other equipment can offset for balance. 

Loudon County, Virginia is the data center capital. Pressure from tenants and pushback from municipalities will lead to advancements, Marchand predicted. Fiber networks often run along rail lines, so there may be connectivity in geographies you wouldn’t expect. 

State policy can support the market. Northern Virginia does have a sales and use tax exemption to help, and Massachusetts recently adopted a similar policy. This has worked in other states. 

Disrupting the space 

Marchand noted that there’s huge opportunity to disrupt the space. There’s a shift towards third-party builds rather than hyperscaler self-builds; hyperscalers aren’t necessarily able to focus on the real estate and siting demands. 

Sadigh mentioned disruptors including modular options, prefabricated. The cost is different. It’s a smaller size but can expand. 

All capital is focused on hyperscale, Tribble added, while legacy collocation is overlooked.