AI and Cloud Adoption Propel Data Center Demand to Record Levels in 2023
The data center industry is experiencing a transformational moment unlike anything seen before. Fueled by the explosive rise of artificial intelligence (AI), machine learning, and the relentless adoption of cloud services, data center demand has surged to record highs in 2023. According to JLL's 1H 2023 North American Data Center Report, these forces are reshaping the landscape of digital infrastructure — pushing hyperscalers, financial firms, healthcare companies, and major enterprises into an unprecedented race for space, power, and capacity.
The Driving Forces Behind Record Demand
At the heart of this remarkable growth are two converging megatrends: artificial intelligence and cloud computing. AI and machine learning workloads are notoriously compute-intensive. Training large language models, running inference at scale, and supporting real-time analytics require vast amounts of processing power, memory, and — critically — physical data center space. As organizations across every industry rush to integrate AI into their products and operations, the infrastructure demands have become staggering.
Cloud adoption, meanwhile, continues its steady and accelerating march forward. Enterprises of all sizes are migrating workloads, applications, and data from on-premises environments to cloud platforms. This ongoing shift places enormous pressure on hyperscale cloud providers to expand their footprints, and that expansion is playing out directly in the data center real estate market.
Together, these two forces have created a demand environment that the industry has never previously encountered. The first half of 2023 closed with record absorption figures, and analysts see no meaningful signs of deceleration on the horizon.
Supply Cannot Keep Pace With Demand
One of the most pressing challenges facing the data center market right now is a severe supply-demand imbalance. The development timeline for new data centers has expanded dramatically — in many markets, it now takes three to five years, or even longer, to bring a new facility online from the point of planning. This extended lead time means that today's shortage is not a problem that can be solved quickly.
The situation is already critical in primary markets. Most of the data center capacity scheduled to be delivered in the third and fourth quarters of 2023 has already been preleased or placed under exclusivity agreements before construction was even completed. Looking further ahead, supply expected to come online in 2024 is similarly spoken for, leaving organizations that have not begun their planning process with extremely limited options.
Andy Cvengros, Managing Director at JLL, summarized the situation bluntly: "The data center industry is continuing to experience explosive growth in demand which is leading to completely sold-out primary markets, secondary market expansion and the development of newer tertiary markets. Major markets and most secondary markets have reached a state of supply and demand imbalance. If you want a new data center within that timeframe, start planning for it now, as we don't see any sign of this demand slowing or the power situation getting any better."
Primary Markets: Phoenix and the Northwest Take the Lead
Traditionally, Northern Virginia has reigned supreme as the dominant data center hub in North America. However, the 1H 2023 data reveals a notable shift in the competitive landscape. Phoenix and the Northwest have surpassed Northern Virginia in absorption figures for the first time, recording 194.5 MW and 185.9 MW respectively, compared to 184 MW for Northern Virginia during the same period.
This geographic diversification is not accidental. Developers and hyperscalers are increasingly looking to diversify their portfolios across multiple regions to mitigate risk, take advantage of available power infrastructure, and reduce their dependence on any single market. As primary markets become increasingly saturated, the appeal of emerging locations grows proportionally stronger.
The pricing environment in primary markets reflects the tightening supply. Data center operators have responded to the inventory squeeze by raising colocation pricing by as much as 20 to 30%. For enterprises that have historically benefited from competitive pricing in established markets, this represents a significant shift in the economic calculus of data center strategy.
Secondary and Tertiary Markets on the Rise
As primary markets reach capacity and pricing escalates, attention is shifting toward secondary and tertiary markets. These emerging locations offer several advantages that are becoming increasingly attractive to data center users:
- Available land and power: Secondary and tertiary markets often have access to larger parcels of land and more accessible power grid connections, two resources that are critically scarce in saturated primary markets.
- Lower operating costs: Real estate, labor, and utility costs in smaller markets can be meaningfully lower than in Tier 1 hubs, helping organizations manage total cost of ownership.
- Reduced latency for regional users: For organizations serving geographically distributed user bases, strategically placed facilities in secondary markets can deliver better performance with reduced latency.
- Incentive programs: Many states and municipalities in secondary and tertiary markets actively court data center investment through tax incentives, grants, and streamlined permitting processes.
The expansion into these markets is not merely a stopgap measure. It represents a structural evolution of the North American data center ecosystem, one that is likely to continue for the foreseeable future as demand continues to outpace supply in traditional hubs.
The Power Challenge: A Growing Constraint
Perhaps no challenge looms larger over the data center industry's growth trajectory than the question of power. AI workloads in particular are extraordinarily power-intensive. A single AI training run for a large foundation model can consume megawatts of power over days or weeks. As more enterprises build and deploy AI systems, the cumulative power demand being placed on electrical grids is becoming a significant bottleneck.
Cvengros specifically noted that there is no expectation of the "power situation getting any better" in the near term. Utilities are under pressure to keep pace with data center expansion, and in many regions, the interconnection queue for large power consumers stretches years into the future. This power constraint is itself becoming a primary determinant of where new data center development is feasible, pushing developers toward regions with surplus generation capacity and favorable grid infrastructure.
Strategic Implications for Enterprises
The message from the 2023 data center market is clear and urgent for enterprise technology leaders: the window for securing affordable, available data center capacity is narrowing rapidly. Organizations that delay their infrastructure planning risk finding themselves locked out of preferred markets or forced to accept premium pricing and unfavorable lease terms.
The convergence of AI adoption, cloud migration, constrained supply, and power limitations has fundamentally altered the strategic calculus for data center planning. Long lead times demand that organizations begin the planning process years ahead of their anticipated need — not months. For those that act with urgency, the opportunities across primary, secondary, and tertiary markets remain substantial. For those that wait, the outlook is considerably more challenging.
As 2023 draws to a close, one thing is certain: the data center industry has entered a new era, and the organizations best positioned for success will be those that recognize the magnitude of this shift and plan accordingly.