Colocation vacancy rates have plummeted to a record low of 2.6 percent in North America, according to a report from JLL.

Vacancy levels have continued to decline despite record construction levels, the report said.

Absorption rates totaled 4.4GW in 2024, a quadruple increase since 2020. This has been attributed to cloud providers, technology companies, and finance sectors.

In 2024, AI represented around 15 percent of data center workloads, with the report adding it could grow to 40 percent by 2030. As usual, AI has been labeled a key source of growth for the sector.

According to JLL, 88 percent of absorption in 2024 was in primary markets, with Northern Virginia taking the top spot with 847MW of absorption in H2 and capturing 50 percent of all demand in North America.

Chicago comes in second with 308MW, and Phoenix (166MW), Dallas-Fort Worth (123MW), and Toronto (55MW) all follow suit.

A contrasting report from CBRE pegged Atlanta as the winner for net absorption in 2024, with 705.8MW.

“Data center rents continue to surge, with a 12 percent year-over-year increase in 2024 and an 11 percent CAGR since 2020, as landlords maintain strong negotiating leverage in a market with near-zero vacancy,” said Andrew Batson, head of US data center research for JLL. “Tenants renewing five-year leases are experiencing significant sticker shock, facing up to 50 percent rent increases, and landlord concessions are becoming increasingly rare in this tight market.”

Construction stays strong

Construction remained “robust”, said JLL, adding that more than 2.6GW of colocation capacity was completed during 2024 and almost all of that was absorbed at delivery.

At the end of the year, 6.6GW of colocation capacity was under construction, with 78 percent of that in primary markets.

The pipelines of planned projects have increased to 22.9GW, confirming strong demand in established markets.

The majority of markets have doubled or tripled in size since 2020, with Austin/San Antonio and Atlanta leading the US in market growth.

“The data center sector remains one of the most favored real estate asset classes due to insatiable tenant demand, limited supply, and rising rents,” said Andy Cvengros, executive managing director, co-lead of US data center markets at JLL. “However, power availability has become the defining constraint on growth, pushing development into new markets in search of capacity. It’s the new ‘gold rush,’ as developers, occupiers, and investors are competing for available power, land and equipment. More power generation is urgently needed if supply is going to keep up with demand.”

What’s the holdup?

The report notes that the North American power grid is taxed, resulting in challenges around capacity, scale, and transmission. Data center projects are requiring more power each year, with new facilities commonly around 100MW.

Some projects are even requesting up to 1GW of power.

Matt Landek, division president, US data center work dynamics, said that data center operators are increasingly turning to alternative energy solutions. He added that natural gas turbines have emerged as the go-to bridge solution, offering affordability, accessibility, and rapid deployment.

Grid power is still considered the most reliable, affordable, and accessible source of electricity in North America, said JLL. However, green energy solutions, such as solar, wind, field cells, hydrogen, nuclear, and geothermal are in various stages of development for data center usage.

Several SMR firms have signed agreements with data center operators in the last 12 months, including Kairos and Deep Fission.

Sam Altman-backed Oklo has been the most active in the market. In January, the firm inked an MoU with RPower to deploy a power model that combines natural gas and nuclear power for the data center sector.

Before this, it signed a non-binding master power agreement with US data center developer Switch to supply up to 12GW of power through 2044. It also has agreements with Equinix, Prometheus Hyperscale, and two undisclosed data center operators. In total, Oklo has a customer pipeline exceeding 14GW of power.

AWS has also signed three agreements with Energy Northwest, X-Energy, and Dominion Virginia to support the deployment of more than 600MW of power across Washington and Virginia.

Lead times are also still 50 percent above pre-pandemic levels and data center supply chains continue to be challenged. However, circumstances are improving with most equipment available for delivery in six months or less.

Generators, switchgear, and transformers take an average of 11 months.

Cashing in on the cloud

The data center sector is among the most favored real estate asset classes for investors. The market saw strong appetite throughout 2024, from core stabilized assets to value-add opportunities.

Significant future investment appetite is expected from sovereign funds and separate accounts seeking large-scale investment. The single-asset borrower (SASB) and asset-backed security (ABS) markets provided substantial liquidity, with data center ABS volume increasing 49 percent year-over-year to $9 billion in 2024.

A recent report from Newmark said capital deployment in the data center construction sector reached an all-time high of $31.5 billion in 2024.

Silicon sprawl: hyperscalers lead the charge into untapped markets

The report also examines emerging data center markets across North America. For example, West Texas, Louisiana, Alabama, New Mexico, and Iowa are attracting significant investment from hyperscalers and colocation providers.

It adds hyperscalers are typically the first movers, followed by colocation firms.

A recent report from CBRE confirmed that Louisiana has emerged as a popular secondary market, with greater power accessibility, available land, and tax incentives.

A Newmark report also confirmed West Texas was emerging as a popular location. The first phase of Stargate is expected to begin in Abilene, Texas, and Microsoft has recently filed to build two more data centers in addition to its five-building campus in San Antonio, with Google and AWS also planning facilities in the area.

Core Scientific is expanding its presence into Alabama. Meta is also developing a $800 million data center in Montgomery, Alabama, and another in Los Lunas, New Mexico.

The CBRE report also added colocation supply in North American data center markets has increased by 34 percent year-over-year in 2024.