Data Center Site Selection: Key Considerations

Building data centers requires substantial resources, and project sites must check a multitude of boxes to be viable — from access to massive amounts of electricity to low natural disaster risk. At the heart of these constraints is a scarcity of land that meets all the criteria necessary for data center development.

The quality of a developer’s due diligence when it comes to site selection plays a massive role in how challenging it will be to design and build a new data center at the speed customers require. At the same time, the shortage of developable sites is pushing data centers into new markets, exposing more construction pros to the specialized needs of this fast-growing asset class.

This article will outline the top considerations for data center developers, operators and end users when it comes to site selection. 

Data Center Power Requirements

Access to power has emerged as the primary consideration in determining where data centers are built today. 

Accessing the Electric Grid

Finding sites with access to sufficient power is becoming increasingly challenging. In part, this is because the data centers built today often require far more power than ever before.

As recently as 2022, a site with 100 megawatts would have been considered a large capacity project. But by 2024, data center campuses were being developed to ultimately support more than a gigawatt. This ballooning energy demand has accelerated due to the computing needs of artificial intelligence. 

At the same time, electric utilities across the U.S. are struggling to provide this power on the short timelines developers need. As data center construction booms and facilities’ hunger for power grows, energy demand from data centers is exceeding the capacity of transmission infrastructure in the sector’s most important hubs.

Amid escalating power constraints, data center site selection has increasingly become a quest for power. Developers are forced to be opportunistic to secure land that can access electricity from the grid quickly.

Exploring Alternative Power Sources

As sites within proximity to existing electrical grids become ever more scarce, the conversation is turning towards finding alternative energy sources. If data center builders can’t get power from the grid, they’ll get it from somewhere else. 

Companies like Amazon have started pursuing data center projects adjacent to existing nuclear power stations where electricity would be purchased directly from the plant operator. Conversely, data center firms are starting to partner with energy developers to build power plants alongside new data centers. According to Bloom Energy, nearly a third of all data centers built by 2030 will use on-site generation as their primary power source. 

The scale at which the data center industry is adopting on-site power solutions can be seen in rising demand for natural gas, which fuels the vast majority of this new generation. According to S&P Global, data center growth could add 50 gigawatts of new gas generation to U.S. grids by 2030, single-handedly raising power sector gas demand in the U.S. by almost 17%. 

With growing adoption of power alternatives, access to utility power may become less of a limiting factor in site selection. On the other hand, sites utilizing on-site power have their own infrastructure requirements, such as access to natural gas pipelines.

Network Infrastructure & Connectivity

The second major consideration when it comes to site selection is network connectivity.

Developers must determine if a site is located in a place with sufficient access to fiber optic infrastructure and other connectivity options from a range of providers, all with sufficient bandwidth for the end user’s needs. In other words, will it be easy to build onramps to the system of data roads and highways that carry information at the speed of light? Those pathways also need to be big enough to ensure the customer’s data rarely gets "stuck in traffic."

Even if a site has immediate access to hundreds of megawatts of affordable power, the location will rarely be viable for data centers if there is not already network infrastructure in place. For this reason, data centers are frequently built in close proximity to existing facilities, creating major data center clusters in a handful of U.S. markets like Northern Virginia, Dallas, Silicon Valley and Chicago that account for the bulk of North America’s data center inventory. These hubs tend to be located at the intersection of long haul fiber routes or near landing stations for major intercontinental cables. It’s the data equivalent of logistics centers clustered around major ports and the intersection points of the interstate highway system. 

A site located in such a cluster allows the data center to piggyback off the robust network ecosystem that already exists in these locations. The infrastructure is already in place to facilitate easy connections not just to major fiber routes but to cloud and internet service providers with nearby facilities and, critically, to nearby network hubs known as “internet exchanges” or “carrier hotels.” These effectively act like a switching station for data between different networks. 

Siting a data center where such infrastructure already exists has a cost benefit in that a developer or end user does not have to put in as much new network infrastructure themselves. But it also has a performance benefit. Sites in areas with strong fiber infrastructure generally have lower latency — the time it takes for data to travel from one point to another within a network. The lower the latency, the wider the array of computing workloads that could ultimately be housed at that data center. Better network equates to more versatility and therefore, in most cases, a more valuable site. 

The Role of the End User

The network infrastructure requirements for a data center site can also vary depending on the business and computing needs of the end user who will ultimately occupy the facility.

On one end of the spectrum, data centers used exclusively for training AI models or mining Bitcoin are not latency sensitive and can be built in remote locations where the lack of network would be prohibitive for nearly any other use case.

At the other end, multitenant colocation data centers hosting real-time market data for financial institutions and video streaming services are very latency sensitive, requiring network-rich sites adjacent to the major population centers where their end users are located so data can travel back and forth quickly. 

Political & Regulatory Environment Factors

Understanding the tax, regulatory, zoning and political landscape of the jurisdiction in which a site is located is critical in evaluating its viability for data centers.

Data Center Tax Incentives

Tax incentives are one of the first things developers and end users look for when evaluating a potential data center site. In fact, most firms will only build large-scale facilities in states that exempt operators and tenants from sales and use tax on the equipment housed inside data centers. 

An individual data center can contain hundreds of millions of dollars worth of computing equipment that is typically replaced every four to six years. Eliminating tax on this equipment can represent tens of millions of dollars in savings over the lifetime of a facility, making such exemptions effectively a prerequisite for data center construction. The majority of U.S. states now have some form of data center tax exemption in place. 

Local Zoning Regulations

At the local level, another key consideration for developers is whether data centers are already an approved use for a site and whether the planned project conforms with zoning regulations.

In recent years, it has become far less common for data centers to be built as a by-right use. In mature markets where some areas are zoned specifically for data centers, undeveloped land in those districts has become scarce — and development is increasingly pushing into submarkets of industry hubs that in many cases did not account for data centers in their land use planning.  

Particularly as a growing share of data center development shifts from individual facilities to multi-building campuses, there is a growing likelihood that a data center project will need local governments to approve land use changes and other entitlements. 

Attitudes towards data centers can vary dramatically between different jurisdictions and communities — even within the same market. And public sentiment can shift quickly in areas where the industry’s growth has led to the rapid proliferation of data centers.  

On one hand, local politicians and economic development officials in a growing number of communities have data centers on their radar. They’re aware of the tax revenue these facilities can generate, and in many cases are working proactively to attract development by creating tax incentives, streamlining permitting and working with developers to navigate the entitlements process. 

On the other hand, many data center hotbeds that once rolled out the red carpet for developers have become increasingly hostile towards the industry, particularly as data centers encroach on residential and rural communities. In Loudoun County, Virginia — home to the densest concentration of data centers in the world and for years among the friendliest jurisdictions for data center builders — lawmakers are now considering measures to eliminate by-right zoning for data centers entirely and place new restrictions on where they can be located. In neighboring Prince William County, residents have elected lawmakers who campaigned on anti-data center platforms.  

Additionally, it's important to understand whether a specific site could face regulatory hurdles at the state and federal level.  Environmental rules limiting the use of diesel backup generator or water consumption in cooling systems are just two of a countless number of potential regulatory tripwires.

Environmental Risk Factors

In the past, an article about data center site selection might have led with environmental risk as the top consideration. Developers’ chief concern was whether a natural disaster could force a data center at a given site to shut down, even temporarily. Today, while environmental risk still matters, it’s a little farther down the list.

Data centers are mission critical facilities, meaning they must be fully operational at all times. Outages can have enormous financial repercussions for both data center operators and end users. For the largest data center users, the costs and lost revenue associated with outages can exceed a million dollars per hour, according to DivergeIT.    

For this reason, data centers are designed with multiple levels of redundancy for nearly every critical system. It’s also why data centers have traditionally been built only in areas with very low environmental and disaster risk. For years, building near the coast or in places that had regular natural disasters was considered almost taboo — but as technology to withstand these outside factors evolves, this is changing.

Campus-scale data center projects are in the development pipeline in places like Florida, Louisiana and Houston, Texas that would likely not have been viable previously due to the threat of hurricanes and flooding. Developers continue to look for opportunities in California despite growing wildfire risks. While building near a natural gas pipeline was considered a risk factor in the past, now it is considered an asset/ a desirable feature for a potential data center site. 

This shift has occurred, in part, due to improvements in construction that have helped mitigate some environmental risks. Data centers are designed to be more resilient: built to withstand hurricanes in Florida and fires in places like California. An ongoing shortage of data center capacity amid record demand has also led some end users to adjust their risk tolerance to consider a broader range of sites. 

Just as layers of redundancy are built into every data center, cloud providers and other large-scale corporate end users are building redundancy into their computing and IT architecture. If a data center goes down or is under threat from a natural disaster, the processing within that facility can fail over to a different data center in a different geographic region. Losing a data center data center to a catastrophe, therefore, doesn’t necessarily equate to crippling catastrophe for the company as a whole.  

While no company wants to lose hundreds of millions of dollars in digital infrastructure, they’re more willing than ever to gamble that such a “thousand-year storm” won’t occur over the lifetime of the facility.  

Build a Strong Foundation with our Preconstruction Course

With 20+ years of experience, Ben Ashburn teaches you how to streamline planning, bidding, and procurement for better outcomes.

Enroll for Free

Additional Considerations for Data Center Site Selection

Water

Access to water can be a site consideration for certain data centers. Traditionally, data centers have used substantial amounts of water in their cooling systems, with some large facilities consuming as much as 5 million gallons per day. But advances in cooling technology have now made it possible for some data centers to be water-free, allowing construction in locations where access to water may be limited.

Physical Security

When it comes to protecting data, cybersecurity may be the first thing that comes to mind. But physical security of critical IT infrastructure is a huge consideration in how data centers are designed. Developers must ensure a site can accommodate the physical security measures the building’s future operators will require.

Sustainability

The tech giants driving the majority of new data center construction all have aggressive carbon reduction goals, and the bulk of their carbon emissions come from the electricity powering their data centers. Because of this, occupiers often place a premium on sites where a significant percentage of the power comes from renewables or other low carbon sources. 

Accessibility

A data center’s tenants need to be able to access their IT equipment, so development sites will ideally be close to large population hubs or near airports or other transportation infrastructure. Locations near large population centers also have access to larger labor pools for operations staff, who need to be within commuting distance of the facility. 

Written by