They May Prefer Texas, But Data Center Developers Aren't Giving Up On California

Texas has surpassed California as the top data center market in the western half of the U.S., and the gap between the two states is only getting wider.

But while California may be a more challenging place to develop digital infrastructure, there is still plenty of demand for it, and developers say it may be worth the extra effort.

Despite being the epicenter of artificial intelligence research and development, California over the past five years has gone from being the second-largest data center hub to a region that has largely sat out the AI building boom. Meanwhile, Texas has exploded as a hotbed of hyperscale development.

There is broad consensus across the data center industry that Texas is a far easier place to build large-scale facilities. Compared to California, the Lone Star State offers faster access to cheaper power, fewer regulatory hurdles and lower taxes, plus less risk of projects being derailed by local opposition. 

Still, industry leaders speaking at Bisnow’s Data Center Construction, Design & Development Conference West — held June 25 at the Hyatt Regency Santa Clara — said it would be unwise to write off California entirely. 

Building in California may be difficult, they said, but the state does have some unique advantages when it comes to solving challenges with power, sustainability and community pushback that developers can take advantage of to get projects over the finish line.

And despite the negative narrative around the state, opportunities for development do exist.

California had nearly 825 megawatts of data center inventory under construction at the start of this year, with more projects expected to be unveiled in the coming months, according to JLL. Nearly all this new capacity has been preleased at rents well above other markets, reflecting a strong desire among tenants to deploy capacity in California and a willingness to work through the state's challenges.

Executing projects in California may be a far heavier lift than in Texas, said HITT Contracting Vice President Rav Dhaliwal, but there is ample opportunity for developers who are prepared. 

“Your list of concerns on the West Coast is going to be longer than Texas, but how do you prepare yourself for things like timing contingencies and pushback?” Dhaliwal said.

Industry players speaking at Bisnow's event didn't sugarcoat the significant hurdles developers face in California compared to Texas and most other major markets — constraints they say extend project timelines and make them more expensive and harder to underwrite. 

While access to grid power has become the industry's biggest bottleneck nationwide, California stands out as one of the most difficult places in the country to secure a utility interconnection. Although utilities in places like San Jose have pursued creative solutions to deliver large blocks of power for data center development, wait times for grid connection in the Bay Area and Southern California are typically measured in years, not months.

The Electric Reliability Council of Texas grid system allows data center developers in the state to pursue solutions to power constraints by producing their own power or partnering with energy generation firms to bring new capacity to the grid. While California is considering measures that would allow data centers to bring their own power, regulatory hurdles make adding new generation incredibly difficult today and such creative power solutions nearly impossible, panelists said. 

Even compared to other regulated power markets, Dhaliwal said California’s regulations are particularly strict and labyrinthian, often requiring developers to hire specialists simply to navigate the interconnection process — a measure rarely required elsewhere. 

“They need to have a whole separate team to understand those requirements and processes,” Dhaliwal said. “It adds to their pain points.”

Compared to California, Texas also offers an easier path when it comes to avoiding and overcoming local opposition to data center projects, a phenomenon that now vies with power constraints as the primary force limiting the industry’s growth.

In part, this is due simply to the fact that Texas has more open land far from population centers or areas known for natural beauty. But throughout much of Texas, residents have much less legal standing to challenge or delay data center projects than they do in California, said Calvano Development President Mark Calvano. 

After relocating his development efforts from California to West Texas, Calvano said he has seen a stark difference between the two markets when it comes to navigating local approvals. The areas in which the firm is currently developing in Texas had no preexisting zoning, a characteristic true for much of the state, he said. While local governments were supportive of his projects, they couldn't have successfully stopped them even if they wanted to, Calvano said. 

“It's a winning hand,” he said. “They can't stop a data center if they try.”

California’s political environment may be more challenging for developers, but panelists argued that the state also has advantages that can make winning community support easier than in many emerging data center markets. This includes the significant influence of the tech sector in the state.

Counterintuitively, HITT’s Dhaliwal said, one factor that gives developers a leg up in California is a characteristic of the state that often chases development away: the prevalence of union labor. Across the U.S., unions have supported data centers due to the construction jobs they create and the funding they generate for unionized school districts. In states like California where unions wield significant political power, they can be critical allies when it comes to navigating local politics and getting projects over the finish line. 

“Unions are very strong here, which is seen somewhat as a negative, but overall, we've brought union team members to the planning commissioning meetings where they were the proponents, and it really helped put a positive spin on the project in front of the council members,” Dhaliwal said. “They live and work in those communities, and they can be helpful proponents of your project.”

Community backlash in California has also been blunted by the fact that the state has seen waves of data center development before that haven't led to the environmental consequences that many project opponents warn will take place, said Sara Neff, general manager for cloud sustainability at Microsoft. 

Californians have seen that it’s possible to dramatically expand data center capacity throughout the region without significantly driving up emissions or other environmental impacts, according to Neff. She said California presents a case study that the industry should be highlighting in other markets. 

“California is the great poster child for the story that we need to tell about data center growth, which is the decoupling of growth from emissions,” Neff said.

The state's robust innovation economy is also increasingly attractive to developers and hyperscalers like Microsoft, Neff said. As the industry contends with power constraints and overmatched grid systems, California remains a hotbed for the development of the alternative generation sources and power management technologies operators are increasingly looking to as critical for the industry’s continued growth. 

At the same time, California is a global hub for sustainability-focused startups offering solutions for firms like Microsoft with significant carbon-reduction goals, Neff said. Compared to other states, she said, California has many manufacturers and suppliers of products like low-carbon concrete that aren’t as readily available in other regions. 

“California is such a great generator of innovation,” Neff said. “There's so many resources that are locally available, and those should be taken advantage of.”