Chicago's Data Center Market Is Booming But Running Out Of Room
The Chicago area is riding a wave of data center development, but a lack of available land appropriate for these projects means data center builders will have to get creative if the market is to continue to grow.
Chicagoland, particularly the northwest suburbs near O’Hare, is a hot market for developers of data centers — buildings housing thousands of servers and other IT infrastructure that are central building blocks of the internet and the increasingly digital world.
The region is already the nation’s fourth-largest data center market, but the number of new facilities currently under construction is set to increase the Chicago area’s total inventory by nearly a third. Almost all of this new development has been pre-leased, with tech giants like Microsoft, Oracle and TikTok snapping up space to house their servers faster than it can be built.
But with nearly the entire data center development pipeline spoken for, the region’s ability to meet accelerating demand is running headlong into a growing scarcity of land that meets the siting requirements for data centers. With land constraints tightening, industry insiders say data center developers are being forced to think way outside of the box to maintain the industry's growth in the Windy City.
“There's been a lot of creativity,” said JLL Regional Director Sean Reynolds, speaking at Bisnow’s DICE Midwest event in September. “The past couple of years we’ve had to adapt and identify opportunities that are not obvious.”
Data center capacity in Chicago has more than doubled since 2015, but that growth has been accelerating significantly over the past 24 months. According to JLL, record absorption in the first half of 2022 exceeded previous highs set last year by more than 50%.
Among the large-scale data center projects driving these numbers: Microsoft is building three data centers in Elk Grove Village and is planning two more in Hoffman Estates. Prime Data Centers is developing a facility on 24 acres in Elk Grove Village, while CloudHQ has broken ground on a massive $2.5B campus on the site of United Airlines’ former headquarters in Mount Prospect.
Experts say they don’t expect this demand to slow down any time soon.
Data center operators and their tenants — particularly the cloud and social media giants known in the data center world as hyperscalers — want to be in Chicagoland. One of the primary appeals of the market is what the tech world calls latency — the fast computing speeds made possible by locating servers close to end users and other data centers.
Companies like Microsoft that provide cloud-based services to enterprise clients in the Midwest’s economic hub are able to provide better performance if the data doesn’t have as far to travel. Experts also point to a state-level data center tax incentive program, enacted in 2019, as a key factor in driving the current development boom.
“The incentives at the state level have really helped accelerate that growth here in Chicago,” said Chris Curtis, senior vice president for development and acquisitions at Compass Datacenters. “It makes a difference. If there's one location that doesn't have an incentive, and another that does, even the largest companies in the world are going to take what they can get.”
Demand may continue to grow, but industry insiders speaking at the event said a shortage of land conducive to data center development in the Chicago area presents a significant obstacle to future growth.
Compared to most other commercial real estate sectors, a massive amount of infrastructure needs to be present for a data center to be built. They need access to massive amounts of power to run the servers and their supporting equipment, and this means proximity to high-capacity transmission lines and generally an electrical substation either nearby or on the property.
Data centers also need access to optical fiber cable networks to transport massive amounts of data in and out of the data center at the speed of light. Operators also like to be located close to other data centers to reduce latency and the cost of connecting to other providers.
The few locations in the Chicago area with this kind of supporting infrastructure have blossomed into data center hubs, such as Elk Grove Village and other industrial areas near O’Hare International Airport. But these same areas are also in high demand from other sectors.
Elk Grove Village, already densely developed, has an industrial vacancy rate below 2%, according to city officials, so available sites are few and far between. And while data center operators can often pay more for a site than logistics companies of other users with an extensive footprint in the area, many landowners are wary of data centers simply due to a lack of familiarity.
“Things are already tight right now in that it’s difficult finding space for new developments,” John Day, head of data center investments at Legacy Investing, said at the event. “Anytime a good parcel comes to market you're competing with a lot of different buyers, not just in your own sector but in other sectors like industrial and life sciences.”
With such scarcity of land, getting deals done requires creativity, experts said. This can mean looking at old industrial properties or other brownfield sites that might not get a second look in less constrained markets. It’s no coincidence that a number of the largest projects underway near Chicago are taking place on previously derelict industrial sites, from CloudHQ’s campus on United’s abandoned headquarters to Aligned’s campus in Northlake that required the teardown of an existing warehouse site.
“Projects like this, where they bought a tear-down building that was well-positioned and things like that are going to continue to be critically important for anybody that wants to grow in this market,” JLL’s Reynolds said.
Experts also point to the potential for creative dealmaking and collaboration with municipalities to create development opportunities.
Last year, data center provider Skybox formed a development partnership with logistics giant Prologis to build a data center on the site of a warehouse in Elk Grove Village. Beyond collaboration with developers from other sectors, others in the data center space are increasingly working with municipal officials in places like Elk Grove Village to rezone or annex properties to allow data centers, or with local utilities to predict which properties may have power availability years down the line.
With so few options, experts say it’s a matter of planning ahead and thinking outside the box.
“Creativity has to play into your strategy: maybe it's a sale-leaseback with a potential customer who’s looking to move elsewhere or an industrial user where then it's a renovation or demolition of the building,” said David Horowitz, executive vice president and director of sales for T5 Data Centers. “It's very challenging to find sites, so you need to think years out, maybe multiple buildings that you need to try to assemble it through different owners.”