'It Doesn’t Even Register': Silicon Valley No Longer Considered A Top Data Center Market

Big Tech’s heartland was once firmly entrenched as one of the world’s most critical data center markets. Now, it's barely an afterthought for the developers and tech giants driving the artificial intelligence data center building boom.

As the home of Google and Meta and the global epicenter of tech and AI innovation, Silicon Valley, and Northern California more broadly, would seem like an intuitive market for one of the world’s largest digital infrastructure hubs.  And for years it was, with the Bay Area serving as the West Coast’s corollary to Northern Virginia’s Data Center Alley. 

But now, an unprecedented wave of data center development to support AI is all but skipping Northern California. While demand for data center capacity in the Bay Area remains high, industry insiders speaking at Bisnow’s DICE West this month said the market’s uniquely acute power shortages, along with power and development costs and regulatory hurdles that are among the highest in the nation, have pushed new construction elsewhere.

Silicon Valley is rapidly evolving into more of a niche, “edge” data center market than a global hub. And industry leaders like Foundation Data Centers’ founder and CEO Arman Khalili don’t expect that developers and tech firms, even those headquartered in the region, will be rushing to build data centers by the Bay any time soon. 

“‘Silicon Valley was arguably the second most important market in the industry, but it doesn’t even register in the top 10 anymore from a pure development perspective,” Khalili told DICE West.

Northern California is still the 6th largest U.S. data center market, according to JLL, but its position in the global data center landscape is in freefall. In the past four years, markets like Dallas, Chicago and the Pacific Northwest have passed the Bay Area in terms of total capacity, and planning pipelines suggest that emerging hubs in Nevada, Texas and Georgia are on pace to catch up in the months ahead.  

Total U.S. data center inventory has doubled in just four years, and the industry’s growth has continued to accelerate as Big Tech’s AI ambitions drive a digital infrastructure arms race that Blackstone predicts will see a trillion dollars invested in new data centers within five years.

Yet even as data center construction boomed across the country, Silicon Valley and Northern California added no new capacity in the first half of this year, according to JLL. 

For the firms leading the data center development wave, Silicon Valley is now regarded less as a global or regional cloud computing hub like Northern Virginia or even Atlanta, and more like Boston or Los Angeles: large but low-growth markets whose data center inventory largely serves end users within those metro areas. 

“We see the market here in the Bay Area as an edge market that will be somewhat left behind by the growth of all the other markets that are able to support much larger AI demand in the western United States,” David Dunn, chief operating officer at H5 Data Centers, said at DICE West. “We see that growth happening outside of California entirely.”

This represents a massive shift over the last several years. As recently as 2020, the region was growing faster than any other data center market except Northern Virginia, with “fundamentals still among the strongest in the U.S.,” according to JLL at the time.

The problem now isn’t that tenants don’t want to be in the Bay Area, executives said at DICE West, it’s that California, and particularly the areas around Silicon Valley, has become a uniquely challenging place to build data centers.

The biggest challenge, by far, is power.

Of course, it’s not just California where shortages of available electricity are slowing the pace of data center development. With energy demand in the U.S. expected to outstrip supply as soon as next year, the industry’s power woes are, by a wide margin, the most significant headwind to building data centers fast enough to meet demand in markets across the country. But in Northern California, dwindling access to electricity has had the most debilitating impact on the industry’s growth, executives said.

Over the past six months, data center developers in most major markets have watched wait times for connections to regional power grids grow to nearly 10 years as utilities go through the cumbersome process of building new transmission lines, substations and power plants to meet skyrocketing demand from data centers. In Silicon Valley, however, developers who bought land for data centers were informed by utilities as early as 2023 that they would need to wait a decade for power connections.

Not only did power shortages hit Northern California earlier and with greater severity than other markets, but there is also widespread skepticism that utilities, developers and state officials have a pathway out of the crisis.

A report published late last year from utility Silicon Valley Power predicted that the region’s power problems would get worse before they get better, painting a pessimistic picture of its ability to build out new infrastructure fast enough to meet data center demand. 

With little in the way of new capacity hitting the market, STACK Infrastructure Chief Operating Officer Matt VanderZanden said the Bay Area  has missed out on large-scale AI opportunities. 

“Some of the constraints that we've seen in lots of markets in the U.S. as far as power availability have been uniquely impactful here,” he said at DICE West.“Five years from now, you're going to look back and if you're just calculating the number of megawatts, this is not going to be a top market…the AI growth curve hit in the last 18 months and there just hasn't been capacity in the Bay Area.”

The Silicon Valley market’s growth has also been stymied by unusually high costs of building and operating data centers there compared to other industry hubs.

Construction costs have risen in the state. And electricity in California isn’t just scarce — it’s expensive.  Energy prices are by far the largest operational cost for data centers and therefore a key development consideration, and power prices in the Bay Area are routinely double those in the industry’s growth markets. 

H5’s Dunn also pointed to California’s lack of targeted data center tax incentives.

Most states now offer special exemptions that reduce the sales and use tax burden on the computing equipment housed in data centers — tax breaks that can be worth hundreds of millions of dollars for data center users over the lifetime of a facility. Although these incentives are now effectively considered a prerequisite for large-scale data center development, California offers no such exemption. 

Panelists at DICE West also attributed the Bay Area’s diminished data center cachet to what they say is a uniquely burdensome regulatory environment in California that makes getting data centers to market quickly impossible. Speed to market is everything for data center builders, and simply obtaining the permits needed to move forward with a project takes months longer in California than in other states, according to Crane Data Centers CEO Matt Pfile. 

California’s regulatory landscape is also perpetuating the market’s power woes by slowing down the buildout of energy infrastructure, experts say. Silicon Valley Power indicated in its study that while it has new infrastructure projects in the works, it is unlikely to deliver those projects fast enough to meet data center demand due to lengthy permitting timelines and an overly complicated state-level process for connecting new projects to the grid. 

“Getting building permits takes years here when the market is signaling that the most important thing is speed,” Crane’s Pfile said. “California is just not a place that's business-friendly if you’re building anything, and we think that’s going to continue to be a constraint.”

Silicon Valley’s decline as the West Coast’s major digital infrastructure hub has spurred the rise of emerging markets west of the Rockies. Projects that would previously have been in the Bay Area are now fueling growth in places like Phoenix; Reno; Las Vegas; Hillsboro, Oregon; Quincy, Washington and Salt Lake City.   

Still, STACK’s VanderZanden emphasized that Northern California’s problems are all on the supply side, and that demand from tenants for capacity in the market remains as strong as ever.

In fact, the Bay Area has “the most inelastic demand” among data center markets, he said. Tech giants and AI startups need certain workloads to be located nearby, particularly for research and development, and are willing to pay through the nose to do so, as evidenced by the market’s highest-in-the-nation rents and vacancy rate just north of 2%, according to JLL.

As a result, according to Crane’s Pfile, Silicon Valley has become almost a luxury data center market for the small cohort of tenants willing to pay.

“We see this market as a sort of premium product — the highest value workloads are going to go here because the rents are the highest and the cost of power is the highest in the country,” he said.  “Deploying hundreds of megawatts for large AI applications doesn't make economic sense in the Bay Area. Demand will be smaller deployments that are really lab space for the AI companies that are pushing the envelope and are headquartered here.” 

CORRECTION, DEC. 24, 7:00 A.M. ET: A previous version of this story misquoted STACK Infrastructure COO Matt VanderZanden.  This story has also been updated to reflect that VanderZanden did not suggest that the Bay Area is slated to miss out on AI  development opportunities in the future. Rather,  he stated that the market has missed out on large-scale AI opportunities already.