Phoenix May Be America's Hottest Data Center Market, But Challenges Lie Ahead
Phoenix’s growth as a data center market trails only Northern Virginia, but becoming the West’s answer to Data Center Alley will require overcoming some major speed bumps.
Demand for data center space in the Phoenix metro area is exploding. Already North America’s fifth-largest data center market, the Phoenix area recorded 142 megawatts of absorption in 2021, second only to Northern Virginia's 338 megawatts, according to JLL. The region also has more data center space planned or under construction than any market other than Virginia, well ahead of other emerging data center hubs like Atlanta or the Pacific Northwest.
Yet continuing this growth will require overcoming some significant challenges. Environmental concerns, particularly surrounding water usage, have created a growing chorus of critics and increased opposition to data center development. At the same time, an industrywide labor crunch is proving to be particularly acute in the Grand Canyon State as record growth runs headlong into a local workforce short on qualified construction labor and operations staff. Yet even with these obstacles, the region’s growth trajectory has some in the industry envisioning a second Data Center Alley blooming in the desert.
“This market was a baby 10 years ago … we were nobody, now we’re No. 2 behind the flagship NoVa,” said Michael Ortiz, CEO of hyperscale provider Layer 9 Data Centers, speaking at Bisnow’s DICE Southwest event Tuesday. “The way this market’s growing, it’s reasonable to think that Virginia and Phoenix are in parity by 2027.”
While the Phoenix data center market has a lot of ground to cover to catch up with Loudoun County, demand and development in the area are significantly outpacing other emerging North American data center hubs. Phoenix's 142 megawatts of absorption last year was up from just 51 megawatts in 2020. The region also has 969 megawatts of data center development either planned or under construction. By comparison, the market currently has 472.2 megawatts of total inventory.
Among the projects driving this growth are Meta’s 960K SF campus currently under construction in Mesa and a Verizon facility underway in Tempe. Vantage Data Centers and Japanese provider NTT both recently completed massive multi-data center campuses in the area, accelerating a building boom that is spreading across cities like East Mesa, Chandler, Goodyear and Glendale.
Why the sudden explosion of growth?
Phoenix has been a strong data center market for the better part of a decade, with local infrastructure and economic conditions that check all the boxes for developers. The area has inexpensive power, sits at the intersection of a number of major telecommunication network cables and offers state-level tax incentives for data centers. Perhaps most significantly, Phoenix is geographically well-positioned to provide data services to Los Angeles and the larger Southern California region, a massive market in which hyperscale data center development has proven extremely difficult.
But experts speaking at Bisnow’s DICE: Southwest say that demand in Phoenix is accelerating in recent months primarily because of a significant shift across the digital infrastructure landscape: Data centers are getting bigger. As a handful of hyperscale cloud providers like Amazon Web Services, Microsoft and Google consolidate their share of the world’s growing computing needs, the scale of their facilities is increasing — 15 megawatts of capacity would have been considered a large facility just three years ago, but today’s developments are now routinely 10 times that size. As the scale of facilities grows, developers need markets with ample developable land, something that the Phoenix area has in abundance.
“The scale is just crazy — Phoenix has always been one of the tried-and-true data center markets, but three or four years ago all the purpose-built facilities put together in total were about 200 megawatts,” said Chris Curtis, senior vice president for Development & Acquisitions at Compass Datacenters. “Now you have some of the top tech players building very large campuses, and Phoenix is really benefiting from that.”
Industry insiders point to municipalities like Goodyear, Arizona, a suburb of Phoenix that is one of the country’s fastest-growing cities but is only at 12% of its planned build-out, according to city officials. Goodyear's chief innovation officer, Justin Fair, says that besides having land available for development, the city’s rapid growth helps facilitate the supporting infrastructure needed by hyperscalers.
“We have a lot of growth potential, and as we’re growing, if we’re tearing up a roadway that’s an opportunity to put infrastructure in the ground to facilitate fiber,” he said. “There’s a lot of opportunity to put this stuff in the ground and be strategic about it.”
Even as the pace of the Phoenix data center market continues to accelerate, some significant speed bumps are emerging that could stand in the way of the region becoming “Loudoun West.” One growing problem: As data centers proliferate throughout the region, they’re getting less popular. The region has seen a wave of pushback against data centers from residents and local politicians.
In the emerging data center hub of Chandler, the local government is considering a ban on new facilities after a flood of resident complaints about noise from cooling systems and generators. In nearby Phoenix and Mesa, officials are pushing back on proposed data centers due to concerns over water usage and proposing similar moratoriums. In the arid and drought-stricken Southwest, the use of millions of gallons of groundwater a day by some data centers has attracted a great deal of scrutiny and opposition that industry insiders only expect to grow.
“Because we’re a lot more visible, there is a lot more pushback now,” Compass’ Curtis said. “It used to be we were welcomed with open arms. Now we have regular Joes and soccer moms seeing these things from the road and wondering what these things are.”
Yet insiders speaking at DICE Southwest suggested that a larger impediment to future growth may be the shortage of qualified construction labor and operations staff in the Phoenix area. A growing labor shortage has been a nationwide issue for the data center industry, but panelists said Phoenix is feeling the crunch most acutely.
“The downside here is people. Arizona is not known for having a lot of skilled tech people,” said Marvin Rowell, co-founder and managing partner at data center builder TBL Mission Critical. “It is an issue that we’re all dealing with every day: Where do you get all these qualified people to help hyperscalers and large Fortune 500 companies build the data centers?”
Exacerbating the problem, experts say, is the upcoming development of two massive microprocessor chip fabrication plants in the region. The pair of enormous high-tech manufacturing plants by Intel and TSMC, both expected to come online in 2024, are competing for the same skilled construction labor force as data center builders. Insiders say this local labor shortage is going to get worse and will have national implications.
“The chip fabrication guys are flying in a lot of their labor, so Phoenix is impacting other markets,” said Jon Benson, director of modular innovation at TAS Energy. “It’s turning into a black hole for labor with all of these megaprojects.”