What Determines Data Center Location

Data center developers evaluate four primary factors when choosing a location: power availability, network connectivity, land and construction costs, and the local regulatory environment. Of these, power availability has become the dominant constraint. A data center cannot operate without reliable, abundant, and affordable electricity. In many markets, the wait time for utility power connections now exceeds three years, making power availability the single biggest factor in site selection.

Network connectivity matters because data centers must connect to the broader internet and to end users with minimal latency. Locations with dense fiber optic networks and proximity to internet exchange points are strongly preferred. Climate influences cooling costs, with cooler locations offering natural advantages. Tax incentives, permitting timelines, and local community attitudes toward data centers also influence decisions.

The Dominant US Markets

Northern Virginia is the world’s largest data center market, with approximately 4,000 megawatts of installed capacity concentrated in Loudoun and Prince William counties. This market developed because of its proximity to the early internet backbone and federal government agencies, abundant fiber connectivity, and historically favorable utility rates. However, the market is showing signs of strain. Vacancy rates have dropped to record lows, and Dominion Energy is investing billions in grid upgrades to serve continued growth.

Texas has emerged as the second-largest US market, driven by cheap power, available land, and a deregulated electricity market that offers pricing flexibility. Data center power demand in Texas is expected to reach 9.7 gigawatts in 2025. Dallas-Fort Worth, San Antonio, and Austin all host major data center clusters. The tradeoff is grid reliability, as the state’s independent grid operated by ERCOT has experienced high-profile failures during extreme weather.

Other major US markets include Phoenix, which offers low humidity and cheap solar power. Chicago, which provides central location and strong network connectivity. Atlanta, which serves the southeastern United States. Oregon, which benefits from abundant hydroelectric power and a cool climate. Silicon Valley remains significant despite high costs, primarily for latency-sensitive applications.

Global Markets

Outside the United States, the largest data center markets include London, Frankfurt, Amsterdam, and Dublin in Europe. Singapore and Tokyo dominate in Asia. These markets developed around major financial centers and internet exchange points, where network connectivity is densest. Nordic countries, particularly Sweden and Finland, have attracted hyperscale development with their cool climates, renewable energy resources, and political stability.

Emerging markets for data center development include India, Indonesia, and the Middle East. These regions are seeing rapid growth in internet users and cloud adoption, creating demand for local data center capacity. However, challenges around power reliability, regulatory uncertainty, and construction timelines remain more significant than in established markets.

The Power Bottleneck

In the current expansion cycle, power availability has overtaken all other factors in location decisions. Developers are increasingly willing to build in less traditional locations if utility power can be delivered quickly. This has led to interest in sites adjacent to existing power plants, including retired coal plants and operating nuclear facilities. The concept of co-location with power generation, placing data centers directly next to power sources, is gaining traction as a way to bypass grid constraints.

Some developers are pursuing bring-your-own-power strategies, installing on-site generation using natural gas turbines, fuel cells, or even modular nuclear reactors. These approaches allow data centers to operate independently of the local grid but raise regulatory questions about emissions, resource adequacy, and the relationship between data centers and the communities they operate in.