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The United States is home to over 50% of the world’s data centers – 5,381 as of March 2024.
But why is the US such a magnet for these crucial facilities? And when it comes to building a successful data center, is location really the top priority?
Here’s the short answer: yes. It’s one of the most important factors, with a huge impact on your data center’s operating costs and performance. If you want to find a dream location for your data center, Scout Cities offers a ton of resources to empower your choice.
In this guide, we’ll talk all about what goes into picking the right data center location.
Why Location Matters for Data Centers
Does your data center’s location really impact its performance and operability? Yes – here’s how.
Latency and Connectivity
First and foremost, your data center location impacts its speed and strength of operations.
Data centers located near IXPs can offer lower latency connections. This is because the physical distance that data must travel is shorter, which is crucial in use cases that demand real-time data processing, like financial transactions and online gaming.
Latency increases with distance – every 100 miles can add about one millisecond of latency to round-trip times.
Plus, proximity to IXPs allows data centers to leverage P2P relationships for better data transmission. Getting rid of third-party transit providers can enhance overall network performance. Data centers connected to multiple IXPs can achieve much higher throughput than those relying on traditional transit providers.
Energy Availability and Cost
Access to reliable, consistent, and affordable power sources is crucial since data centers run on massive amounts of power. The cost of electricity can account for up to 60–70% of a data center's operating expenses. Placing your data center in areas with competitive energy rates can help cut costs and guarantee minimal downtime.
Here are some examples of US states with competitive energy rates, considering the national average is 7.33 cents per kWh:
- Texas: 5.8 cents per kWh
- Oregon: 6.1 cents per kWh
- Washington: 5.5 cents per kWh
- Virginia: 6.4 cents per kWh
- Nevada: 6.2 cents per kWh
Climate and Environmental Considerations
Hotter climates force data center cooling systems to work harder to maintain the perfect temperatures for sensitive IT equipment. Placing your data centers in regions with cooler climates can drastically cut your energy costs with free cooling methods like air-side economizers.
Washington and Oregon are great examples since they have cool, temperate climates with moderate temperatures and low humidity levels. Nevada's hot, dry climate is suitable for air-cooled systems, which are more energy-efficient than water-cooled systems.
Key Factors to Consider When Choosing a Data Center Location
When it’s time to choose a location for your data center, how do you decide which state or city is right? Here are some factors to consider.
Proximity to Major Markets
Proximity to major markets affects the operational efficiency and costs of your data centers. Ideally, they should be closed to high-demand markets to meet the growing needs of customers.
Not only does it reduce latency, but being closer to major markets can also lower transportation and operational costs. Without latency-related issues, companies can save on data transfer fees and improve their ROI.
As the largest data center market in the world, Northern Virginia's net absorption has increased by 407.4 MW since last year. The region also benefits from its proximity to Washington, D.C., and its abundance of cloud providers and AI companies.
Silicon Valley is another great example, with an average net absorption of 62.6 MW in the past year. Lastly, Dallas Forts-Worth has a net absorption of 140.2 MW in the last year.
Energy Availability and Cost
The energy availability and costs of a data center’s location have a huge impact on its operational efficiency and long-term sustainability. Data centers need massive amounts of power, so a stable and cost-effective power supply is an absolute must.
Oregon cities have one of the most competitive energy rates nationwide. Part of the Portland metro area, Hillsboro, offers power rates of $0.05 to $0.07 per kWh. Plus, The Dalles is also home to many hyperscale data centers attracted by the low electricity rates.
Meanwhile, Texas, in general, has some of the lowest electricity rates in the country, with an average industrial rate of 5.8 cents per kWh in 2021.
In Washington cities, Quincy and East Wenatchee offer average power rates of $0.028 to $0.035 per kWh. Microsoft, Dell, Yahoo, and tech giants have built large data centers here due to the low rates.
Climate and Environmental Factors
Data centers spend 40% of their electricity bills on cooling systems. Placing your facility in colder locations or using natural cooling techniques can drastically reduce these costs. For instance, data centers that use economizers to circulate outside air can achieve savings of up to 20% on cooling costs.
Iceland's cool climate and abundant geothermal energy is a great example, since the average annual temperature is around 5°C (41°F). Finland is also favorable, with an average annual temperature of approximately 5.5°C (42°F).
In Canada, cities like Montreal and Quebec City benefit from average annual temperatures around 6°C (43°F). The Canadian government has also incentivized data center development through tax breaks and access to renewable energy sources.
Regulatory Environment and Incentives
Tax incentives, like property tax abatements and sales tax exemptions, can lower the operational costs for data centers. For instance, states with major tax breaks can reduce the total cost of ownership. Plus, states with faster permitting processes and fewer regulatory hurdles can make it easier to build data centers.
For instance, Nevada offers a 75% personal property tax abatement for 10 or 20 years, along with a 2% sales tax abatement for the same duration. To qualify, data centers must create jobs and invest significant capital – at least $25 million for a 10-year abatement and $100 million for a 20-year abatement.
Similarly, North Carolina offers a sales tax exemption on energy used in data centers and a Job Development Investment Grant (JDIG) program. Charlotte and the Research Triangle area (including Raleigh and Durham) are key locations for data centers in this state.
Utah also offers a property tax exemption for data centers, along with all kinds of business grants and incentives.
Infrastructure and Connectivity
Data centers need a strong infrastructure to support high-performance computing and storage needs. That includes reliable power supplies, cooling systems, and networking equipment. A well-designed infrastructure reduces downtime for 24/7 availability.
Additionally, high-speed connectivity is important for latency reduction. Data centers should be located close to major fiber optic networks and internet exchange points for faster data transmission.
For instance, NYC, New York, is a major hub for data centers thanks to its extensive fiber optic networks and multiple internet exchange points. The city offers access to over 200 data carriers, which is why the average latency from NYC to London is approximately 60 milliseconds.
Chicago, Illinois, is another great example, with access to major highways and railroads for smooth logistics and connectivity. The city has seen a 30% increase in data center capacity over the past year, and the average latency to major markets like New York is around 15 milliseconds!
Lastly, Atlanta, Georgia, has a strong telecommunications infrastructure and access to multiple fiber optic networks. The city has had a 20% boost in data center absorption rates in the past year, and the average latency to major markets like Dallas is 30 milliseconds.
Security and Risk Factors
Data centers are vulnerable to natural disasters like earthquakes, floods, hurricanes, and tornadoes. Choosing locations with low risks of such disasters can reduce the likelihood of outages and damage, which can be costly. According to a 2023 study, 48% of outages cost organizations between $100,000 and $1 million!
For instance, Utah has a relatively low risk of natural disasters. The state has a seismic risk index that is significantly lower than states like California. It’s experienced only a few major earthquakes in the last century, with the largest being a magnitude of 6.0 in 1934.
Ohio is also not prone to hurricanes, tornadoes, or significant seismic activity. The state has an average of 15 tornadoes per year, while states like Texas average around 140 tornadoes.
Specific States and Cities for Data Center Locations
Over half of the world’s data centers are concentrated in the US since these locations check off all the boxes mentioned above. Here are some of the best US locations for data centers.
Northern Virginia
Northern Virginia is home to over 300 data centers, making it the largest data center market globally. The region's data center ecosystem is flourishing thanks to its proximity to Washington, D.C., and its dense fiber optic network. Its data center industry has created over 12,140 direct jobs.
Virginia also hosts about 35% (150) of all hyperscale data centers worldwide.
The state offers a Data Center Sales and Use Tax Exemption on data center equipment. More importantly, the region has one of the world's densest fiber networks, with over 200 data carriers operating in the area. Since it’s close to the nation capital, data centers get access to a vast customer base, including government agencies, financial institutions, and tech giants.
Lastly, more than 70% of the world’s internet traffic passes through Northern Virginia's colocation and interconnection infrastructure.
Silicon Valley, California
The Silicon Valley region in the San Francisco Bay Area of California serves as the headquarters for many of the world's top tech companies, including Apple, Google, and Facebook. Since it’s home to over 30,000 startups, it’s also known as a global center for technology and innovation.
First and foremost, California offers the California Competes Tax Credit to encourage businesses to locate and expand in the state. This tax credit is awarded based on a company’s potential to create jobs and contribute to the state's economy.
The area is also close to major tech firms, allowing for minimal latency. Most of Silicon Valley’s data centers are located in San Jose, Santa Clara, and Palo Alto.
Dallas-Fort Worth, Texas
The Dallas-Fort Worth metro area in Texas has recently grown into a premier data center location. Recent reports say that North Texas has become even more desirable than Silicon Valley for data centers! Its data center inventory has grown by 247% since 2015.
As of late 2022, the DFW region offered 390 megawatts of data center inventory, with rental rates ranging from $120 to $250 per month for 250 kilowatts of power.
Plus, Texas provides a Data Center Sales Tax Exemption, which allows qualifying data centers to exempt certain purchases from state and local sales taxes.
The state is also home to various facilities, including those operated by Stream Data Centers. The company has developed a 77-acre hyperscale campus in South Dallas County, supporting up to 90 megawatts of capacity.
Garland is another notable city in Texas thanks to its aggressive utility pricing and renewable energy sourcing. The Stream Data Centers facility in Garland has a capacity of 43 megawatts and is powered by a 95 MW on-site substation.
Phoenix, Arizona
The metro area in Phoenix, Arizona, is the fifth-largest data center market in the US, with over 300 megawatts of existing inventory and an extra 250 planned for the near future!
In the last decade, there were over $480 million in data center transactions closed in the Phoenix area, including some of the biggest sales of the past decade. Around 876,000 sqft of data center space was also added during that time. Plus, tech industry jobs make up 7% of Phoenix's workforce as of 2021.
Arizona has a Data Center Tax Exemption program for new construction or expansion of data centers and a sales tax exemption on equipment purchases.
More importantly, Phoenix has an extremely low risk of natural disasters, with only 33 total hours of disturbances over the last decade. The city has almost no history of seismic, tornado, and flooding damage.
Its stable climate also allows you to reduce the amount of energy necessary for data center operations. The region enjoys at least 300 days of sunshine per year and average temperatures of 75°F.
Columbus, Ohio
Columbus, Ohio, is also rapidly becoming a key player in the data center industry. First, it’s centrally located in the United States, offering easy access to major markets in the Midwest and beyond.
Columbus has a very low risk of natural disasters such as earthquakes, hurricanes, and floods, minimizing the risk of service disruptions and infrastructure damage. Plus, Ohio has an average of only 15 tornadoes per year.
The state also offers competitive electricity rates, with an average industrial rate of around 6.5 cents per kWh. That’s also why Columbus has seen a 25% increase in data center capacity over the past five years – nearly 30 data centers today.
Ohio offers a Data Center Sales Tax Exemption, which applies to the purchase of data center equipment. To qualify, data centers must invest at least $100 million and create a minimum of 30 new jobs.
The top cities for data centers in Ohio include Columbus, Dublin, and New Albany.
Reno, Nevada
Reno, Nevada, is located just a few hours from the California border, which allows data centers to serve the large tech market in Silicon Valley and the broader Bay Area. Plus, the Nevada Data Center Abatement provides major tax breaks for qualifying data centers!
The city is situated in a region with a low risk of natural disasters like earthquakes and floods. That’s one of the many reasons Reno has seen a drastic increase in data center capacity over the past five years. In 2021, data centers in the Reno area attracted over $1 billion in investments, including major players like Switch and Google. Switch, specifically, has invested heavily in the area, creating a 1.5 million square foot data center campus known as the "Switch Tahoe Reno" facility.
Adjacent to Reno, the city of Sparks is home to many data centers and is seeing rapid growth due to its favorable business environment and access to infrastructure. Although smaller, Carson City is also a great data center location, with efforts to enhance its infrastructure and attract tech companies.
Incentive Programs for Data Centers
Ideal locations often offer financial incentives or tax breaks to encourage the construction and expansion of data centers in the area. Some of them include:
Federal Incentives
The federal government has introduced several incentives to support data center development and promote sustainability in the industry. These include:
- Investment Tax Credit (ITC): The ITC provides a tax credit for investments in energy projects related to data centers. Qualifying projects can receive a credit of up to 30% of the investment cost.
- New Markets Tax Credit (NMTC): The NMTC program provides tax credits to investors making equity investments in low-income communities. Data centers located in eligible areas can benefit from this program to offset the costs of development.
State and Local Incentives
Many states and local governments offer their own incentives to attract data center investments, such as:
- Tax Exemptions: Several states, such as Virginia, Texas, and Arizona, offer sales tax exemptions on the purchase of data center equipment and infrastructure.
- Tax Abatements: Some states, like Nevada, offer property tax abatements for data centers that meet certain investment and job creation thresholds. These abatements can create long-term savings for data center operators.
- Utility Discounts: Some states, such as Oregon, offer discounted electricity rates for data centers to help lower their operating costs.
Case Studies
Switch
The data center operator has benefited from Nevada's data center tax abatement program, which provides a 75% reduction in property taxes for qualifying projects. Switch's Tahoe Reno facility, which is one of the largest data centers in the world, has received major tax savings through this program.
Microsoft
Microsoft has taken advantage of federal incentives like the ITC to support its investments in renewable energy projects that power its data centers. It has also made use of state and local incentives in Virginia and Washington to expand its data center footprint in these regions.
Conclusion
The location of your facility is one of the most important factors to consider when building a data center. It affects the facility’s operational efficiency, costs, access to energy and major markets, regulatory environment, and security levels.
Luckily, the US is home to tons of favorable locations that’ll welcome your new data center with open arms – better yet, with financial incentives and tax breaks. If you are considering locating a data center or need more information about data centers, you can sign up for Scout, and we will source your off-market real estate, local data, and incentive information.
