The data center industry’s dramatic expansion in Northern Virginia continues — but is hitting snags as its massive demand for electricity strains the region’s power grid and space for the largest complexes begins to run out, according to a new report from real estate firm JLL.

The data center cluster in Northern Virginia is three times the size of the next-largest data center area in the world, in Singapore. The industry saw a major boost during the pandemic, as more work and social life shifted online. Those boom times are expected to continue, with new artificial intelligence technology driving even more demand for server space. That’s significant for local governments increasingly dependent on the industry for tax revenue. Those same localities have seen the shift to hybrid work decimate tax revenue from office space, with commercial vacancy rates hitting 20% regionally.

By contrast, Northern Virginia’s data centers had a 2% vacancy rate in the first half of 2023, and prices for companies looking to lease that space jumped by 15-20%, both signs of remarkably high demand for square footage in the massive complexes.

“Our daily lives are really intertwined and reliant on data centers, and in our backyard of Northern Virginia, we happen to have the largest inventory in the world of such data centers,” said Michael Hartnett, JLL’s senior director for research for the Mid-Atlantic region. Hartnett called the industry “a really key component of this market’s workforce moving forward, especially as AI continues to take off.”

This demand comes amid fierce local opposition from some residents, who are pushing back on efforts to rezone land for new data center development in an increasingly land-strapped region. The latest flashpoint is Prince William County, where officials are nearing a final vote on the Prince William Digital Gateway, a controversial proposal to build as much as 27.6 million square feet of data centers in the county’s rural west, adjacent to Manassas Battlefield National Park. The debate has become the focal point of county politics.

Hartnett attributes the region’s continued global dominance in the industry to a combination of factors: favorable state tax incentives for the industry, a skilled workforce, access to relatively cheap electricity and land, and, most significantly, an extensive fiber network that dates to the region’s role as the birthplace of the internet.

All that has resulted in Northern Virginia’s staggering 47.7 million square feet of data center space, with 6.7 million square feet under construction and another 45 million planned.

But that growth locally could be constrained by an increasing lack of available land for the massive, warehouse-like complexes, and importantly, by the region’s ability to provide enough power to them, Hartnett says.

Dominion Energy, the utility company, has been forced to limit power to new data centers as it scrambles to supply electricity to existing ones. Data center demand is increasing at “an unprecedented rate,” and has far outstripped regional forecasts for electrical load, according to PJM, a regional organization that coordinates the flow of electricity through the power grid in the Mid-Atlantic. Data centers could double Virginia’s peak energy demand through 2038.

Earlier in the year, the Virginia Department of Environmental Quality toyed with the idea of lifting restrictions on the use of backup diesel generators in an attempt to ease pressure on the electrical grid during peak demand in the summer months.

The state ultimately didn’t move forward with the measure, but environmentalists and other data center opponents cited it as part of their larger concerns about the impact the electricity-hungry industry is having and will have on the region’s environmental and sustainability goals.

Those capacity challenges have slowed the process of bringing new centers online, Hartnett says. But he doesn’t expect it to affect the voracious demand for new data centers in the area longer term, though it could prompt a trickle-down of demand from Northern Virginia to secondary markets.

“I think power in general will become a major focal point for the next few years, especially as the artificial intelligence gold rush is firmly underway,” Hartnett said.

“So many markets are really going through the same experiences as this market when it comes to the future and the infrastructure,” he added.

Who will ultimately be on the hook to pay for the new electrical infrastructure required to satisfy the industry’s demand is a key concern for data center opponents, who note it has usually fallen to local customers in the form of rate hikes.

Reporting from the Piedmont Journalism Foundation and the Prince William Times suggests the cost of the transmission expansions in Prince William County alone could be $16.7 billion.

“The cost burden on all transmission rate payers in Prince William County and other jurisdictions for these data center power projects will be paralyzing and unfair,” predicted the Coalition to Protect Prince William County in a letter to the county supervisors. The Coalition is an anti-data center group that formed in 2014 in opposition to a transmission line project in Haymarket.

The rapidly growing demand for power is also likely to impact Virginia’s climate goals. Dominion Energy’s latest plans to meet expected demand would add renewable energy and storage to the grid, but also would extend the life of coal and natural gas infrastructure and invest in small modular nuclear reactors. That’s prompted concerns from the Virginia Conservation Network, which included an extensive section on data centers in their 2024 policy agenda.

“This plan ignores Virginia’s clean energy requirements and places a significant burden on families and other businesses to subsidize the construction and operation of the significant infrastructure necessary to meet the increase in electricity demand,” the group asserts.

The Network, a coalition of more than 150 environmental and land-use advocacy organizations, is calling for an independent study of the industry’s impacts and more state oversight of approvals of new data center projects, which currently happen at the local level.

Hartnett says local opposition hasn’t cooled the red-hot data center market in the region, though he believes it may be impacting where developers are willing to build.

“What we’re finding is that it could deter developers from purchasing land outside of what’s called a data center designated area,” like Prince William’s overlay district, he said. (The Digital Gateway is located outside of the overlay district.)

“In terms of the competition for land sites, it’s only becoming more fierce in Loudoun and Prince William,” Hartnett said. The JLL report notes that “few sites of scale remain” in the two counties.

Other data center developers are turning their focus to Stafford and Fauquier counties, according to Hartnett. Another idea gathering steam is repurposing Northern Virginia’s underused office parks.

“You’re beginning to see the early stages of an office-to-data center conversion story play out,” he said. “We have examples on the edges of the market of obsolete office buildings being converted into data centers.”