Why Data Center Development is Surging in 2023
Data centers are booming in 2023! Discover the key factors driving this trend and what it means for infrastructure and investment.
The screenshot tells the story before you even read the redacted text: a letter of intent between a data center developer and NorthWestern Energy, filed with a Public Service Commission. That kind of document — quietly submitted, rarely discussed outside regulatory circles — is becoming a regular occurrence across utility commissions from Montana to Virginia. Data centers aren't just growing; they're reshaping the relationship between private capital and public infrastructure in ways that most people outside the industry haven't caught up to yet.
The numbers explain why. Global data center capacity additions hit record levels in 2023, with hyperscale operators and colocation providers both accelerating build timelines. Northern Virginia — the world's largest data center market — added more than 2,000 MW of capacity in a single year. But the more interesting story isn't in the established markets. It's in the secondary and tertiary markets where land is cheaper, fiber is increasingly accessible, and utilities are eager to add large commercial customers to their rate base.
The Demand Stack Is Deeper Than Cloud
Most coverage of data center development points to cloud computing as the primary driver, and that's accurate — but incomplete. Yes, AWS, Microsoft Azure, and Google Cloud are still expanding aggressively. Enterprise cloud adoption continues to pull workloads off on-premises servers and into third-party facilities. That demand isn't going anywhere.
What's layered on top of that baseline is newer and growing faster. AI training workloads require compute density that standard cloud infrastructure wasn't originally designed for. A single AI training cluster can draw 10–20 MW on its own. NVIDIA's H100 GPUs — the hardware of choice for large language model training — consume roughly 700 watts per chip, and modern AI racks hold dozens. When you're stacking that kind of power density into a building, you're not just planning a data center — you're effectively planning a small power plant with a roof over it.
Edge computing is adding a different kind of pressure: distributed, lower-capacity facilities positioned closer to end users for latency-sensitive applications. These don't replace hyperscale campuses; they complement them. The result is demand at both ends of the size spectrum simultaneously.
Why Utilities Are Paying Attention — And Why That Matters
The NorthWestern Energy filing is instructive precisely because NorthWestern serves Montana — not a state anyone would have listed among top data center markets five years ago. Yet here's a developer submitting a letter of intent through formal regulatory channels, which means they're serious enough to start the interconnection conversation.
For utilities, a large data center customer is simultaneously a gift and a headache. On the gift side: data centers provide predictable, around-the-clock load, which helps utilities justify infrastructure investment and improves system economics. A 100 MW data center doesn't fluctuate the way residential demand does. It runs. That predictability has real value on a grid increasingly complicated by intermittent renewables.
The headache is capacity. In markets where data center development is accelerating fastest, utilities are reporting interconnection queues measured in years, not months. PJM Interconnection — the grid operator covering much of the Mid-Atlantic and Midwest — has seen its interconnection queue balloon to over 2,500 projects representing hundreds of gigawatts. Not all of those are data centers, but the growth of high-density commercial load is a significant contributor to the backlog.
This is why the "pressure on utilities" framing undersells what's actually happening. In some markets, utilities aren't just feeling pressure — they're being forced to make capital allocation decisions at a pace their planning cycles weren't built for.
The Land and Infrastructure Equation
Data center development isn't just a technology story. It's fundamentally a land development story with extreme infrastructure requirements attached.
Site selection for a utility-scale data center campus involves a checklist that would intimidate most commercial real estate developers: proximity to fiber backbone routes, distance to transmission substations (ideally within a mile or two), acreage sufficient for phased expansion, flood zone classification, local permitting environment, and tax incentive availability. Missing any one of those criteria can unravel the economics.
The sites that check all the boxes are becoming scarcer in primary markets. That's pushing developers into new geographies — and creating genuine opportunity for landowners, municipalities, and infrastructure investors who are positioned ahead of the wave. A parcel that seems unremarkable today can become extraordinarily valuable when a transmission line upgrade lands nearby and a developer is looking for 50+ acres with clean title and a cooperative local government.
Energy efficiency standards are adding another layer of complexity. Power Usage Effectiveness (PUE) — the ratio of total facility energy to IT equipment energy — has become a key metric for both operators and, increasingly, regulators. Best-in-class hyperscale facilities operate at PUEs of 1.1 or lower. Older facilities running at 1.5 or higher are candidates for decommissioning or significant capital investment. As efficiency standards tighten, the gap between well-designed new facilities and aging stock widens, creating both development opportunities and stranded asset risk.
Financing the Build: Where the Capital Is Coming From
Data center development has attracted a broad and deepening capital stack. On one end, you have the hyperscalers financing builds directly — Amazon, Microsoft, and Google collectively committed hundreds of billions in capital expenditure over the next several years, with data center infrastructure representing a significant portion. On the other end, specialized REITs like Equinix and Digital Realty have demonstrated that stabilized colocation assets command premium valuations and support attractive dividend yields.
The middle market — developer-owned facilities built on a speculative or pre-leased basis — is where the most interesting activity is happening for infrastructure investors. Development yields on new builds in secondary markets can reach 8–12% on cost before stabilization, compared to 5–6% cap rates on stabilized assets in primary markets. That spread is what's driving developers into markets like the Mountain West, the Gulf Coast, and parts of the Midwest where NorthWestern-type utility interactions are becoming more common.
Sale-leaseback structures and build-to-suit arrangements with creditworthy tenants have also made construction financing more accessible. When a developer can show a 15-year lease with an investment-grade counterparty, the lending conversation changes significantly.
What the Next Five Years Look Like
The AI compute buildout alone would be enough to sustain elevated data center development activity through the late 2020s. But the demand drivers are broader than any single technology cycle. Regulatory requirements around data sovereignty and localization are forcing multinational companies to build or lease facilities in markets they might otherwise have served remotely — adding geographic breadth to a market that was already expanding rapidly.
The constraint that deserves the most attention isn't capital, land, or even fiber. It's power. The interconnection bottleneck is real, and in the most competitive markets, it's already determining winners and losers. Developers who control sites with existing or near-term access to adequate transmission capacity are holding the most valuable cards in the deck.
For infrastructure professionals, the actionable insight is straightforward: the utility commission filing that started this conversation is a signal worth tracking. Regulatory filings, interconnection applications, and zoning variance requests are early indicators of where development is heading — often 12 to 24 months before a shovel breaks ground. The investors and landowners who learn to read those signals early are the ones who tend to be on the right side of the transaction when the data center developer finally shows up with a letter of intent.
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[INTERNAL LINK: data center market trends]
[INTERNAL LINK: AI training workloads]
[INTERNAL LINK: financing data centers]