New York’s data center space shortage: What it might mean for a city near you

As of 2024, New York City has outranked London and Singapore to become the most attractive financial center in the world. Not only is it home to the NYSE and the NASDAQ, the world’s largest stock markets, it’s also regarded as the capital of enterprise. Many large businesses are headquartered in the city, and of the 220,000 total businesses that chose to call New York City their home, roughly 89% are regarded as small businesses or startups, making New York the very definition of a business hub.

Aside from people and capital, there is one very important intangible asset that all businesses need – a home for their data. At present, there is a severe shortage of data center space in New York. Over the past few years, the New York data center market has encountered significant challenges caused by the lack of space in the city center. There is neither real estate nor power capacity available for new data center builds – the only option in NYC is to convert existing buildings into data centers. 

The result has been that data center investments in New York City have lagged behind other major markets. For instance, according to data from JLL and Arthur D. Little, while Greater New York saw only a 4% growth in data center power capacity developments (measured in MegaWatts) over the last decade, cities like Dallas (with plenty of space for new construction projects) experienced a 250% increase.

Broken down even further, NYC has seen growth of a mere 0.7%, while New Jersey, still part of the New York metropolitan area, has enjoyed ten times more, at 7.9%. This disparity highlights the growing pressure on Manhattan's data center infrastructure, compounded by the rising demands of AI and cloud computing, which require substantial space and resources.

So, what has fueled the demand for the limited space in NYC? The growth of cloud computing more than a decade ago fired the starting gun for consolidation. The explosive growth of AI has further accelerated the need for data center space everywhere, pushing many enterprises to seek alternative data center options outside the city center. What were formally multi-tenant data centers where a range of companies could find space are now transitioning to single-tenant facilities. And some multi-tenant facilities are only housing strategic large-scale corporations such as hyperscalers or large multinationals. 

As other businesses relocate their data center space out of Manhattan, they face increased operational challenges such as the potential for increased latency and difficulties gaining access to the networks that reside in the city center. With the data center space at a premium, solutions are now needed to ensure data centers further afield can still be part of the important ecosystem of NYC.

The ripple effect on businesses

Relocating data centers from New York City to surrounding areas such as New Jersey, Long Island, Brooklyn, or even further afield, introduces several logistical and operational challenges for businesses. The physical move of data infrastructure can result in significant downtime, disrupting business operations and affecting service delivery. Potential delays in accessing critical data due to increased physical distance can degrade performance, especially for businesses that require real-time data processing and low-latency connectivity.

As a result, connectivity to relevant networks can become more challenging. Where previously companies may have used cross connects to access networks in the same facility, or peered via an Internet Exchange in the city, their choice of an outlying data center might result in them needing to resort to IP Transit to access the city’s networks. IP transit reduces the security of dataflows, as control is taken out of the hands of the company. Data needs to flow through the public Internet, with no guarantees regarding either the routes, handover points, or performance and latency.

Adapting to the new data landscape

It’s important to point out that relocation of data operations to a new city or region is not a bad thing. While some might point the finger at larger corporations or hyperscalers for the shortage of data center space, it’s simply a sign that the region’s data center needs are growing faster than the infrastructure build can keep up. In fact, it could be argued that New York City’s data center space issues are actually good for the region more generally, increasing infrastructure investment in the surrounding areas. New Jersey and Long Island, for instance, have seen increased investment in multi-tenant data centers, designed to meet the growing demands of cloud computing and AI. 

We see a similar trend in other regions, where data center investment has been strong but space is now becoming scarce. Cities like Richmond in Virginia are emerging as new hubs for data center growth due to their available space and strategic location, taking the strain off areas like Northern Virginia, where there is now less space and capacity for new builds. These new markets not only alleviate the pressure on densely populated cities, but also provide opportunities for further expansion and innovation in the data center industry.

For businesses that do need to resettle or expand their data operations, interconnection solutions in the form of a distributed and data center neutral Internet Exchange become critical. These platforms enable direct peering and cloud connectivity across multiple data centers, regardless of who the data center operator is, ensuring that data can move swiftly and securely between locations. By leveraging secure, direct, low-latency connections, businesses can ensure that their operations remain efficient and uninterrupted, even when their data centers are situated outside their home city. In New York, for example, this means that a company can settle in a data center in New Jersey or Long Island, and still have low millisecond access to the networks in the center.

New York stands out in the interconnection market as the only city in the US to play home to two large, distributed and data center/carrier neutral Internet Exchanges, NYIIX New York (connecting 7 data centers) and DE-CIX New York (interconnecting 30 data centers across the entire metropolitan region). A company thus has more choice as to where they can settle outside of Manhattan and still be a part of the city’s thriving ecosystem. Such interconnectivity not only mitigates the impact of relocating data centers but also enhances the resilience and redundancy of the overall digital infrastructure; by making use of multiple interconnected data centers, businesses can distribute their data load more effectively, ensuring continuity and reliability in their digital services regardless of where their chosen data centers are located or who their operator is.

The future of data center growth will likely see an increased focus on developing and enhancing these interconnection ecosystems as other cities begin to face similar challenges. As demand for data processing, storage, and exchange continues to rise, the ability to efficiently connect diverse data center locations will be key to maintaining a competitive edge and ensuring operational efficiency for businesses. Those who invest in interconnectivity will be better positioned to navigate the challenges of a constrained data center market, ensuring they can meet their digital infrastructure needs both now, and in the future.

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