The Inside Look with Xander Snyder - Episode 24

In this episode of The Inside Look, Senior Commercial Real Estate Economist Xander Snyder and Annemarie Caruso dive into the rapidly expanding data center market in Pennsylvania - an emerging hotspot that reflects national trends. They explore the economic forces and policy changes fueling this growth, including the rising energy demands driven by artificial intelligence, shifting incentives, and increasing competition among regions to attract large-scale facilities.

Hi, I'm Xander Snyder, and this is First Americans Inside Look, where we explore the trends shaping commercial real estate. Today, we're diving into one of the hottest topics in the world of commercial real estate today, which is data centers.

Now, data centers aren't new, but their importance to the modern economy has grown significant. And while demand for data centers has been rising for years, the recent AI boom has accelerated that trend dramatically.

Joining me today to help us understand what's happening on the ground in an up-and-coming region for data center development is Anne-Marie Caruso, a commercial sales representative with First Americans Philadelphia Office for National Commercial Services. Anne-Marie works closely with clients involved in many of the land deals that ultimately become dev sites for data centers, and so she brings a front-row perspective on this emerging market.

Anne-Marie, welcome to the show, and thanks for being the very first guest on the Inside Look.

Thank you. I am honored to be your guinea pig.

Well, before we get into the nitty-gritty on data center activity in Pennsylvania, could you first just tell us a bit about your role at First American and what types of transactions you typically work on?

Sure. I've been with the National Commercial Services Division of First American Title since 2010, started as a title officer, became an escrow officer, and now I'm in the business development side. As we mentioned, my division specializes in commercial transactions locally in Pennsylvania as well as nationally. And I'd say recently the types of transactions I've been seeing, it's not really one asset class of work in so long as it's commercial, we can close it, but I've been seeing a lot of industrial, retail, and of most recent data centers.

Great, well, thanks again for joining us. Now, to frame the conversation, it's worth mentioning that data centers have been around since the 90s — they aren't necessarily new — but they've quickly become one of the most talked-about commercial properties because of the advent of AI technology, even though they only really make up a small percentage of commercial real estate transaction volume.

So from your perspective, Anne-Marie, what do you think is driving this surge in interest in data centers in development? Is it just mainly the AI boom?

I mean, the AI boom is definitely a factor. However, we can't forget about the increase in streaming, remote work, and e-commerce. All of this is leading…

Great. Now, nationally, vacancy rates for data centers are very, very low, around 2%. And nearly three-quarters of data center space that's under construction is already pre-leased. And, you know, that's far higher than your typical pre-lease rate for industrial properties, which has typically been delivered to market at around 40% pre-lease.

What do you think that says about the strength and staying power of the data center sector?

I think it says a lot. Yeah, this sector is strong. It has staying power, but the developers have to be adaptable. The physical build, mechanical infrastructure, it's built to last. But they need to be prepared for upgrades, keep up with IT advancements, as well as the power demands. Some of these major tenants are confident — they're going out there buying thousands of acres of space right now. I'm thinking if they over-commit, there could be pockets of oversupply in the future.

Interesting. And, of course, it's not just about demand. It's about supply. And supply is fairly constrained right now in terms of power availability and just general infrastructure capacity to add more data center space to the market. Some developers are waiting years to even connect their new data centers to the grid.

Do you think that these challenges, these supply constraints, are driving some of the demand from the more traditional data center hubs like Northern Virginia, Dallas, Chicago, or Atlanta into some of the new regions like Pennsylvania, which we'll talk about in a minute?

100%. The demand, the cost of power, as well as available land, tax incentives — these are all factors of why we're seeing an expansion at other areas. Like you were saying, we already see hyperscale centers being built in Arizona, Ohio, Pennsylvania. Time is money, and these states have the resources and now they're even starting to have the legislation to get these projects off the ground faster.

That's right. And it's interesting to me when we first caught up about this because I wasn't even particularly familiar with the slate of new development in northern Pennsylvania, but you work across the state and so you have visibility into where development activity, data center development activity, is picking up.

What are you seeing right now in terms of where people are most interested in space, in data center space, in Pennsylvania?

I mean, it's basically the entire state. Google is planning a data center near Wilkes-Barre, PA. There's also about a dozen planned data centers in Lackawanna County alone. You're going to see central Pennsylvania blow up. York County developers are taking advantage of the existing power infrastructure. There's the Three Mile Island nuclear plant that is planning a restart in 2028, which aims to provide power for Microsoft data centers in that area. And then Western PA has actually had data centers for a decade now. But with this AI boom, there are additional ones popping up all over the place.

Got it. So not just northern Pennsylvania — it's happening all over. And in fact, it seems like in the West, there's been a fairly substantial presence for years.

What makes Pennsylvania attractive to developers right now? We talked a little bit about the supply constraints, and from some of my research before this episode, it seems like there's just a relative abundance of some of the utilities that are necessary to run data centers in Pennsylvania. Is that the case?

Yeah, I mean, there's abundant low-cost energy. Pennsylvania remains a net power producer with strong natural gas resources. I don't think people realize this, but Pennsylvania is the second-largest electricity producer in the United States behind Texas, and number two in natural gas.

And then you look at the location. We're located in an Atlantic corridor. This gives direct fiber infrastructure connectivity to New York, New Jersey, Washington, D.C., and even the Midwest. All these locations are within a few hundred miles. And it's a low-disaster-risk area. We don't see hurricanes, earthquakes, wildfires — it's fairly calm when it comes to Mother Nature.

And then there's redevelopment opportunities. Pennsylvania has legacy sites from old steel mills, power plants, which provide the developers ready-to-develop brownfield properties that have existing transmission lines as well as water access and the zoning already in place to support these large facilities.

And typically, it seems like there's a sufficient supply of technical labor to staff data centers within Pennsylvania due to — I mean, there's a number of well-known universities throughout the state, right?

Correct, correct. We're known for our meds and eds, specifically in the Philadelphia area as well.

Right. So turning now to the policy perspective, because this is one area that local governments can twist the knob a little bit in terms of encouraging development one way or another. To what degree do you think state or local policy is attracting a lot of that data center development capital and activity?

And, you know, as an example, I know that the Shapiro administration recently rolled out what they're calling the Lightning Plan, which is aimed at both modernizing Pennsylvania's energy grid, but also in part streamlining permitting for more energy-intensive industries like data centers.

So how significant is this plan or other plans for the state's competitiveness in attracting data center projects?

It's extremely significant. Like you said, they rolled out the Lightning Plan earlier this year. The full plan has not fully passed into law, but there are major steps taking place. This signals to developers that the state is actively improving our energy structure, streamlining permitting, offering incentives, and positioning ourselves for large-scale growth.

It's also aiming to mitigate higher energy rates for local communities, which is creating less opposition for those that live in the communities where these data centers are being erected.

As far as local incentives, there's a lot of townships that are writing data center definitions, ordinances, and standards into the zoning code. These steps reduce the number of hearings that have to be done, making approvals more administrative and less discretionary, which can shorten the timeline for these developers.

Even Cumberland County — their staff published reviews and white papers to help the townships create data center overlays, which is a sign the regions are providing clearer standards, which again can speed this process.

So every growth story comes with some challenges. What roadblocks would you say data center developers are running into in Pennsylvania when they go to break ground on a new project?

I think Pennsylvania is seeing similar roadblocks that you see in other markets. As I mentioned before, there's definitely opposition in Pennsylvania by local communities pushing back, which creates regulatory hurdles for the data centers. They're concerned about higher utility costs, the environmental footprint, and they're worried because large data centers are being built on previously rural properties or even residential-adjacent areas, which they don't love.

And as we mentioned before, Pennsylvania is a net power state. However, data centers are power-intensive. We will probably see a bottleneck with the grid and utility infrastructure upgrades. The cost of power may go up, and there may be sustainability issues in the future.

And also, data centers require water for their cooling systems, and while we're not a drought-prone area, water supply and environmental impacts are still concerns for sure.

We talked a little bit about the educated labor that's necessary to staff data centers once they're built. But then there's also the issue of construction labor. You need a lot of really specialized construction skills to build a data center and to outfit it.

Are you seeing adequate local labor supply in order to support the build-out?

As you had said earlier, there is a lot of talented labor in Pennsylvania. There seems to be adequate labor at this point. However, looking ahead, I'm not sure Pennsylvania is ready for the scale and the specialization of what's coming. Many of these large projects are on parallel timeframes, which may cause a shortage of skilled labor in the future.

For example, Corwave Campus, which is in Lancaster, they anticipate about 600 construction jobs in just the building phase alone. And I read an article that stated this is just one of eight to twelve data centers proposed in that region. So if all these start to develop at the same period, I think we may have a shortage, especially in the specialized side of the labor field.

I'm curious. In Pennsylvania, do you see more of certain types of development players like hyperscalers? Do you see mainly large hyperscalers? Do you see colocation providers? Or are you beginning to see build-out of these smaller, regional cloud edge facilities that you talked about a moment ago?

You know, I'm seeing a mix. The regional developers that were ahead of this boom were the ones purchasing the land. They could foresee what was coming. They are obtaining the entitlements, they're getting the approvals, and they prepare the property to sell to the end users. These smaller developers — I see them doing the smaller campuses — but there's definitely these power players in Pennsylvania right now.

Powerhouse committed to $15 billion on three hyperscale campuses in central Pennsylvania. Corwave, which I mentioned before, $6 billion to a campus in Lancaster, and then Amazon has another $20 billion in two campuses in the Southeast Pennsylvania region. So I do see a mix right now. It's not just the power players coming here.

So it's a mix. Looking ahead, do you see this momentum continuing in Pennsylvania? Do you think that the state is going to play an even greater role — be a really meaningful node — in the broader national data center network over the next, call it, five to ten years?

Yeah, I think Pennsylvania is well positioned to be a significant hotspot in the next five years. There's a strong investment pipeline. We have the land, the energy, the infrastructure advantages. There are state and regional policies actually being put into place. The state produced a 10-year roadmap for data centers, providing strategic planning and legislative efforts aimed at improving permitting, zoning, and tax incentives — all ideal for these developers.

All these factors strengthen Pennsylvania's appeal. I think in five years, Pennsylvania will not just be recognized as emerging. I'm thinking they're going to be an active competitor in this industry for sure.

Makes sense. It'll be a fascinating story to watch develop. Well, Anne-Marie, thanks so much for joining me on The Inside Look. This has been a really fun, insightful discussion, and I learned a little bit more about Pennsylvania's data center market.

I know you have a pretty active social media presence. If people wanted to learn more about your projects and what you're working on, how can they find you?

They can find me on LinkedIn, just under Anne-Marie Caruso, or they can go to the First American National Commercial…