As demand for data storage and processing continues its meteoric rise, Canadian real estate investors are grappling with an unexpected hurdle: the scarcity of large-scale data centre spaces. Institutional players—once drawn by the promise of stable, long-term returns—are discovering that the rapid proliferation of cloud computing and edge technologies has outstripped the availability of suitably sized properties. In this post, we analyze the forces behind these scale constraints and explore how investors are adapting to maintain momentum in one of the fastest-growing segments of commercial real estate.

Understanding the Data Centre Boom in Canada

Over the past decade, data centres have evolved from niche facilities to critical national infrastructure. They underpin services from video streaming to financial transactions and power emerging technologies like artificial intelligence and the Internet of Things (IoT). In Canada, favourable energy costs, competitive real estate markets and a cold climate—ideal for efficient cooling—have attracted hyperscale operators, cloud service providers and major enterprises.

Institutional capital, traditionally focused on office towers, logistics warehouses and multi-family residential assets, has recognized data centres as a compelling alternative. According to Connect Commercial Real Estate Canada, investors are targeting yields in the 6–8% range, outpacing many core real estate segments. This surge in interest has triggered new development pipelines, but it has also exposed a gap between demand for large data halls—typically 20 MW or more of capacity—and the available land, power and connectivity resources to support them.

Key Scale Constraints Faced by Investors

Despite robust demand, institutional investors are encountering several bottlenecks that limit their ability to deploy capital at scale. The primary constraints include:

  • Land and Zoning Limitations: Building a large data centre requires sizable parcels—often tens of acres—located close to major fibre routes and substations. In rapidly developing tech hubs such as Toronto, Montreal and Vancouver, such land is scarce or subject to stringent zoning regulations that slow approvals.
  • Power Availability: Hyperscale facilities consume hundreds of megawatts of electricity. Securing reliable connections to the grid, negotiating favourable rates and ensuring redundancy involves lengthy regulatory processes and sometimes expensive upgrades to local infrastructure.
  • Connectivity Requirements: Data centres need multiple high-capacity fibre links. While urban cores tend to have abundant fibre, suburban or exurban development sites often require carriers to extend lines at significant cost.
  • Construction and Supply Chain Challenges: The specialized nature of data centre builds—high-density power, precision cooling systems and advanced security—has led to skills shortages and longer lead times for components, pushing out delivery schedules.
  • Sustainability and ESG Considerations: Institutional investors are under pressure to align with environmental, social and governance (ESG) criteria. Renewable energy sourcing, water stewardship and carbon neutrality goals add complexity to site selection and operational planning.

Investor Strategies to Overcome Scale Constraints

Faced with these obstacles, investors are deploying creative strategies to capture data centre opportunities despite limited large-scale footprints:

  • Modular and Edge Deployments: Rather than waiting for megasite approvals, some investors are proactively developing smaller “edge” data centre modules near urban and suburban demand centres. These facilities—typically 1–5 MW—can be deployed quickly, serving latency-sensitive applications such as autonomous vehicles and 5G networks.
  • Joint Ventures with Utilities and Telecoms: To secure power and connectivity, institutional funds are partnering directly with provincial utilities or major carriers. These alliances can expedite grid connections and fibre buildouts, sharing both risk and reward.
  • Adaptive Reuse of Existing Facilities: Converting underutilized industrial properties or former office campuses into data centres reduces land acquisition hurdles. While repurposing requires careful structural and electrical retrofit work, it can shorten development timelines.
  • Phased Expansion Projects: Recognizing that hyperscale tenants can scale incrementally, investors are designing campuses that can be built in 20–30 MW phases. This approach aligns capital expenditure with pre-leasing commitments, mitigating the risk of vacant space.
  • Renewable Energy Partnerships: To meet ESG objectives, some funds are co-investing in nearby solar or wind projects. These agreements provide dedicated green-power corridors for data centre operations, enhancing sustainability credentials.

Regional Focus and Emerging Hotspots

While Ontario’s Greater Toronto Area remains Canada’s primary data centre market, other regions are attracting attention:

  • Montreal: Leveraging Quebec’s abundant hydropower, Montreal offers some of the lowest power rates in North America. Hyperscale tenants are expanding here, but land near fibre routes is tightening.
  • Vancouver and Lower Mainland: Proximity to Pacific subsea cables makes this corridor strategic for global connectivity, though topography and seismic considerations restrict large site availability.
  • Alberta: Calgary and Edmonton benefit from local oil-and-gas grid infrastructure and a business-friendly regulatory environment. Renewable energy projects are on the rise, making Alberta an attractive secondary market.
  • Atlantic Canada: Provinces like Nova Scotia and New Brunswick are marketing surplus power and cooler climates, but high latency to major user bases remains a challenge.

Future Outlook for Institutional Investors

The structural drivers behind data centre demand show no signs of slowing. Cloud migration, AI workloads and the expansion of 5G will continue to fuel requirements for both hyperscale and edge capacity. However, institutional investors must adapt to the evolving landscape:

  • Embrace flexibility through modular design and multi-phase rollouts.
  • Leverage partnerships with utilities and carriers to streamline resource access.
  • Prioritize sustainable development to align with ESG mandates.
  • Watch emerging secondary markets for cost-effective growth prospects.

By incorporating these strategies, investors can navigate scale constraints and maintain healthy returns in Canada’s high-growth data centre sector.

Conclusion

Canada’s data centre market presents an unparalleled investment opportunity, but one that comes with unique scale constraints. Institutional investors looking to capitalize on robust demand must be innovative—utilizing modular deployments, strategic partnerships and phased campus expansions. While land, power and connectivity bottlenecks challenge traditional development approaches, a flexible, ESG-aligned mindset can unlock new pathways to profitability. As the digital economy accelerates, those who overcome these scale hurdles will solidify Canada’s position as a premier data centre hub.

Source: Connect CRE Canada