Data Center Zoning Wars: Spotting Undervalued Real Estate Plays in Tech-Dense Regions

The rapid expansion of data centers to support AI, cloud computing, and 5G infrastructure has collided head-on with community and regulatory pushback. From Virginia's “Data Center Alley” to rural Mississippi, municipalities are tightening zoning rules, mandating setbacks, and demanding environmental safeguards—creating both risks and opportunities for real estate investors. In this article, we dissect how zoning reforms are reshaping the landscape and highlight undervalued real estate plays in regions where operators are adapting to stricter rules.

The Regulatory Gauntlet: Risks for Data Center Operators

Data center developers are navigating a labyrinth of new zoning requirements. Loudoun County, Virginia—a hub with over 30 million square feet of data centers—now requires special exceptions for projects near residential areas and mandates enhanced setbacks and noise controls. In Prince William County, a data center overlay district restricts development to industrial zones, while Frederick County, Maryland, is drafting zoning bills with community input to preempt future conflicts.

These reforms aren't just about aesthetics. Infrastructure strain is a critical concern. A proposed 772-acre data center in Fort Wayne, Indiana, required rezoning agricultural land to industrial and annexation agreements, highlighting the cost and complexity of securing permits in secondary markets. Meanwhile, Texas and the Midwest face delays due to vague zoning classifications and aging power grids.

The result? Higher development costs and regulatory uncertainty for operators. Projects like the rejected Belmont Innovation campus in Loudoun County—a $2 billion proposal initially denied due to grid constraints—show how zoning can kill deals.

The Investment Play: Undervalued Real Estate in Proactive Regions

Despite the risks, zoning reforms create opportunities for investors to capitalize on real estate assets that are positioned for long-term resilience. Key criteria:

1. Proactive Zoning Frameworks: Regions like Loudoun and Prince William have established clear rules, reducing uncertainty.
2. Infrastructure Readiness: Access to power grids and water sources—critical for data centers—adds value.
3. Buffer Zones and Industrial Designations: Properties in designated industrial areas face fewer regulatory hurdles.

Spotlight: Digital Realty Trust (DLR)

Digital Realty Trust, a leading data center REIT, has 98% occupancy in Virginia and Texas. Its portfolio includes properties in Loudoun County's industrial zones, which already comply with stringent zoning rules. While DLR's stock dipped 12% in 2024 amid regulatory fears, its dividend yield of 3.8% and prime locations suggest it's undervalued.

Frontier Opportunity: QTS Realty Trust (QTS)

QTS has aggressively expanded into secondary markets like Indiana and Arizona. Its 2023 acquisition of a 772-acre site in Fort Wayne—now zoned industrial—positions it to benefit from hyperscaler demand. QTS's stock trades at a 20% discount to its 5-year average P/FFO ratio, making it a contrarian bet on zoning approvals.

Undervalued Land Plays:

• Frederick County, Maryland: A workgroup is drafting zoning bills to attract data centers with community benefits. Land developers with holdings in its industrial zones—like Frederick Land Company (FLC)—could see appreciation as rules solidify.
• Chandler, Arizona: New zoning restricts data centers to planning area development zones. Investors in industrial land trusts like Prologis (PLD), which owns 1.2 million sq. ft. in Chandler, are well-positioned.

Red Flags: Regions to Avoid

Not all markets are winners. Mississippi and rural Texas face regulatory gaps and community opposition. A rejected data center proposal in Peculiar, Missouri, underscores the execution risk of projects in less-developed regions. Avoid REITs with heavy exposure to areas lacking clear zoning or infrastructure, such as CyrusOne (CONN), which has 40% of its portfolio in regions with pending zoning disputes.

The Bottom Line

Zoning reforms are here to stay. Investors should focus on **REITs and land trusts with assets in regions that have:
1. Proven regulatory clarity,
2. Strong power/water infrastructure, and
3. Buffer zones separating data centers from residential areas.

While short-term volatility may persist, the long-term demand for data centers—driven by AI and 5G—ensures winners will emerge. For now, Digital Realty and QTS Realty Trust offer the best risk-reward profiles, while proactive land plays in Frederick County and Chandler could yield outsized gains as zoning rules stabilize.

Investors should pair these plays with close monitoring of federal policies. A Biden administration push to fast-track data center access to federal lands could unlock upside—especially for rural land holdings.

Data as of June 2025. Past performance does not guarantee future results.