The Data Center Deal Cities Should Be Thinking About

As San José rethinks the rules for data center development, a bigger question is emerging: What should communities get in return for hosting the infrastructure powering the AI economy?

I found myself thinking about data centers differently this week, and not because another enormous AI campus was announced in Texas or Virginia. It was something happening much closer to home. San José is in the middle of deciding what it should expect from the next generation of data centers. This month, city leaders expanded an effort already underway to develop uniform standards for data centers and other large energy users, including exploring community benefits that could accompany their development.

It made me wonder: What should a city get in return for hosting a data center? It sounds like a simple question. The more you look at how these facilities fit into cities, the less simple it becomes.

The Economic Development Math Is Different

For decades, the pitch behind large economic development projects has been fairly familiar. A company invests millions of dollars, builds something, creates jobs, generates taxes and, hopefully, produces enough activity around it to leave the community better off. Data centers scramble that equation. They can represent enormous private investments and generate significant tax and utility revenue. Their construction creates jobs. And the infrastructure inside them is increasingly essential to nearly everything we do online, from banking and streaming to cloud computing and artificial intelligence.

But once construction ends, the number of people working inside a data center can be surprisingly small compared with the investment, land and infrastructure required to operate it. That doesn't mean the economic development math doesn't work. It means the math is different.

You can see that just a few miles from San José in Santa Clara. The city has spent decades becoming one of the country's most established data center markets, helped by its location in Silicon Valley and something most cities don't have: its own electric utility, Silicon Valley Power. Data centers are major utility customers, producing revenue that ultimately benefits the city alongside property taxes, sales and use taxes, business license taxes and development fees. That is real community value, and it is one reason simply comparing permanent jobs with electricity consumption doesn't tell us the whole story.

There is another side of the ledger. Data centers need land. They can require substantial new electrical infrastructure. Depending on their design, they can use significant amounts of water. And dedicating industrial land to a data center means that land isn't available for another employer or use. Perhaps counting jobs or tax revenue alone isn't enough. The more useful question is whether the benefits a community receives make sense alongside the resources and opportunities it commits to hosting the project.

San José Is Trying to Define the Deal

For San José, this isn't a hypothetical conversation. The city is already a destination for data center investment, and another wave is moving through the development process. San José currently lists eight data center applications under review, ranging from an 18 MW facility on Embedded Way to much larger projects. At least three pending projects identified in public records are above 50 MW, including Microsoft's proposed 97.8 MW San José Data Center 04, the 97.3 MW NorthTown project and a new 99 MW proposal on Silver Creek Valley Road.

The buildings themselves offer another sense of scale. One pending Orchard Parkway proposal calls for two four-story data center buildings totaling about 630,000 square feet, along with water storage tanks, utility buildings, a customer-owned substation and a PG&E high-voltage switching station. Another proposal on Great Oaks Parkway would add more than 440,000 square feet.Once you start looking at everything required to make these buildings work, questions about infrastructure stop feeling abstract.

That helps explain why San José began developing uniform standards for data centers and other large energy users in June. The first round focused heavily on their physical footprint, including electricity consumption and sourcing, water use, air quality, backup generators, greenhouse gas emissions, noise and community engagement. The city specifically called for strategies that could reduce reliance on potable water through recycled water, closed-loop systems and other technologies.

Then, on August 12, the conversation expanded. City leaders asked staff to look beyond mitigating impacts and consider what communities might receive in return, including possibilities around workforce development, clean energy, affordable housing, public spaces and neighborhood investment. Environmental standards generally ask how we can reduce the negative impacts of a project. Community benefits introduce another question: How can this project leave the community better off? San José appears interested in both.

The city isn't developing the answer entirely inside City Hall either. On August 19, residents were invited to a public listening session to help shape the standards, with additional stakeholder conversations expected before proposed standards reach the City Council. There isn't a universally accepted formula for what a community should expect from a data center. That may actually be San José's opportunity, because it can look beyond its borders.

California Doesn't Have to Start From Scratch

Ireland offers one cautionary lesson. Data centers grew from 5 percent of Ireland's electricity demand in 2015 to 22 percent in 2024, an extraordinary shift for the country's power system. Ireland has since adopted a new connection policy requiring new data centers to provide generation or storage matching their requested maximum import capacity and, over time, meet at least 80 percent of their annual electricity demand with additional renewable generation developed in Ireland. California doesn't need to copy those rules, but Ireland's experience raises a useful question: If a development requires major new energy infrastructure, how much responsibility should the project have for helping build the system it needs?

Water offers another lesson. In Australia, water agencies are thinking about how data centers fit into systems that already have an obligation to serve homes and businesses. Sydney Water's approach prioritizes recycled water and emphasizes that existing customers should not bear additional costs or supply risks created by major new water users. For drought-prone California, there is an appealingly simple principle in that approach: don't use drinking water where drinking water isn't necessary.

The interesting thing is that we don't have to travel to Australia to see what that idea can look like. About 30 miles south of San José, Gilroy is already experimenting with a version of it.

Gilroy Is Already Trying Something Different

Gilroy recently approved recycled-water agreements connected to an Amazon Web Services data center under construction. Once the necessary infrastructure is completed, the project will be required to use recycled water for its industrial and irrigation needs. Amazon must fund more than $10 million in improvements needed to bring that water to the site, including a new three-million-gallon storage reservoir, a pump station and connecting infrastructure.

What caught my attention wasn't simply that Amazon is paying for the infrastructure. The new reservoir will add capacity to the regional recycled-water system, and the data center will need only part of it. The remaining capacity can support other recycled-water customers, while residents aren't being asked to pay for its construction. That is easy to overlook as a community benefit because there isn't a ceremonial check being handed to a neighborhood organization. Instead, the benefit is something much more physical: infrastructure that remains useful beyond the property line.

Think about the sequence for a moment. A private development creates an infrastructure need. The developer pays to address it. The project gets what it needs to operate, but when the work is finished, the community is also left with greater capacity than it had before. That got me thinking about whether cities need a broader way of evaluating what they receive from projects like these.

Maybe Cities Need Five Returns

Community benefits don't have to mean requiring every data center to provide the same list of concessions, and a Community Benefits Agreement is only one tool cities could consider. Perhaps the more useful starting point is to ask what kind of return a project creates for the community hosting it. I see at least five: fiscal, economic, infrastructure, environmental and community returns.

The fiscal return includes taxes, fees, utility revenue and other recurring public revenue that can help fund city services. For a place like Santa Clara, where the city owns its electric utility, that part of the equation can be especially significant. The economic return looks beyond the number of people working inside the facility after construction. It can include construction employment, local purchasing, apprenticeships, workforce training and whether residents have pathways to participate in the much larger digital economy growing around the project.

The infrastructure return asks whether investments required by the development serve only the data center or can leave the surrounding community with greater capacity and resilience. Gilroy's recycled-water system offers one example. The environmental return looks at whether a project reduces its resource footprint through recycled water, renewable energy, battery storage, cleaner backup systems, efficient cooling or other investments that lessen pressure on resources shared with the surrounding community.

And then there is the community return. That could mean affordable housing, neighborhood investment, education, workforce opportunities, public spaces or other benefits shaped by what the people who live around these facilities actually need to build a better quality of life. This is also where listening matters. A benefit that looks good on paper isn't necessarily the benefit a particular neighborhood needs most.

Not every data center will deliver equally across all five, nor should every city necessarily expect it to. Santa Clara's municipal utility changes its fiscal equation. Gilroy found an opportunity in recycled-water infrastructure. San José may decide workforce development or neighborhood investment should carry greater weight. A community facing grid constraints may prioritize energy infrastructure above everything else. The point isn't to create another checklist. It's to see the whole deal.

What Will the Data Center Leave Behind?

The AI economy is making data centers increasingly necessary, but necessity doesn't remove the need for thoughtful planning. If anything, it makes that planning more important. Cities will continue to compete for investment, while developers will continue looking for land, electricity, water and communities where projects can actually get built. There doesn't have to be a winner and loser in that relationship.

What changes when we use a wider lens is the conversation itself. Instead of asking only how many jobs a project creates or how much tax revenue it generates, cities can ask what happens to the electric grid, what infrastructure gets built, which water source is used, what economic opportunities residents can access and whether some of the value created by the development remains in the place that hosts it.

San José is beginning that conversation now. Ireland, Australia and nearby Gilroy offer glimpses of how much broader it could become. None has the perfect formula, and perhaps there shouldn't be one. Cities are different, their needs are different, and the value a project can create will be different too.

Maybe that's what makes this moment interesting. The question doesn't have to be whether a data center is good or bad for a city. Years after the construction crews have gone home, the servers have switched on and the development has become part of the everyday landscape, what will the people who live there be able to point to and say: that made our city better, too?