The demand for cloud computing, artificial intelligence, and digital infrastructure continues to accelerate, making data centers among the fastest growing and most capital-intensive property types in commercial real estate. As of November 2025, the U.S. has approximately 5,427 data centers, accounting for 45% of all facilities worldwide. Yet, despite this growth and their strategic importance to the economy, data centers present persistent challenges in terms of valuation and property tax assessment. This results in assessments that are often overvalued, creating uncertainty and the risk of inflated property taxes for owners, developers, and investors. Understanding how and why these issues arise is essential for industry stakeholders seeking fair market valuations and reduced tax obligations.
Why Data Centers Defy Traditional Valuation Models
Data Centers are often grouped together with conventional industrial, office, or warehouse properties, but there are fundamental differences that cannot be overlooked. While the physical building of a data center may resemble an industrial facility, the true economic drivers of value lie in highly specialized infrastructure, including electrical distribution systems, cooling equipment, backup power generation, and redundant mechanical systems.
Many assessing jurisdictions still rely heavily on the cost approach to value data centers, but this method of valuation, if incorrectly applied, can equate construction costs with market value. Assessors can significantly overstate value if they fail to consider the rapid depreciation of specialized equipment, which in many jurisdictions must be separated from the value of the real estate when assessing fair market value. Making matters worse, assessors often lack specialized expertise in data center economics, and many states lack personal property depreciation schedules specific to data centers. Similarly, functional obsolescence is a significant issue for data centers, driven by quickly evolving technological requirements.
Valuing data centers with the sales comparison approach is also complicated given the scarcity of arm’s length data center transactions, and the fact that sale prices incorporate the total assets of the business – intangible assets, tangible personal property, and real property – when the fair market value should, in many jurisdictions, reflect only the value of the real property. This results in the use of less similar properties, such as conventional warehouses with significant power, requiring substantial adjustments for differences in features, location, age, and market conditions.
What Data Center Owners Should Watch For
There are several areas that owners and operators of data centers should watch for when contesting the assessed value of their real estate:
- Misclassification of Assets
One of the most significant sources of overassessment stems from the misclassification of personal property or intangible assets as real property. Data centers contain substantial amounts of equipment that depreciate far more quickly than real estate and, in many jurisdictions, must be separated from the value of the real property. Additionally, intangible assets (e.g., service contracts, intellectual property, etc.) contribute to the Business Enterprise Value (BEV) of the property, which is separate and distinct from the value of the real estate.
- Lack of Standardized Valuation Methodologies
Because there is no universally accepted framework for valuing data centers for property tax purposes, owners/operators must watch for assessors applying inconsistent methods from one jurisdiction to another, often without transparency into assumptions regarding depreciation, obsolescence, or market demand.
- Technological (Functional) Obsolescence
Technological change occurs far more rapidly in data centers than in most real estate asset classes. Facilities designed even a decade ago may be unable to support current power density, cooling, or redundancy requirements. When assessors fail to take this into account, owners may be taxed on values that greatly exceed actual market utility. This risk is sharply elevated for legacy or enterprise data centers facing competition from newer hyperscale facilities that accommodate the exponential growth of AI.
Moving Forward
The growth of data center development shows no signs of slowing down. In order to mitigate property tax burdens on owners/operators, property tax appeals are often prudent and necessary. Successful appeals will focus on: demonstrating that construction cost does not equal market value, quantifying functional and economic obsolescence, separating real property from personal property and intangible assets (BEV), and presenting market-supported valuation analysis prepared by data center specialists.
If you have questions about whether your data center is over assessed, Jones Pyatt Law can provide a property specific analysis and advise whether appealing the property’s valuation is likely to result in tax savings. We represent commercial real estate owners and operators to reduce and mitigate property tax burdens in OH, MD, PA, IN, MI, MO, TN, and KY.