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Data center construction has long been recognized as a strong sector, but its true magnitude may still be underestimated.
For example, builder MasTec of Coral Gables, Fla., told investors it is looking to increase its footprint in the industry and establish a a strong portfolio of data center work, according to its call for first quarter results in May. Similarly, Fluor CEO David Constable recently drew a parallel between current surge in data center construction and the manufacturing boom during the company’s own earnings call.
That optimism stems from increased institutional investment and strong market fundamentals, which together will continue to drive the data center construction industry, according to a recent CBRE Global Data Center Investor Intent Survey.
As businesses increasingly rely on data centers for digital infrastructure, the need for new construction projects remains strong, according to CBRE. Despite headwinds from high interest rates and lingering industry-wide inflation, data center projects continue to bolster overall construction planning, according to the Dodge Momentum Index.
Recently announced projects include a Billion dollar Microsoft data center in Indiana, a $800 million data center in Alabama and a $630 million digital data center in Dulles, Virginia, to name a few.
Pre-lease rates of more than 83% in the markets also show an impressive rate at which demand meets supply, he said Pat Lynch, Dallas-based managing director of data center solutions at CBRE. In Northern Virginia, he added that even with an 18% increase in year-over-year inventory, the region’s vacancy rate fell to 0.9% from 1.8% a year earlier.
“In addition to cloud service providers, financial services companies, healthcare companies, generative artificial intelligence and GPU-as-a-service companies are a great example of a demand driver that remains active in the market,” Lynch said. “From an AI perspective, much of what we’ll use this technology for has yet to be invented, making the growth prospects hard to define but opportunistic nonetheless.”
Growth limitations
Not everything is ahead, however. According to the report, the data center construction industry still faces challenges such as power distribution constraints and supply chain delays for critical electrical components such as transformers and switches.
These issues are extending construction timelines and limiting the availability of new data center facilities, ultimately impacting project delivery and costs.
“The ability to procure transformers, switches, generators and other equipment needed for transmission, distribution and electricity needs are the bottlenecks today,” Lynch said. “Construction companies are managing as best they can.”
For example, Larry Ellison, company president and chief technology officer at tech giant Oracle, said that his data center projects typically takes longer to build than desired, largely due to problems with the procurement of generators, power systems, electrical appliances and power distribution units. Tesla also faced delays with its own Dojo Data Center Project in Austin, Texas due to delivery issues.
Advance purchase
For construction professionals, this means innovative solutions to mitigate delays and manage supply chain disruptions effectively. That includes alternative supply chains, investments in advanced project management technologies and closer collaborations with suppliers and stakeholders, Lynch said.
“We’ve seen many of the larger data center operators provision equipment upfront and decide later where to use the equipment in a particular market or project,” Lynch said. “Essentially, they’re getting their equipment needs in the queue long before they know exactly where it might be deployed.”
According to CBRE, strong investor interest, particularly in the opportunistic and value-added segments, indicates a strong market for construction companies specializing in high-performance projects. The report indicates that about 80% of investors favor these types of assets, highlighting a substantial opportunity for construction companies to align their offerings with market demand, Lynch said.
“Recruiting and retaining talent that has a recent and successful history of successfully deploying and managing data center projects is key,” said Lynch. “This is a highly specialized and risk-averse industry and end users expect a high level of expertise and knowledge for the projects they are undertaking.”
