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Data center construction activity finally appears to be slowing, according to a report from the Professional Services Management Journal, a provider of architectural engineering and construction data.
In the third quarter, only 10% of respondents PSMJ Quarterly Market Forecast Survey reported an increase in proposal opportunities for data center facilities compared to the previous quarter. Meanwhile, 26% of respondents reported a decrease, according to PSMJ. That difference ranked the fifth largest slowdown among 58 submarkets assessed in the survey.
The first three laggards, according to PSMJ, were:
- office
- Retail sale
- Single-family residence.
PSMJ’s Quarterly Market Forecast survey measures proposal activity, which is one of the earliest stages of the design and construction process.
In addition to this negativity, growth in data center proposal activity showed only a slight improvement over the previous two quarters. This suggests that activity at these types of facilities will likely cool, according to PSMJ.
What slowdown?
Not everyone believes the segment, long a juggernaut among non-residential construction subtypes, is losing steam. Raul Martynek, CEO of Databank, a Dallas-based data center services provider, remains confident of strong data center activity.
“The industry itself has been doing very well for the last five to seven years, and there’s been a noticeable acceleration in the last 24 months,” Martynek said. “We expect the pace of data center development, uptake and therefore construction to remain robust over the next two years.”
Data center construction activity in primary US markets rose 25% year-on-year to a record 2,288 megawatts of capacity in the first half of 2023, according to CBRE. In addition, pre-leasing activity, which serves as an indicator of the balance between demand and supply, is at an “impressive” 73.1 percent, said Gordon Dolven, director of research at Americas data center at CBRE.
“Leasing through the third quarter of 2023 has continued at a record pace; we’ve even heard whispers of several 100+ megawatt deals being pre-leased by hyperscalers for potential AI workloads,” Dolven said. “This will only exacerbate this imbalance between supply and demand. New supply needs to be created to keep up with strong demand.”
The demand track is still strong
Although AI workloads are in their early stages of growth, they are already driving substantial demand for data center capacity, Dolven said. It expects generative AI in North America to grow from $2.19 billion in 2023 to about $19.55 billion in 2028, a CAGR of 54.8%.
Hyperscalers, technology companies that operate massive data centers, are also aggressively buying land and holding it for future use. Hyperscale data center operators account for about 60% to 70% of new data center uptake, Martynek said.
For example, Microsoft recently announced a plan to invest $1 billion in a data center campus in Rome, Georgia. In Temple, Texas, contractor JE Dunn recently resumed construction on one $800 million meta data center project after being redesigned to meet AI needs.
However, supply chain issues are causing some headaches in data center construction. For example, the lack of critical supply chain components is jeopardizing data center construction timelines, Martynek said. This includes issues with the procurement of generators, uninterruptible power systems, electrical appliances and power distribution units.
“These items are critical for us to outfit a data center, and these supply chains have been stretched based on all this demand,” Martynek said. “That would be the only thing I think is a risk.”
Extension of construction deadlines
The average construction timeline for a data center ranged from one to three years from 2015 to 2020, Dolven said. During this period, data center developers and operators benefited from a low cost of capital, streamlined construction processes, advances in the supply chain, and wide availability of power.
Today, construction timelines range from two to six years, largely due to limited energy availability, according to CBRE. For example, if a project requires a new electrical substation or upgraded transmission lines, this could delay delivery times by one to four years. Meanwhile, backup diesel generators can also take up to 90 weeks to procure, according to the report.
Still, Dolven, like Martynek, expects data center construction to remain strong because of its importance to technology adoption.
“While interest rates and the cost of capital continue to rise, data centers continue to benefit from long-term sources of infrastructure capital,” Dolven said. “We are not seeing a slowdown in construction activity and demand from developers continues to increase.”
