Survey signals warning for data center construction

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Data center construction activity finally appears to be slowing down, according to a report from the Professional Services Management Journal, an architectural engineering and construction data provider.

In the third quarter, only 10% of respondents in PSMJ’s quarterly market forecast survey reported an increase in proposal opportunities for data center facilities from the prior quarter. Meanwhile, 26% of survey respondents reported a decrease, according to PSMJ. That difference ranked the fifth-largest slowdown among 58 submarkets assessed in the survey.

The top three lagards, according to PSMJ, were:

  • Office.
  • Retail.
  • Single-family residential.

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 that negativity, growth in data center proposal activity showed only a slight improvement in the two previous quarters. That suggests activity for these types of facilities will likely cool down, according to PSMJ.

What slowdown?

Not everyone thinks the segment, long a juggernaut among nonresidential construction subtypes, is losing steam. Raul Martynek, CEO of Databank, a Dallas-based provider of data center services, remains confident in robust data center activity. 

“The sector itself has been doing very well over the last five to seven years, and there’s been a noticeable acceleration in the last 24 months,” said Martynek. “We expect the pace of data center development, absorption and hence construction to remain robust over the next couple of years.”

Data center construction activity in U.S. primary markets increased 25% year-over-year to a record-high capacity of 2,288 megawatts in the first half of 2023, according to CBRE. Additionally, pre-leasing activity, which serves as an indicator of demand versus supply balance, sits at an “impressive” 73.1%, said Gordon Dolven, director of Americas data center research at CBRE.

“Leasing in Q3 2023 has continued at a record pace — we have even heard whispers of several 100+ megawatt deals pre-leased by hyperscalers for potential AI workloads,” said Dolven. “This will only further exacerbate this supply-demand imbalance. New supply needs to be built to keep up with the strong demand.”

Demand runway still strong

Even though AI workloads are in their early stages of growth, they are already driving substantial demand for data center capacity, said Dolven. He expects generative AI in North America to increase from $2.19 billion in 2023 to about $19.55 billion in 2028, a compound annual growth rate 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 absorption, said Martynek.

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 a $800 million Meta data center project after it was redesigned to cater to AI needs.

However, supply chain issues are causing some headaches in data center construction. For example, a lack of critical supply chain components is jeopardizing data center construction timelines, said Martynek. That includes issues with the procurement of generators, uninterruptible power supply systems, electrical switchgear and power distribution units.

“Those items are critical to us being able to fit out a data center, and those supply chains have been stretched as a function of all this demand,” said Martynek. “That would be the only thing that I think is a risk.”

Lengthening build timelines

The average construction timeline for a data center ranged between one to three years from 2015 to 2020, said Dolven. During that period, data center developers and operators benefited from a low cost of capital, streamlined construction processes, supply chain advances and ample power availability.

Today, construction timelines range anywhere from two to six years, largely due to constrained power availability, according to CBRE. For example, if a project requires a new electricity substation or upgraded transmission lines, that could delay delivery timelines by one to four years. Meanwhile, backup diesel generators also can take up to 90 weeks to procure, according to the report.

Still Dolven, like Martynek, expects data center construction to remain strong due to its importance for technology adoption.

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