Data Center Development Is Starting to Monopolize Construction Resources

If you build it, they will come — but at what cost?

Data center development in the U.S. is bigger than ever before, after the asset class saw its deal volume more than double from $26 billion in 2023 to $57 billion in 2024, according to research from Colliers.

Overall, the U.S. had a total of approximately 5,426 data centers as of March, with most spanning tens of thousands of square feet. The centers are popping up not only in Northern Virginia, the national capital of data centers, but also in secondary markets such as Dallas, the Pacific Northwest, Chicago and Phoenix, where land is cheaper and more plentiful.

“The scale is the only reason we’re talking about [data centers],” said John Medina, senior vice president of Moody’s Ratings’ global project and infrastructure finance team. “They’re bigger now, and, once they get bigger, they get more expensive. They need more financing, and then everybody ultimately gets involved.”

Hyperscalers such as Amazon, meta and Microsoft are pushing the trend by ramping up their investments and demanding new artificial intelligence-based data center space.

Meta, for instance, was in talks in February to secure a roughly $35 billion financing package from an investor group led by Apollo Global Management for a major data center campus in the U.S., while Amazon in May bought 97 acres of land in Northern Virginia’s Loudoun County for $195 million to develop its own data center. And, in January, Microsoft announced it would invest $80 billion of its budget for the fiscal year 2025 in building data centers in the U.S.

Just how big is this? Let’s put it this way: The rapid growth in data center development is even affecting construction in other sectors.

The uptick in construction of data centers is pulling resources — including power, materials and labor — away from other key sectors and is “steadily” increasing the cost to build as the supply chain struggles to keep pace with demand, according to a recent report from consultancy Turner & Townsend.

“The surge in data center construction is certainly putting additional pressure on the availability of materials, labor and capital for other types of new real estate development,” said Lynn McKee, director of Georgia State University’s commercial real estate program.

“It’s a question of what are the resources they’re using and where would those [resources] go anyway,” Medina added. “It’s going to potentially have more pressure, which means that costs could increase.”

The average prices in secondary markets for data center development are set to rise significantly, with construction costs in Austin and Atlanta expected to rise to 5 percent in 2025, the highest rate of construction inflation in North America, according to Turner & Townsend’s report, which analyzed 99 global cities’ construction markets.

The sheer size and power requirements of data center developments could be a factor driving the imbalance.

Data centers require much more power (literally) than typical real estate, which uses square footage to determine rents. Data center properties, rather, are defined by power usage — either gigawatts, kilowatts or megawatts — with rents calculated by power supply agreements with utility companies.

“The limiting factor in a data center is not how big it is square footage-wise, it’s how much power it gets,” said McKee, who was formerly senior vice president at Truist Bank. “Therefore it rents based on the power you use.”

And data center pricing in North America is “significantly accelerating” due to supply shortages and high demand, according to a report from CBRE. The average asking rate for a typical 250-kilowatt to 500-kilowatt facility surged 20 percent year-over-year in 2024, which was the highest global increase, the report found.

Top markets such as Chicago and Northern Virginia led the pack, with increases in asking rents of 14.7 percent and 15 percent, respectively, CBRE found. In Northern Virginia, specifically, the average monthly rent for data center space during the first half of 2024 was between $165 and $205 per kilowatt.

So far, it seems like both hyperscalers and developers can foot the bill. The companies building these facilities — whether it’s tech giants like Microsoft and Google or developers like Prologis and Digital Realty — can undertake the high costs for land, materials and labor that building a data center requires.

Those prices add up, too, as data centers can cost up to $15 million per megawatt and an additional $50 billion per gigawatt to build, according to Raj Joshi, senior vice president at Moody’s Investors Service.

Industrial giant Prologis currently has data centers either under construction or already completed that will together produce 1.1 gigawatts of electricity, according to Prologis’ second-quarter earnings report. (For reference, 1 gigawatt is enough to power roughly 750,000 homes.)

Plus, Prologis has committed to investing nearly $8 billion in data center development over the next five years, Data Center Frontier reported.

Lots of developers are following in those footsteps. In 2024, construction was completed on more than 2.5 gigawatts of colocation capacity, and a record-setting 6.6 gigawatts of colocation capacity was under construction at the end of the year, according to a recent report from JLL. (Colocation capacity is the amount of space, power and network connectivity available for businesses to house their equipment within a data center facility.)

That included BlackChamber Group’s $190 million acquisition of a 65-acre industrial campus adjacent to Northern Virginia’s Manassas Regional Airport to build a new crop of data centers, as well as Blue Owl Real Estate, Chirisa and PowerHouse Data Centers’ deal to build a new data center development in central Virginia through $600 million of construction financing.

“Because of the revenue [data centers] generate, [these developers are] able to pay whatever it costs,” McKee said. “So they’re going to get what they need first, and then what’s left is going to be for everyone else.”

That influx of capital going into data centers is shifting the environment for other sectors, too.

“The U.S. capital markets are highly adaptive, and what we’re seeing is capital flowing into higher-growth asset classes, while other sectors are naturally resizing and rightsizing in response to shifting fundamentals like interest rates, cap rates, and ongoing uncertainty around construction costs and labor,” said William Sankey, CEO and co-founder of real estate development management platform Northspyre.

However, the exponential growth of data center demand in secondary markets — where vacancy is largely near zero percent — is pushing power supply to its limit, and in turn taking power away from nearby communities.

National energy usage is set to increase to 100 gigawatts by 2030, but with the rapid growth of AI workloads, a high energy usage could potentially amplify power issues and cause the U.S. to experience a data center supply deficit of more than 156 gigawatts by 2030, Colliers found.

In Northern Virginia specifically — which has at least 300 data centers and had the largest year-over-year net absorption increase in 2024 at 407.4 megawatts — construction is slowing significantly over concerns power could run out.

“You need to have power, and you need to know you’re going to get it,” McKee said. “That’s one of the reasons why Northern Virginia, which is the biggest hub of AI in the country, is running into issues and being constrained, because they’ve run past their power capability.”

In addition to taking a large amount of power from local power grids, data centers could pull water resources from residential areas, as liquid cooling is quickly becoming the preferred cooling solution for high-performance computing, according to Turner & Townsend’s annual data center cost index report.

“Power is definitely the biggest constraint,” Medina said. “But water has always been a question depending on the cooling system. … There’s a question on local governments making agreements or not making agreements, if they have enough water or not. … It’s all part of the development risk that each project has to take on themselves.”

The high demand for data center space is pushing manufacturers, both domestic and international, to their limits, too.

President Donald Trump’s 50 percent tariff on copper imports could severely upend data center supply chains and construction costs, as copper is crucial to data centers’ electrical infrastructure and is relied on as the best conductor for power distribution.

To put it into perspective, Microsoft’s $500 million data center in Chicago used 2,177 tons of copper for construction, according to the Copper Development Association.

And, while the U.S. produces 60 percent of the world’s copper, developers still have to import 40 percent, with copper prices expected to rise across the board as domestic and international copper manufacturers stay competitive, according to McKee.

It’s not just copper. To build a data center, you also need concrete, steel and other specific power infrastructure to store equipment — almost all of which are facing tariffs under the Trump administration and will likely skyrocket in cost.

“Demand for these components will compete with the building of manufacturing facilities, renewable energy projects, traditional real estate projects, homes, cars and many other products,” McKee said.

“When you start putting high tariffs on these materials and the components that go into the electrical systems and the HVAC systems, all that, it’s going to directly drive up costs,” McKee added.

But Trump’s potential tariffs on semiconductors may be the biggest problem when it comes to building data centers, as semiconductors provide the processing power and efficiency needed for complex AI technology, Joshi said.

“It’s affecting everything that’s being built, and it’s not only materials,” McKee said. “There’s three things that make a building — the materials, the labor and the cost of capital. … When you put all those three things together, it’s just really, really hard to make a new development work right now.”

And political tensions stemming from the U.S. aren’t helping.

As of September 2024, roughly 30 percent of workers in the U.S. construction industry were immigrants, according to the National Immigration Forum, a nonprofit. With rising threats of federal Immigration and Customs Enforcement raids under the current administration, a lot of undocumented workers may be afraid to go to work, and that could lead to labor shortages at data center sites, McKee said.

“We are so dependent on [immigrants] for construction,” McKee said. “If you take that labor away, and at the same time you have tariffs on the materials that go into a property, that is a more immediate threat to me.”

Data centers are also much longer-term projects compared to short-term construction developments such as office or residential buildings.

“If you have two- to three-year work on a data center, that gives you a longer treadway to set up an operation and build staff,” Medina said. “That’s a lot of long-term work for workers that are typically working on shorter contracts. People like to work on five-year deals, because they could set up with a family and move.”

And that portion of the labor force that might be leaving traditional sites for data center construction is already putting a dent in housing projects.

“I have had several buyers interested in new construction, but they have been told that delivery dates have been delayed because labor has been diverted to industrial projects with a great need for infrastructure,” said Alexei Morgado, CEO and founder of Lexawise Real Estate Exam Prep.

“Builders are even delaying the launch of new phases until they can secure materials and personnel, especially when it comes to electrical work, which is critical for both homes and data centers,” Morgado added.

Unfortunately for those builders, data center development does not seem to be slowing anytime soon, as AI-ready data center capacity is expected to rise at an average rate of 33 percent per year until 2030, according to McKinsey & Company.

“If the current pace of data center development holds, or accelerates, we could see prolonged strain on both labor and material pipelines as well as general contractor and developer know-how to execute these specialized projects,” Northspyre’s Sankey said.

“With hundreds of billions of dollars of new investment planned for things like data centers and manufacturing of semiconductors, there certainly doesn’t exist an adequate labor pool or know-how to execute this number of projects,” he added.

But there are things data center developers can do differently to mitigate the impacts, like investing in energy infrastructure, building alternative supply chain capacity and implementing design adaptations smoothly, according to Turner & Townsend’s report.

“The market may be unpredictable, but predictability at the project level is still possible — if you have the right tools and data,” Sankey said.

Isabelle Durso can be reached at idurso@commercialobserver.com.