The data center sector is on fire, and it’s not just the digital kind. A rapid expansion is driving unprecedented levels of investment and building activity across the commercial real estate world. Yet, this growth is not without its challenges. With substantial costs involved, only those with the deepest pockets are finding themselves able to play the game.
At the recent Bisnow National Commercial Real Estate Finance conference, industry titans like Yorick Starr, Managing Director at Invesco, made it clear just how hefty these financial commitments are. "We've got strong conviction in the data center space. The problem is we just can't write a $2B loan," Starr noted, emphasizing the staggering amounts of capital needed to build out these facilities. Deals of such magnitude are becoming the norm as demand surges, leaving many players out of the game.
Take Vantage Data Centers, for example, which secured a whopping $3B loan this April to boost their construction efforts. DataBank, another key player, struck out with a $725M credit facility the same month. Then there’s CyrusOne, which recently reached for the stars with an $8B loan to accelerate its commitments. Yet, even these massive funding efforts are but a drop in the bucket, as the data center construction scene typically demands investments far beyond billions.
Data center construction costs can be dizzying. According to research from JLL, building just the core structure and shell of what could be considered average facilities hovers between $125 and $200 per square foot. When factoring in the additional infrastructure costs—things like electrical equipment—the price skyrockets to anywhere from $280 to $350 per square foot. For larger operations, particularly those focused on cutting-edge artificial intelligence (AI), the financial stakes are even higher. Google, for example, recently announced it would pour $1B more to expand three of its Virginia facilities, pushing total expenditures there to $4B, and plans are also underway for another $2B investment to build new infrastructure from scratch in Fort Wayne, Indiana.
These investments aren't just connected to existing platforms. They also aim to support the burgeoning field of AI, which is changing the data center calculus entirely. Microsoft is contemplating spending up to $100B to develop new centers alongside BlackRock, creating infrastructure to support this massive digital shift. With broader commitments pouring out from these tech giants, it’s clear there’s no slowing down.
But it's more than just the purely financial aspect; developers like John Gustafson from Wells Fargo pointed out the insatiable appetite for capital among those leading these projects. Gustafson remarked, "Sponsors are voracious users of capital," highlighting the relentless drive for more funding to navigate this burgeoning market. But with this kind of demand also come logistical hurdles. While industry growth is expected to explode—with global data center capacity projected to swell to 35 gigawatts (GW) by 2030, up from 17 GW at the end of 2022—site selection is becoming trickier. Developers are scrambling for prime locations close to the necessary power infrastructure.
This scarcity of suitable sites has laid bare another challenge: finding lenders willing to step up to the plate. The data center boom has led to increased conversations within financial circles about the best strategies for funding these enormous projects, pushing many lenders to pivot their focus. "It seems like every day, we’re seeing five more lenders learning the space and trying to get in it," said Gustafson, underscoring how competitive the financing environment has become, as new entrants seek to capitalize on the burgeoning demand for data centers.
To navigate this complex maze, innovative solutions are gaining traction. Some developers are taking old manufacturing facilities and repurposing them to house data centers. Poverni Sheikh Group CEO Eugene Poverni describes this shift: "Doing so opens up opportunities for smaller lenders." For example, when Remington Firearms closed its long-standing plant, developers quickly moved to convert the facility for data center use, pointing to the growing trend of upcycling old buildings to meet today's tech needs. This provides easier access to pre-existing power supplies which are often hard to come by for new builds.
With developers scrambling to meet the insatiable demand for data centers and lenders rushing to provide the necessary funds, the stakes have never been higher. The investment appetite shows no signs of slowing, and industry leaders like Apollo Global Management’s Catherine Chen note, there's been "a huge wave of data center acquisitions, financing, and development." Current projects often require funding upwards of $800M to $1B, and those numbers will likely continue to climb as the appetite for data shows little sign of cooling down.
Experts are optimistic—but also aware of the obstacles. There are major logistical and infrastructural challenges still looming. The connection to sufficient power sources is especially pressing as many states face their own limitations. Eugene Poverni encapsulated the concern succinctly: "It takes forever to get power. There’s not enough power capacity... for all the data centers we think we need."
With projections indicating the rapid expansion of the data center market, the clash between opportunity and logistical reality will define the next phase of this industry's growth. Will lenders step up to meet the challenge? And will developers find creative solutions to overcome site and infrastructure scarcity? That’s the question on everyone’s mind as the charge to build the future’s tech infrastructure accelerates.
