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Private Equity to Fuel Data Center Growth But Regulatory Risk Grows

Global data center capacity will ‘surge again in 2025,’ says a January global outlook from Moody’s Ratings. Some of the drivers are the need to support rapidly expanding artificial intelligence, cloud computing, and data storage servicers.

Large tech companies, often called hyperscalers (referring to scaling up the amount of computing work that can be done), like Microsoft, Amazon, Google, Meta, and Oracle continue to move into new markets and types of applications, requiring an increasing number of data centers. This is necessary to provide the total amount of computing power, decentralize the technology to create redundancy and reduce risk, deliver computing and communications more efficiently and quickly to different geographic areas.

The amount of expansion is largely preleased to Microsoft, Google, Amazon, Meta, and Oracle, which has two implications. One is that it limits the speculative provision of capacity that might or might not be in demand. Another is that developers and landlords need to raise a lot of money through equity investments, loans, securitized bonds, private equity, or project finance vehicles. The five tech companies have a lot of capital available to pay so projects are financially viable.

However, the money still needs to be raised. Leverage levels are likely to increase over the next 12 to 18 months, says Moody’s. That requires enough capital to maintain operations until operating revenue becomes available. The requirement for financing isn’t just for developers but power and telecommunication providers that are part of the development process.

The finances get more complicated as increasing demand for materials, components, servers, new power capacity, and other key components. Altogether this is projected to run $2.5 trillion of necessary investment through 2028.

There are other hurdles to clear. One is finding locations with access to enough water for cooling equipment and with enough power and communications capabilities for new construction. That has brought public concerns to the fore. Even as states and local governments offer tax breaks and other incentives to attract new projects, there is growing scrutiny, particularly over the amounts of electricity the projects ultimately require for full operation.

The Virginia Joint Legislative Audit and Review Commission (JLARC) recently issued a report about the possible impacts data center projects have on local economies. Building enough electrical infrastructure to meet even half of the increased demand will be difficult. The Ohio Power Company requested approval from the Public Utilities Commission of Ohio to charge data center projects for at least 85% of their projected monthly needs whether the amount of usage reaches that level or not. Spain and Ireland are looking for regulations to account for electrical use, and AI projects in particular have higher consumption patterns.

Those who own or develop such projects need to keep such regulations in mind when proposing and even while building data centers.

Reprinted with permission from the Monday, 27 January 2025 07:01:32 EST online edition of GlobeSt © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.