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Data Center Demand Faces Headwinds: AI Could Be Why
It’s a well-known fact that a demand driver for data center development and investments has been the rapid rise of generative AI. How hot has the demand been? According to a recent CommercialEdge report, tech firms’ AI investments have led to “more than 51 million square feet of new data centers breaking ground since the start of 2023.”
However, there are indications that demand could be cooling off. CommercialEdge analysts point out that AWS and Microsoft have put data center leasing plans on pause. “Both firms downplayed these pauses as temporary and the result of capacity management,” the analysts said. “But this marks the first noteworthy slowdown that has occurred during the AI boom.
Additionally, questions have been raised about the sector’s return on investment, which seems to be cooling investor interest. In quoting a Goldman Sachs June 2024 report, “Gen AI: Too Much Spend, Too Little Benefit?” CommercialEdge analysts explained that the trillion-dollar investment spent on AI doesn’t have a trillion-dollar problem to solve. Additionally, “Investor skepticism picked up again this year when Chinese startup DeepSeek unveiled a cheaper, less resource-intensive model than Western companies have been able to produce,” the analysts said.
AI—and associated data center growth—also faces the following challenges:
- Data center power requirements mean site-selection problems and community pushback.
- Hallucinations—which occur when AI produces misleading or false information—might reduce the technology’s impact in the medical, legal and manufacturing industries.
- Legal issues concerning discrimination, bias, copyright infringement and liability could impact growth in the artificial intelligence sector.
The CommercialEdge analysts pointed out that generative AI isn’t going anywhere. However, “it’s not a given that demand will continue to grow at this pace over the next decade,” they said. “Issues around resource usage, return on investment, model accuracy and legal challenges will determine if AI reshapes the economy as we know it or if its uses will be narrower.”
As to the impact on the real estate end, CommercialEdge Director Peter Kolaczynski indicated that the current scenario is similar to the rush to build distribution for e-commerce back in the days of the pandemic. “The right-sizing mentality that soon followed is already on the minds of data center users and developers,” he added in the report. “We expect more caution in the near future, as companies determine what the right footprint should be.”
- ◦Development
