ITR Economics Consulting Managing Director Eric Post provides insight into the data behind data center construction, as well as risks and opportunities.
As the world has grown more dependent on big data and quantitative analysis to power our businesses, the demand for data centers has increased over the years. ITR Economics Consulting Managing Director Eric Post highlights the data behind data center construction, the risks to the sector, and the opportunities that exist in the market today.
Q: Over the past 10 years, what kind of growth has data center construction seen as the reliance on technology has increased?
Eric: It has been an explosive growth segment. Back in 2014, data centers accounted for 0.5% of overall US Private Nonresidential Construction spending. As of the latest data, they account for 3.2%. They continue to gain an increasing share of the overall pie as a wide array of industries increasingly adopt data-intensive analysis. It has just been growing, growing, and growing. No Phase D, Recession, whatsoever.
Q: What are the known risks of getting into the data center construction space?
Eric: It is the big unknown of “Are we going to overbuild or not?” Right now, companies are just throwing so much money into AI with an uncertain payback. If we start to see that payback fall short of expectations, we absolutely could see firms think: “Wait, maybe I should not be spending $20 million on AI. Maybe I should be spending $5 million on AI.”
One reason for that is the latest study from MIT showed that AI implemented properly could lead to a double-digit increase in productivity, but implemented improperly it could lead to a double-digit decrease in productivity. Not everyone will get it right. (As an aside, that is why it is so important to pick the right firm to assist you with your AI effort. Crowe can help with that.) So, that could eventually lead to a slowdown in that space. Certainly, data centers are a growth market, but it is not like they are immune to a pullback in the future.
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Q: How might the economic depression we have forecasted for the 2030s impact the data center market?
Eric: I certainly think the 2030s will be a time in which investors and businesses are going to have to be careful with their cash and really make sure they know what is really going to pay off.
ITR Economics is forecasting a significant decline in GDP and business-to-business spending that will leave few segments of the economy unscathed. And in a tough economic time, what will be cut back the most will be any sort of discretionary-type spending, whether it is by a business or a consumer.
For some IT projects, the potential payoff is less than crystal clear. Those sorts of projects will be under tremendous pressure, either from Wall Street if the company is publicly traded, or from the company ownership if the company is privately held.
Consumers are going to be cutting back, and employment will be lower. People are going to prioritize their groceries over their cloud streaming services. Essential goods and services will come first, and there may not be enough money left over for whatever would come second. And so I would certainly be concerned about consumer-driven data center demand in the 2030s.
Q: When is the best time for a business to get involved in the data center market?
Eric: Ideally, yesterday. The data center market is currently in Phase B, Accelerating Growth, and the 2030s depression is getting closer.
A business leader’s mindset for the next couple years should be “make your money fast.” That does not mean that all data center creation is going to cease in the 2030s, but it is certainly going to have a step-back.
I think all businesses, regardless of the industries they participate in, should be thinking about having that rock solid balance sheet going into the 2030s and not being over-scaled or over-leveraged.
Meanwhile, if companies can target data centers as an area of opportunity, it could help them build up their cash reserves and potentially spin off part of their business in 2028 or 2029 in advance of the 2030s depression.
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