Data center construction

Dive Brief:

• Multinational tech giant Amazon’s cloud computing subsidiary, Amazon Web Services, will invest $10 billion in Mississippi to build two data center complexes, the company announced Jan. 25.
• AWS will build the facilities across two industrial parks in Madison County, which sits just outside of the state capital of Jackson. The project is the largest capital investment in the state’s history, according to a release from the Mississippi Development Authority.
• Mississippi Gov. Tate Reeves signed the legislation finalizing the agreement on Jan. 30 that included $44 million in state incentives and said that the data centers could be at least partially open by 2027, local media outlet WJTV reported.

Dive Insight:

Since 2010, Amazon has invested $2.3 billion in Mississippi, which includes the construction of five fulfillment and sortation centers, four delivery stations, five solar farms and the state’s first utility-scale wind farm, per the company’s release. It’s also the largest corporate purchaser of renewable energy in the state.

This record-shattering $10 billion private sector investment will create hundreds of high-tech jobs for Mississippians, Reeves said in the development authority’s release. 

“Mississippi is building a business climate that is ripe for further growth, especially in the technology sector,” he said.

Data centers have been a point of interest for Amazon as it looks to bolster its own tech capabilities. Last year, in Ohio alone, the company announced two investments — one worth $7.8 billion, and another worth $3.5 billion — in data centers around the state. 

In immediate construction, Amazon was also responsible for two of the largest data centers to break ground last year — the $1 billion Prime Data Center Campus in Elk Grove Village, Illinois, and the $515 million data farm in Hilliard, Ohio.

This growth comes as activity in some other sectors, like office construction, flounders. The conglomerate purchased nine office buildings in Loudoun County, Virginia, last June, but plans to tear them down to make way for more data center facilities.

The renewed onshoring push is already stretching procurement timelines for many materials across the board, namely microchips, HVAC equipment, electrical switchgear and fabricated millwork.

Now, in addition to those materials, these multibillion-dollar megaprojects are also exerting pressure on sourcing steel.

Chip factories, battery plants and even data centers all require more and larger steel conduit than typical nonresidential construction, such as office buildings or hospitality facilities, said Dale Crawford, executive director of the Steel Tube Institute, a Chicago-based organization that brings together key producers in the steel industry.

Spending on manufacturing construction projects, the largest nonresidential building segment, reached a seasonally adjusted annual rate of $206.85 billion in October, a 71.2% increase from October 2022. Data center starts should reach $16.4 billion in 2023 and $17.9 billion in 2024, a 14% and 6% annual growth, respectively, over the next two years, according to Dodge Construction Network.

For smaller contractors, that means these types of projects will further amplify the strain on steel prices, said Scott Keller, engineer at Gordian, a Greenville, South Carolina-based construction cost data tracking firm. That’s true even after a short reprieve following labor stoppages at some plants.

“We have seen steel prices decrease over the latter half of 2023 with the United Auto Workers’ strike decreasing demand for certain steel products. Now that the strike has ended and demand has gone up, steel prices are following suit,” said Keller. “We would expect that if these megaprojects all move forward, further increasing demand, it could make it difficult for smaller contractors with increased costs and possibly longer lead times for residential projects.”

Prices for steel mill products, such as large structural sections, heavy plate, strip, wire rod, bars and pipe, dropped 2.5% in October, and remain down close to 10% over the past 12 months, according to U.S. Bureau of Labor Statistics data. However, despite much-needed cooling over the past year, steel mill products are still 62.1% more expensive than in February 2020.

That’s bad news for smaller contractors, who are already grappling with reduced commercial real estate activity, said Anirban Basu, chief economist at Associated Builders and Contractors.

"Smaller contractors are often the ones most dependent on developer-driven activity," said Basu. "With developers facing both higher borrowing costs and greater difficulty lining up project financing, backlog among some contractors is beginning to dissipate."

Smaller contractors, or those firms with less than $30 million in annual revenue, have now posted three straight months of overall backlog contractions, according to the ABC backlog indicator report. On the other hand, contractors with annual revenue greater than $30 million continue to pile on work.

For example, firms that bring in between $50 million and $100 million in sales notched the biggest backlog growth in October, according to the ABC backlog indicator report. That pipeline of work by larger contractors, coupled with other global trends, will put pressure on steel prices again in 2024, said Sam Giffin, director of data operations at Gordian.

“Looking at the trends in the market over the past six months, we’ve seen steel prices largely stabilize,” said Giffin. “[However,] with reduced international demand coming down the pipe from China, increasing costs here in the United States and supply constraints, it seems likely that prices will continue to trend up mildly in 2024.”

Cause for optimism

Not all the news is bad, though. Steel pipe and tube, which includes conduits, account for a small fraction of overall demand for steel, said Basu. 

So, while manufacturing projects and substantial data center investments may put upward pressure on steel conduit prices, that does not necessarily translate to an immediate increase in steel prices within the next year, he added.

“Prices received by domestic producers of iron and steel remain up more than 52% from February 2020 but have fallen 26% since the end of 2021,” said Basu. “Other factors, like declining global demand, falling diesel prices and softer activity in other nonresidential segments should allow steel prices to continue to moderate, although they will remain elevated relative to the pre-pandemic level.”

Design LLC, a wholly-owned subsidiary of tech giant Google, selected Baltimore-based Whiting-Turner Contracting Co. to build a $600 million data center in Wasco County, Oregon, according to filings with The Dalles Community Development Department.

The 290,000-square foot facility will add to Google’s already existing data center footprint in the area. Since 2006, the tech giant has invested over $1.8 billion into its Oregon facilities, according to the Mountain View, California-based company.  

Google selected the Wasco County area due to its energy infrastructure, developable land and available workforce, according to Google.  

Google’s data center footprint

The project follows other similar data center developments across the country for Google over the past few years, including:

• Three data centers worth $1.7 billion in Ohio.
• Two $800 million facilities in Temple, Texas, and Kansas City, Missouri.
• A $600 million data center in Mesa, Arizona.
• A $350 million data center campus in Council Bluffs, Iowa.

Along with Google, other hyperscalers continue to aggressively buy land and hold it for future data center use, according to Databank, a Dallas-based provider of data center services. Hyperscalers, technology companies that operate massive data centers, account for about 60% to 70% of new data center absorption, according to Databank.

For example, Meta Platforms, the Menlo, California-based company formerly known as Facebook, recently selected earlier this month New York City-based Turner Construction to build a new $800 million data center campus in Jeffersonville, Indiana.

Meanwhile, EdgeCore Digital Infrastructure, a Broomfield, Colorado-based data center developer, tapped Atlanta-based Holder Construction to build its $1.9 billion data center campus in Mesa, Arizona. Additionally, Amazon, another major hyperscaler in the sector, shared plans last year to build a $515 million data center farm in Hilliard, Ohio.

If money talks, then tech companies’ moves in construction this year speak volumes. The top five most expensive data centers to break ground in the U.S. this year all came with multibillion-dollar price tags, according to an analysis by Dodge Construction Network.

In fact, data centers made up half of the most valuable projects in commercial construction this year, according to a Nov. 17 outlook webinar. Dodge categorizes its commercial component as projects within the office, data center, warehouse, retail and hotel sectors.

Taking a more granular look, four out of those five data center starts are located in the Midwest. Major players included tech giants Meta, parent company of Facebook, and Amazon. 

The data center boom has been in motion since the start of the COVID-19 pandemic, when homebound consumers created an online ordering frenzy. But since then, the gradual re-opening of the world has done little to slow it down, even as experts predicted that demand would cool in 2022.

Tech giants have done little to dissuade that notion — Amazon announced it would dedicate $7.8 billion toward the construction of these facilities in July. In addition, Gordon Dolven, director of Americas data center research at CBRE, told Construction Dive in August that the sector’s construction surge has been riding the artificial intelligence wave.

However, there are signs of challenges ahead. A report from the Professional Services Management Journal, an architectural engineering and construction data provider, showed that the boom is starting to show cracks. While some experts still see a high level of demand, supply chain issues and power availability are weighing on its performance.

Indeed, in the third quarter, only 10% of respondents in PSMJ’s quarterly market forecast, a survey of architecture and engineering firms, reported an increase in proposal opportunities for data center facilities from the prior quarter.

Data center construction activity finally appears to be slowing down, according to a report from the Professional Services Management Journal, an architectural engineering and construction data provider.

In the third quarter, only 10% of respondents in PSMJ’s quarterly market forecast, a survey of architecture and engineering firms, reported an increase in proposal opportunities for data center facilities from the prior quarter. Meanwhile, 26% of survey respondents reported a decrease, according to PSMJ. That difference ranked the fifth-largest slowdown among 58 submarkets assessed in the survey.

The top three laggards, according to PSMJ, were:

• Office.
• Retail.
• Single-family residential.

PSMJ’s Quarterly Market Forecast survey measures proposal activity, which is one of the earliest stages of the design and construction process.

In addition to that negativity, growth in data center proposal activity showed only a slight improvement in the two previous quarters. That suggests activity for these types of facilities will likely cool down, according to PSMJ.

What slowdown?

Not everyone thinks the segment, long a juggernaut among nonresidential construction subtypes, is losing steam. Raul Martynek, CEO of Databank, a Dallas-based provider of data center services, remains confident in robust data center activity. 

“The sector itself has been doing very well over the last five to seven years, and there’s been a noticeable acceleration in the last 24 months,” said Martynek. “We expect the pace of data center development, absorption and hence construction to remain robust over the next couple of years.”

Data center construction activity in U.S. primary markets increased 25% year-over-year to a record-high capacity of 2,288 megawatts in the first half of 2023, according to CBRE. Additionally, pre-leasing activity, which serves as an indicator of demand versus supply balance, sits at an “impressive” 73.1%, said Gordon Dolven, director of Americas data center research at CBRE.

“Leasing in Q3 2023 has continued at a record pace — we have even heard whispers of several 100+ megawatt deals pre-leased by hyperscalers for potential AI workloads,” said Dolven. “This will only further exacerbate this supply-demand imbalance. New supply needs to be built to keep up with the strong demand.”

Demand runway still strong

Even though AI workloads are in their early stages of growth, they are already driving substantial demand for data center capacity, said Dolven. He expects generative AI in North America to increase from $2.19 billion in 2023 to about $19.55 billion in 2028, a compound annual growth rate of 54.8%.

Hyperscalers, technology companies that operate massive data centers, are also aggressively buying land and holding it for future use. Hyperscale data center operators account for about 60% to 70% of new data center absorption, said Martynek.

For example, Microsoft recently announced a plan to invest $1 billion in a data center campus in Rome, Georgia. In Temple, Texas, contractor JE Dunn recently resumed construction on a $800 million Meta data center project after it was redesigned to cater to AI needs.

However, supply chain issues are causing some headaches in data center construction. For example, a lack of critical supply chain components is jeopardizing data center construction timelines, said Martynek. That includes issues with the procurement of generators, uninterruptible power supply systems, electrical switchgear and power distribution units.

“Those items are critical to us being able to fit out a data center, and those supply chains have been stretched as a function of all this demand,” said Martynek. “That would be the only thing that I think is a risk.”

Lengthening build timelines

The average construction timeline for a data center ranged between one to three years from 2015 to 2020, said Dolven. During that period, data center developers and operators benefited from a low cost of capital, streamlined construction processes, supply chain advances and ample power availability.

Today, construction timelines range anywhere from two to six years, largely due to constrained power availability, according to CBRE. For example, if a project requires a new electricity substation or upgraded transmission lines, that could delay delivery timelines by one to four years. Meanwhile, backup diesel generators also can take up to 90 weeks to procure, according to the report.

Still Dolven, like Martynek, expects data center construction to remain strong due to its importance for technology adoption.

“While interest rates and the cost of capital continue to climb, data centers continue to benefit from long-term infrastructure capital sources,” said Dolven. “We are not seeing a slowdown in construction activity and demand from developers continues to climb.”

Dive Brief:

• Meta shared plans Thursday to build a new $800 million data center campus in Jeffersonville, Indiana, according to a release from the Indiana Economic Development Corp. 
• The project falls under a data center sales tax exemption, according to the IEDC. Under the terms of the deal, if Meta invests at least $800 million into the data center, the company will not pay sales tax for 35 years, with further incentives that could extend its sales tax exemption.
• New York City-based Turner Construction will start on the 700,000-square-foot facility this month, according to the contractor. Meta expects the campus to be operational by 2026, according to the IEDC release.

Dive Insight:

The near-$1 billion build follows a series of other massive data center projects — at least some of which have also been sweetened by tax breaks — in the U.S. for Meta Platforms, the Menlo, California-based company formerly known as Facebook. 

Its $800 million data center project in Kansas City, Missouri, for example, qualified to receive up to nearly $1.8 billion in sales and use tax exemptions over the next 15 years, according to the Missouri Department of Economic Development. 

The tech conglomerate also plans to build a $1 billion data center campus in Mesa, Arizona, as well as another $800 million data center site in Temple, Texas.

Exciting news for #Indiana! @Meta is set to invest $800 million in our state, bringing a cutting-edge data center to Jeffersonville. This venture will create jobs for 100 #Hoosiers, marking a significant step towards a future at the forefront of technology. #NextLevelIndiana pic.twitter.com/K7Yha3ilT9

— Governor Eric Holcomb (@GovHolcomb) January 25, 2024

It also marks the latest win for Indiana, which has snared several high-profile projects recently due to the state’s infrastructure resources, labor availability and growing technology and semiconductor sectors.

Billion-dollar advanced manufacturing projects in the state include a $3.5 billion Samsung SDI plant in New Carlisle, a $3.2 billion Stellantis EV plant in Kokomo and a $1.6 billion Eli Lilly facility in Lebanon. In total, Indiana welcomed in 2023 more than $28.7 billion in planned capital investment from businesses committing to locate or grow in the Hoosier State, according to the IEDC.

“River Ridge has been saving this 619-acre site for a mega company, and Meta’s investment and commitment to our community are proof that this strategy is paying off,” said Jeffersonville Mayor Mike Moore, referring to the River Ridge Commerce Center where the data center will be located, in the release. “The economic activity around this new data center will support every sector of our economy.”

The tech giant plans for the campus to achieve LEED Gold certification once operational, according to the release, and be supported by 100% renewable energy.

In addition to the initial 35-year tax incentive, for each additional $800 million Meta invests, it can extend its tax exemption for another five years, up to a total of 50 years, according to the release.