By Sebastien Tillett | Economist | Oxford Economics
Originally published by Oxford Economics
The demand for data centers in the United States is rapidly increasing, driven primarily by the continued rise of cloud computing and the emergence of artificial intelligence (AI). As businesses and consumers generate more data than ever and AI requires greater computational power to train more advanced models, companies are investing heavily in building the infrastructure needed to store, process and deliver this capability.
By understanding the growth trajectory of this subsector we can better assess the impact that emerging technologies like Generative AI will have on industries and the broader U.S. economy. Since July 2024, the U.S. Census Bureau has published data center construction spending and the early results align with our analysis of the sub-sector globally. To support this, we now include a forecast for data centers as part of our U.S. Construction Service.
Understanding Data Center Growth
One of the primary drivers of the surge in data center construction is the massive increase in data consumption. Cloud computing has become an essential service for businesses of all sizes, allowing them to scale their operations quickly and efficiently. The growing reliance on remote work and digital collaboration tools has accelerated the demand for cloud services. This, in turn, requires more data centers to manage the storage and processing needs of companies across industries.
To illustrate just how large this change has been, we can look at the shifting share of overall office construction spending since 2014. Figure 1 highlights how data center construction has risen considerably over the previous decade against a backdrop of falling office spending. This becomes even more pronounced after the COVID-19 pandemic when U.S. office real estate has taken a large hit. In 2014, data centers only accounted for roughly 5% of spending whereas now they represent almost a third (32%). We believe data center construction will continue to eat into the total share of office construction, approaching 40% by 2028.
Figure 1. Put in place construction of general office building and data centers
AI and machine learning is also playing a critical role. According to U.S. census survey data, 7% of firms across all industries plan to use AI in the production of goods and services in the next six months (Figure 2). This is borne out by the construction statistics since Q1 2021, a year before ChatGPT was released, that show construction spending on data centers was more than 250% higher while office spending was down by around 15%. Data center providers are attempting to catch up on demand and this trend is likely to continue, considering the resource heavy method of training models currently in use, as well as the need to process more and more queries.
Figure 2. AI use expected in producing goods or services in the next six months across U.S. industries
Challenges in the Sector
One of the biggest concerns to data center growth is energy consumption. Data centers require massive amounts of electricity to operate, and as more facilities are built, concerns over their environmental impact are growing. Global IT power capacity of data centers is estimated to be around 32 gigawatts as of 2023, equivalent to around 1% of the global electricity supply (Figure 3). The downside risk to construction spending is that governments cut back on planning permissions for these projects to bolster their environmental credibility, thus slowing down spending.
Figure 3. Global data center IT power (GW)
Nevertheless, power generation and transmission need to keep in lockstep with the sector energy demands to enable continued growth. Given the strategic importance of this sector and pressure from companies with the largest stock caps in the U.S., it is unlikely that growth will be stunted in the short term and longer-term opportunities beckon.
As digital transformation accelerates, the demand for data centers in the U.S. will continue to grow. These facilities will play a crucial role in powering the next generation of digital services and innovations, ensuring that the U.S. remains at the forefront of economic growth.
About the Author
Sebastien Tillett joined Oxford Economics in 2023 as a graduate working across freight and transport advisory consulting. His main area of experience is in providing data analysis on projects within the maritime/trade and transport industries. Prior to working at Oxford Economics, Tillett had technology roles at AMP and Macquarie Bank before completing a Master of Economics.
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