Data centers are enjoying a lot of attention lately. Usage is at record highs and it will only continue to rise for the foreseeable future. New projects are being built at a record pace, and that is still not enough to cover all of the demand.
Still, all of this attention should be great, right? It means a lot of investments, demand for capacity, busy data center operators and a lot of clients. There’s another side to these glory days. And it’s not so bright. The heightened demand is bringing a lot of additional challenges to the data center industry which are increasing the costs. And these costs in turn threaten the boom of AI which is among the key drivers of the industry at the moment. A lot of the new projects are being made exactly to accommodate the demand for AI computing resources. If that slows down, it can threaten the cycle and could cut the AI boom short, before it reaches its maximum potential.
These are among the conclusions we can see from Turner & Townsend’s latest data center report. It cover a cross-market view of the data center costs and the trends related to them. The report also features an analysis of the price rises, demand, new market opportunities and more.
Data center prices continue to rise
The report notes, that tender prices for data center construction projects will continue to rise in the coming years. And that raise will be at a constant rate. “58 percent of respondents to our survey reported rises of 5 to 15 percent over the past 12 months, with a further 21 percent reporting more than a 15 percent increase. The majority expect tender prices to continue rising at the 5 to 15 percent rate over the next 12 months, but about a third of respondents anticipate rises might slow to around a 5 percent increase”, says the report.
Globally, the average year-on-year increase is 9% for 2024. It was 6% for 2023. The 2024 index analyzes the average cost per watt to build in the 50 key data center locations around the world.
Tokyo is noted as the most expensive data center market in the world. The cost there is $14.30 per watt. Second, it’s the Republic of Singapore with $13.80 per watt. Third is Zurich with $13.30 per watt. Fourth we have the Silicon Valley with $12.80 per watt. And in fifth place is New Jersey with $12.40 per watt.
On the other side of the chart, the cheapest location currently is Shanghai with just $6 per watt. Next it’s Mumbai with $6.60 per watt, followed by Bogota with $7.10 per watt. The fourth cheapest place is Athens with $7.30 per watt and fifth is Santiago with $8.30 per watt.
In general, the chart doesn’t offer big surprises. The most popular data center markets are also among the most expensive. But there are some potential opportunities forming, as well. For example, there are locations close to top markets which are cheaper. Athens is one of them, but also Warsaw where the cost is $8.50 per watt. Madrid and Milan are also relatively cheap compared to the main ones – $9.20 and $9.30 per watt respectively.
This shows, there are possibilities to add cheaper capacity close to prime locations. The analysts also note there’s going to be a lot of changes to the market soon: “It is worth noting that widespread design and cost analysis is currently underway on many data centre programmes to implement liquid cooling technologies for increased densities. These design changes and subsequent costs are not included within this year’s publication, which represents completed or live builds over the past 12 months. They will likely impact the 2025 results and beyond.”
Yet the demand is still higher than the supply
The report notes another thing that’s not much of a surprise. The fact that global demand is still higher than the supply and higher than the ability of the industry to deliver on that demand. This is one of the main reasons for the rise in prices, especially in markets where there’s limited labor and contractors.
“Singapore, for example, has risen from 5th place in 2023 to 2nd this year, driven by the continued supply-demand imbalance. Singapore remains the most power-constrained market for data centres, with low capacity and vacancy rates. Many markets, such as Auckland, Vienna, São Paulo, Singapore, Querétaro and Cape Town have seen cost inflation on data centre projects above 20 percent – driven by low supply chain capacity”, notes the report.
There’s challenges in Europe, too. And they are starting to reflect on the direction of flow of investments. As noted above, some are now refocusing toward cheaper markets in close proximity to the hotbeds: “Rising markets in the index reflect increased demand outside traditional markets that are becoming saturated. This is particularly true in Europe, where the trend for investment outside the traditional ‘FLAPD’ markets continues. Vienna, for example, is now in joint 14th place in the cost index with Jakarta”, says the report.
Looking for new markets
The trend to look for new data center markets is becoming more and more important. 92% of respondents say power availability is more important than the location, when they consider an investment. Energy consumption and efficiency are top concerns for 68.4% of respondents.
This changes the ways new markets are being picked. Of course, other factors are also very important. “While some of these markets have been popular for some time such as Helsinki, others such as Bordeaux reflect emerging hotspots for investment and construction activity, particularly over the past 12-24 months.Several of these locations enter the index with higher comparative costs than might be expected in general construction. This is largely due to limited existing supply chain capability and experience, needing more upfront investment and import of materials and skills. As these markets mature, costs are likely to stabilise and drop in index position”, says the report.
As an example of this it gives Lagos, Nigeria. It’s a new market to the index, but in general it has seen a steady increase in investment over the past three years. The build costs have even reduced a bit, but they are still quite high due to the location and currency conversions. Also, a lot of the equipment has to be imported and there are high import duties. And local materials often aren’t up to par with the requirements, thus driving the costs further up.
“The data centre pipeline in the Nordics remains strong, where the climate and access to cost competitive renewable energy counteract challenges relating to cooling and net zero. However, getting talent to these locations continues to be a major challenge, with high dependency on an international supply chain.As the second-largest metropolitan market in the Nordics, Helsinki is attracting more interest in the European data centre landscape, with investments by both domestic and foreign investors, and new hyperscale market entrants. Google, for example, acquires wind power in Finland under long-term contracts and recently announced it will invest a further one billion euros (US$1.1bn) into the expansion of its data centre campus in Helsinki to drive its AI business growth in Europe”, it adds.
Be careful when entering new markets
“It is vital to consider how to mitigate the risks of a location with less experience and maturity in data centre delivery. Regions with existing advanced manufacturing or life sciences clusters may be easier to expand into, where the skills and supply chains from these sectors may be more easily transferred to data centre work”, says the report.
The analysts say the data center industry has some benefits that it should take advantage of. One of them if the fact that there’s a big, mobile talent base which is able and willing to travel. So, it’s possible to import the needed specialists into a new market, while it’s being developed and to help it grow properly. “Many data centre developers choose to establish a central Programme Management Office (PMO) to bring in global expertise while also curating and building local skillsets on the ground for the long term”, says the report.
Despite that, the industry needs help. It needs the collaboration from the local institutions and governments in order to address all of the challenges. “Data centers are increasingly seen by governments as critical national infrastructure, and there is clearly a huge opportunity for clients – but growing challenges, not least power supply, and labor shortages, need to be managed”, Lisa Duignan, data centers sector lead at Turner & Townsend says to DataCenterDyniamics.
And even well established markets are also working to keep their attraction for investors and new projects. As such, the US Department of Energy (DOE) recently opened the applications for $900 million in funding to support a domestic deployment of small modular reactor (SMR) technologies.
“Next-generation nuclear energy will play an important role in building the clean power sector of the future,” said John Podesta, senior advisor to the president on international climate policy.
The funding will split into two tiers. The first one is for first-mover team support. It will provide up to $800 million for milestone-based awards. “Tier one must include a US utility, reactor technology vendor, engineering, procurement, and construction company, with the utility, end-user/off-taker, development company, or incorporated consortium as the lead applicant”, DataCenterDynamics notes.
The second tier is up to $100 million and it’s aimed on deployment support. Its goal is to “spur additional Gen III+ SMR deployments by addressing critical gaps that have hindered the domestic nuclear industry in design, licensing, supplier development, and site preparation”. Applications are due to January 17th, 2025.