Data center demand boosted through AI

The biggest trend in the telecommunications industry—and the business market as a whole—is artificial intelligence. Even though the hype surrounding AI has been steadily building since ChatGPT was released in late 2022, we are currently in the early stages of the AI computing cycle. If similar patterns from past computing cycles hold true, the first wave of monetization generally involves semiconductors; the second, infrastructure; and finally, software and services associated with the new computing tool.

The largest growth from AI so far has been from the companies that manufacture semiconductors and the AI companies developing the large language models. The next wave should see increased growth in infrastructure, mainly through data centers needed to handle the increase in computing power. The ultimate business model will be the software and services that use the AI models to perform specific tasks that drive efficiency, increase automation and increase production.

Data center development

Data center construction has increased steadily over the last 30 years, with high rates of growth during emerging computing cycles. For example, a spike in data center construction from the late 1990s to the early 2000s was related to the internet computing cycle, while another from the mid-2000s to the mid-2010s reflected the advent of smartphone computing. The new AI computing cycle drove up data construction again last year, beginning a trend that could continue for the next five to seven years.

According to the RSM Middle Market AI Survey 2024: U.S. and Canada, 78% of middle market executives polled reported either formally or informally using AI in their business practices. As AI continues to be adopted across all industries, new data centers will need to be operational to service the additional computing power required for AI functions.

Global demand

The United States is home to the highest concentration of data centers in the world, accounting for around 25% of centers globally. Data centers are primarily located in northern Virginia, Phoenix, Dallas, Atlanta, Chicago, Silicon Valley, Los Angeles, and the tristate area of New York, New Jersey and Connecticut. From a mergers and acquisitions perspective, U.S.-based data center companies have seen saturation in the U.S. market and have primarily focused on acquiring new data centers in secondary locations abroad for expansion opportunities.

Emphasizing those trends, U.S. companies accounted for more than half of total data center deals from 2013 through 2020, according to PitchBook. However, U.S.-based deals have dropped to around 40%-45% for 2021 through 2023. Substantial data center growth has occurred in the Asia Pacific region, Europe and Latin America, with the strongest growth in the Asian market. China saw double-digit growth in data centers from 2012 to 2022 and was only recently overtaken by India, which saw an increase of 22% in 2023.

Computing power priorities

A company seeking to leverage the power of AI must decide where to house the computing power necessary to run the models. The options include on-premises IT infrastructure, colocation facilities, cloud computing and edge computing. Most customers of the largest data center operators purchase colocation services, in which they rent the physical infrastructure located at the data center. Colocation is ideal for companies looking to implement AI solutions, as larger host facilities users can handle the more extensive and powerful hardware required to run the large language models.

Some data centers have also recently transitioned from focusing on cryptocurrency mining to hosting AI computing. The bitcoin halving event that took place on April 19 has increased the computing power necessary to mine a bitcoin, leaving some companies questioning whether to utilize their space and hardware for more opportunistic ventures like AI computing.

Data center challenges

Data centers face challenges related to energy costs and sustainability. As capacity needs grow, the International Energy Agency forecasts data center electricity consumption will expand to 6% of total U.S. electricity demand by 2026, a 50% increase from 2022. Therefore, companies are evaluating their energy options, including small modular reactors that utilize nuclear power for a low carbon footprint and consistent output.

Meeting the demand for increased computing power that companies require on a global scale also creates other potential challenges, including dealing with international currency fluctuations, higher interest rates, an increase in cybersecurity risks and evolving regulatory issues.

The takeaway

The demand for data centers and computing power will increase as more companies and industries adopt AI solutions. Market insight provider Research and Markets expects the global market for data center construction to grow from $229 billion in 2023 to $371.7 billion in 2030, a compound annual growth rate of 7.2%. To keep up with demand, data center companies will scale with internal development and acquisitions that allow for expansion into new markets and the overall increase of data centers worldwide.