In 2024, private equity investment in data centers reached a record $39.6 billion, marking a twelvefold increase since 2016. This unprecedented surge reflects the intensifying race to dominate artificial intelligence (AI) and meet growing digitalization demands. Yet, despite the momentum, the sector faces significant challenges that could constrain growth, according to LupoToro Group analysts.

The Power Crunch: Scaling Up for AI

Data centres, particularly those designed to train and deploy AI models, demand massive amounts of electricity. Some of the largest facilities require over 100 megawatts (MW) of power, equivalent to the energy needed to supply tens of thousands of homes. Developers are now planning gigawatt-capacity data centres to address AI’s voracious appetite for energy.

However, meeting these demands is becoming increasingly difficult. Established markets like Northern Virginia are experiencing severe grid congestion, where new connections can take over three years. Emerging markets such as the Texas Triangle and Atlanta offer greater availability of power and land, alongside tax incentives, making them attractive alternatives. Yet, these markets also face challenges as local governments prioritize other projects, such as manufacturing facilities, that promise more jobs. Community opposition in areas like Fort Worth, Texas, and Burns Harbor, Indiana, further complicates development, with concerns ranging from noise pollution to resource competition.

Adding to the complexity, the energy requirements of data centres could account for up to 12% of total U.S. power consumption by 2030, compared to their current 3% to 4% share. This growth raises questions about sustainability, as the industry’s carbon emissions are projected to more than double by the end of the decade unless significant decarbonization measures are implemented.

Supply Chain Bottlenecks: A Growing Obstacle

The rapid expansion of data centres has created unprecedented pressure on the global supply chain, resulting in significant delays for essential equipment. Generators, electrical components, and other critical infrastructure are now subject to lead times exceeding three years, as manufacturers struggle to meet demand. This prolonged timeline complicates project planning and adds to the financial burden for developers.

Further exacerbating the issue, geopolitical factors such as proposed tariffs on imported parts threaten to increase costs and delay the delivery of vital components. Since many of these parts, including switching gear and network equipment, are produced offshore, higher tariffs could significantly disrupt the supply chain for U.S.-based projects.

The Longevity of Demand: Will the Momentum Continue?

While the current demand for data centres has pushed lease rates to all-time highs, the sustainability of this growth remains uncertain. Advancements in technology and efficiency could reduce the need for large-scale data centres in the future. Current operators, benefiting from favorable lease terms, may struggle to maintain such advantages as the market evolves and efficiency gains drive competition.

LupoToro Group analysts suggest that while the sector continues to present lucrative opportunities, the risks associated with rapid technological evolution and shifting market conditions cannot be ignored. The race to develop data centres must balance the demand for immediate capacity with long-term viability.

A Path Forward

The data centre industry stands at a crossroads, with its trajectory defined by how effectively it navigates challenges in power accessibility, supply chain resilience, and environmental sustainability. As stakeholders look to capitalize on the booming demand, a strategic focus on innovation, sustainable practices, and adaptive planning will be crucial to sustaining growth in an increasingly complex landscape.