Digital transformation continues at an unprecedented pace, this time driven by huge strides in artificial intelligence. Data centers are an often overlooked yet critical part of this transformation, which comes with challenges and opportunities for investing in data centers as we move toward a world powered by AI. Since AI requires significantly more computing power and electricity than traditional computing, a massive buildout of data center infrastructure worldwide has affected the technology and real estate sectors.

The global data center market reached a significant milestone of $213 billion in 2023, with projections showing a healthy compound annual growth rate of 10.9% through 2030. Several key factors drive this growth, including:

• Artificial intelligence
• Internet of Things (IoT)
• Big Data
• Continued cloud adoption

With over 10,000 data centers around the world and 5,381 in the United States alone, the infrastructure buildout continues at a remarkable pace. Digital Realty, a real estate investment trust focusing on data centers, just announced $521 million in leasing volume for Q3 2024. This is a testament to this explosive growth, shattering previous records and exceeding expectations.

The surge in data center demand is largely due to the increasing popularity of AI, which has significant semiconductor requirements and Big Data applications. These factors fuel the need for ever-growing disk storage capabilities, with no slowdown in sight as organizations increasingly rely on cloud services and AI applications.

These factors have created a perfect storm of demand, pushing data center operators to expand their facilities and upgrade their capabilities at extraordinary rates. It’s happening across all types of data centers, from edge facilities with roughly 1,000 servers to hyperscale operations with up to 600,000 servers.

Companies strategically choose their data center locations based on reliable power access, cost-effective electricity, network connectivity, and proximity to major hubs. The most successful data center markets are in regions that can support intensive infrastructure needs while maintaining competitive operating costs. Some of the biggest data center hubs in the US are:

• Northern Virginia: This region has established itself as the largest data center market in the country, with approximately 300 data centers. Supported primarily by Dominion Energy’s power infrastructure, Northern Virginia benefits from its proximity to federal government agencies and major internet exchange points.
• Silicon Valley: With no need for an introduction, this region maintains its importance as a data center hub with 160 centers. The region’s concentration of tech companies and startups makes it an ideal location for data centers that require low-latency connections to major technology firms. Despite high operating costs, the area’s strategic importance to the tech industry guarantees continued demand for data center capacity.
• New York/New Jersey metro area: The largest metropolitan area in the United States is, perhaps unsurprisingly, a critical data center market with 145 centers. This market’s strength lies in its position as a global financial hub and supporting high-frequency trading operations requiring minimal latency.

The power demands of modern data centers present unique challenges for the industry. Current projections show that US data center power consumption will reach 35GW by 2030, nearly doubling from 2022. Global data center electricity demand ranges from 240-340 TWh, excluding cryptocurrency mining operations, with forecasts showing potential increases of 176-426 TWh by 2029.

The power situation is further complicated by the role of Big Tech companies and data centers as the largest purchasers of clean energy, which has created a new dynamic in the power generation and distribution landscape. Efficiency gains, alternative energy adoption, and the shift toward less energy-intensive industries have helped offset some of these demands. However, the rapidly increasing power requirements of data centers still present a challenge for power infrastructure planning and development.

The quick expansion of data centers has created multiple investment opportunities for savvy investors. These range from direct investment in data center facilities to the companies providing the components and services that make these centers possible.

The digital infrastructure landscape is dominated by specialized real estate investment trusts (REITs) that focus on developing and managing these facilities. These companies must balance power distribution, cooling, security, and connectivity while maintaining high reliability standards. Some of the leading REITs in the market are:

• Digital Realty: This company has established itself as a leading provider of wholesale data center space and hyperscale facilities. It has properties on multiple continents and serves a diverse client base, including cloud providers and enterprise customers. The company’s record-breaking leasing volume demonstrates the strong demand for its facilities and its ability to execute large-scale projects.
• Equinix: This REIT operates as a global interconnection and data center platform specializing in retail colocation and interconnection services. Its extensive network of data centers facilitates direct connections between businesses and their partners, creating valuable digital ecosystems. Its business model emphasizes the value of network effects and ecosystem development, which has been especially attractive to those pursuing digital transformation initiatives.

The data center ecosystem relies on an extensive provider network that supplies critical infrastructure components. These companies are the backbone of the data center industry and provide everything from basic infrastructure to cutting-edge technology solutions. Their success is closely tied to the overall growth of data center capacity. Some of the most critical types of suppliers are:

• Electric supply companies: Form the backbone of data center operations, providing the power data centers need for a smooth operation. Their services range from basic power distribution to sophisticated power management systems that optimize energy efficiency.
• Cooling companies: Becoming increasingly important as data center power density increases. These companies help implement cooling solutions that maintain optimal operating temperatures while minimizing energy consumption. The challenge of cooling high-density AI computer clusters has created new opportunities for tech development in this sector.
• Networking: Deliver the connectivity infrastructure that allows data centers to stay connected. They produce everything from basic networking equipment to routing and switching systems.
• Servers: The computational core of data center operations. These companies produce professional-grade hardware that powers cloud computing, AI processing, and data storage. Their products must balance processing power with energy efficiency while maintaining reliability under 24/7 server operations.
• Chips: Manufacture the processing components that allow modern data centers to run smoothly. They produce traditional CPUs, specialized AI accelerators, and data processing units. The demand for AI-specific processors has created a massive demand for these chips, but the technological challenges in designing and manufacturing them significantly limit their production and scalability.

We’re still in the early stages of a new era in computing infrastructure. The current data center buildout represents just the beginning of what will become the core of our AI-powered future. While we can only imagine some of the possibilities this infrastructure will enable, we’re only scratching the surface of its potential impact. Much like the early days of the internet, we’re building the infrastructure first and figuring out its best uses later. These developments create opportunities across multiple industries and potentially change how we live and work in ways we can’t yet imagine.