The Data Center Dilemma

They are popping up in enormous numbers, and yet attracting very little attention outside of Wall Street. Indeed, over the next five years, analysts project about 20,000 data centers will be constructed globally to help power the AI revolution. But will all of them be needed?

It's a question more and more investors are asking as big tech companies, private equity firms, government agencies, and others race to secure new development deals. Last week, one prominent tech investor warned at an AI conference that the tens of billions of dollars being spent to construct new data centers is becoming “irrational” and “will not necessarily persist.” Recent media stories, including in The New York Times and Korn Ferry’s Briefings magazine, have cited other industry experts sounding the alarm about a data center building bubble. “Savvy leaders and investors are starting to anticipate a possible correction,” says Tim Walton, head of Korn Ferry’s Digital Infrastructure Executive Search practice in Europe, the Middle East, and Asia.

According to the Boston Consulting Group, spending on data centers will reach $1.8 trillion by 2030. Over that time span, revenue from them is expected to nearly double, to $406 billion from $213 billion today. At the same time, building a large-scale data center can cost anywhere from $250 million to more than $3 billion. Some big tech and private equity firms are spending upwards of $10 billion to build huge data campuses.

To be sure, the power demand for artificial intelligence is soaring, with demand for data centers so far still far outstripping supply. But Walton says the investment calculus is changing. Access to power and water, along with regulatory changes, tariffs, supply-chain disruption, and other factors are driving up costs. “CEOs are raising the bar internally on performance,” says Walton. He says the uncertainty and volatility in the global economy is prompting leaders to focus more on profitability and margin discipline.

Scott Atkinson, a senior client partner in the Global Technology practice at Korn Ferry, says having a strong finance team is critical to avoiding unsustainable investments based on speculative trends. Put another way, firms can no longer take a “if you build it, they will come” approach to data centers. To be sure, many firms are adopting a co-location approach where they are locking in clients before the facility is constructed to offset costs and mitigate risk. CFOs are also developing contingency plans for ongoing construction to deal with fluctuating energy prices or geopolitical uncertainties that may arise because of tariffs or a potential trade war. “Robust risk management can reduce the volatility associated with a bubble and ensure the viability of projects,” says Atkinson.

Walton says talk of a data-center bubble reflects an awareness on the part of leaders and investors that some skepticism is healthy. He says firms are being more careful about securing energy commitments, filling capacity, and other ways to commercialize data centers to build value and generate revenue before breaking ground. “No one yet has enough data or experience to fully understand the risk of partnering with or hosting companies in the AI ecosystem,” says Walton. “A major collapse may be possible for some operators if they fail to fill capacity at viable margins.”

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