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The costs of key components used in data centers are expected to rise further as global supply constraints persist, says a report by Moody's.
The report also highlighted that companies involved in the data center value chain are either adjusting their current operations or investing in new production capacity to meet the soaring demand. However, until this additional capacity is integrated into the supply chain, the ongoing high demand will continue to drive up prices. It said "Costs for key components will continue to rise as supplies remain tight Companies within the data center value chain are either adjusting their operations or investing in new production capacity and products to meet high demand". The report added that the key components such as mechanical cooling systems, electrical equipment, semiconductors, and computing devices are seeing a significant increase in costs. The situation is prompting developers and landlords to pass these rising costs onto tenants through higher lease rates. With vacancy rates in most markets at historic lows, these increased costs are being absorbed by tenants, pushing up operational expenses. Moody's also noted that the demand for data centers is expected to intensify in 2025 driven by the rapid growth of artificial intelligence (AI), cloud computing, and data storage services. The report stated that the new colocation data centers are being developed to cater to small and medium-sized tenants who typically pay higher lease rates on a per kilowatt per month basis. While some markets may briefly experience a slight rise in vacancy rates as this new colocation capacity becomes available, supply constraints will likely keep vacancy rates low in the long term. To meet this surging demand, developers are taking on more debt to construct and upgrade data centers. Hyperscalers such as Microsoft, AWS, Google, Meta, and Oracle are rapidly expanding their infrastructure across the globe, including in newer and smaller markets. This growth requires significant capital, often funded by equity, bank loans, and corporate or securitized debt. As developers engage in accelerated construction cycles, their financial leverage is expected to remain elevated in the short term. Revenue generated from these data centers will help offset the costs, but only once the facilities are operational and accessible to tenants. This delay in revenue generation is expected to temporarily weaken financial metrics, which are likely to stabilize over time. The rising costs of data center equipment and semiconductors underscore the ongoing challenges faced by the industry in meeting escalating demand. Until supply issues are resolved, companies and tenants alike will continue to feel the impact of these higher costs. (ANI)
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