Mark Bonner: 00:10

Okay. Welcome to First Draft Live. It's Friday, July 25. I'm your host, Mark Bonner, BizNell's editor in chief, I'm coming to you live from New York. Thank you.

Mark Bonner: 00:21

Thank you to so many of you tuning in from across The US and around the world. On today's episode, can the grid keep up or is the data center surge about to break? AI demand has supercharged leasing and rents, but the infrastructure cannot keep pace and the cracks are starting to show. Transformers are backlogged, transmission lines are stuck in permitting, and in some markets, developers are waiting up to five years, five years, Dan, just to plug in. Now PJM, the country's grid operator, country's largest grid operator, is under political fire.

Mark Bonner: 00:57

And from Phoenix to Northern Virginia, fully funded sites are frozen, tangled in delays, politics and grid dysfunction. Our guest today, my colleague, Dan Rab, Bisnow's national data center reporter. Dan's been talking to developers, power providers, and hyperscale tenants for years. And today he's here to help us make sense of the cracks forming an industry's hottest hottest asset class. We'll also get into the capital stack and why data center CRE is starting to look more like infrastructure finance, very annoying, very interesting development in the last couple of weeks.

Mark Bonner: 01:35

Also to the audience, we're taking questions from you today, AMA style. Send them into the chat now and my producers will get this to me as soon as possible. Dan, welcome to the show. I know you're calling from Boston.

Dan Rabb: 01:49

Yeah. Thanks for having me on and for the kind introduction. Happy Friday and excited to be chatting about data centers with you.

Mark Bonner: 01:56

Okay, let's jump on in. Nearly 80% of U. S. Data center demand is concentrated in just six markets, and all of them are power constrained as per your reporting. In PJM, home to Northern Virginia and Ohio, average interconnection wait times now exceed five years.

Mark Bonner: 02:14

Lead times for key components like transformers and switch gears are eighteen to thirty six months. And what's going on here? What's the latest?

Dan Rabb: 02:25

Well, you know, overall in the data center industry, you know, power is the long pole in the tent when it comes to development, the scarcity of power, you might say. It's the biggest challenge that developers are solving for right now, among many, right? It's not we hear about these waves of demand, you know, and the growth of the industry, but it, you know, there's labor constraints, severe labor constraints that have slowed growth. There's supply chain constraints. You were mentioning, you know, wait times for transformers.

Dan Rabb: 02:55

It really is, though, power that is kind of superseding all those things. And just to give you a sense of it, and I don't wanna oversimplify things here, but an easy way to think about it is if you turn back the clock just five years, seven years, you know, a data center that had a a few dozen megawatts of capacity, you know, 30 megawatts, that was considered a pretty big data center project. Today, we're looking at projects that are a few 100 megawatts being announced regularly. And so say you're trying to build, it's five to seven years ago, you wanna build a 50 megawatt data center in Northern Virginia, the world's largest data center market.

Mark Bonner: 03:40

Loudoun County.

Dan Rabb: 03:40

Yeah, Loudoun County. Five to seven years ago, you get some land near transmission lines, you get in touch with the utility, they give you a letter saying you'll have power by a certain time. And we're talking probably months, not years, right? And the amount of time varies depending whether they need to build a substation, things like that. But you could count on, know, they said they'll have power to you by a certain date.

Dan Rabb: 04:09

There's no mystery there. You're gonna get power by that date. Fast forward to today, that situation looks really, really different. You know, there's more data centers being built, and the scale of those projects is just way, way bigger. You know?

Dan Rabb: 04:23

Campuses with multiple data centers that have fifty, sixty, 70 megawatts each, you know, it's sort of wild to see how it's gone from, you know, there's megawatt scale campuses being built right now. Know, that was something that we wrote an article two years ago saying, are we ever gonna see a gigawatt data center campus? And now, you know, that's at least planning for those is the new normal. So now, if you wanna build say a 500 megawatt data center in Northern Virginia and any of the traditional hotspots, you go to the utility, you say you need 500 megawatts, it's a lot different situation than it was five to seven years ago. First of all, you're one of 50 developers who's asking for that same sort of thing.

Dan Rabb: 05:08

And the utility, who's legally obligated to fulfill those requests is looking at this queue of gigawatts of power that people are asking for. It's way, way more than they can possibly fill, right? It's overwhelmed what the grid infrastructure can carry. A transmission line can only carry so much power. Right?

Dan Rabb: 05:28

A power plant can only produce so much power. So now it's not just them building like a substation for you and running a little transmission line to redeveloping an entire transmission corridor, know, or it's building new power plants. These are things that take, you know, years to do, take billions of dollars to do. So they may, and so now they're saying, well, it's not six months, it's seven years to get power, but also that seven year timeline is really kind of an estimate, right? You can't really count on that.

Dan Rabb: 06:04

So the hyperscalers who are driving all this demand, you know, the big tech companies, the Googles, Microsofts, you know, data center procurement teams who are driving demand here, they have desks full of people saying, hey, we're gonna have, you know, 300 megawatts for you at this site in this market by this date, but they don't really trust any of that. And so basically the winners here are going to be the companies that can reliably get power quickly for these

Mark Bonner: 06:35

ideas,

Dan Rabb: 06:36

if that makes sense.

Mark Bonner: 06:36

And this situation has gotten so dire in recent months that it's become political. And now there's real questions nationally about who's actually in charge of the grid in The United States. PJM interconnection, which serves about 65,000,000 people give or take, is under political fire. Nine governors signed a letter this month accusing PJM of dysfunction and threatening to leave. Meanwhile, FERC, that's the federal regulator in charge of transmission, is also in leadership transmission, which is throwing a little bit more chaos into this conversation.

Mark Bonner: 07:07

Yet PJM at this moment controls nearly 30% of US data center development. Dan, I know you've dug into this tension. Does anyone actually have the power, no pun intended, to speed things up?

Dan Rabb: 07:21

Yeah. You know, it's it's a good question and a and a timely one. I mean, I guess the where I'd start with this is just the way that our power grid and electric transmission infrastructure is structured in The US is just incredibly labyrinthian and balkanized and multilayered in a way that makes any sort broad scale reform very difficult. And just to kind of outline it, you you mentioned PJM. PJM is one of seven kind of regional, they're called RTOs or ISOs, but they're these regional transmission organizations that basically run the grid in sections of the country, separate grids.

Dan Rabb: 08:05

And within these organizations are the utilities who actually sell power to customers. And let's take PJM as an example. PJM has 1,200 member utilities. Right? So over a thousand member utilities underneath it who all have their own operations and ways of doing things and interactions with customers.

Dan Rabb: 08:27

You also have each state within, you know, has their own utility commissions and their own laws that regulate power transmission. So that's another sort of actor and complicating factor within that. And then on top of that, you have sort of the federal regulatory bodies like the Federal Energy Regulatory Commission, FERC, who sort of oversee all these transmission organizations. So you think about all these different bodies with their own agendas and their own, who all kind of are a different piece of the puzzle, you know? And the amount of stakeholders you have to get on board with any kind of change is really significant.

Dan Rabb: 09:08

And so it's just not a system that's particularly well suited to making the widespread changes that a lot of people I talk to say are needed right now if we're going to, you know, if the demand from data centers is going to be fulfilled, if that makes sense.

Mark Bonner: 09:29

Right. And like in this broadly in commercial real estate, you know, the housing crisis here is a great example of this. There's a whole lot of energy around interest rates is another conversation about this where it's like things that the industry says it needs yesterday but then can't come to pass for years ahead. Housing crisis can't be solved in the next ten years. It's going to take a long time.

Mark Bonner: 09:48

Interest rates were still wait and see mode. We'll see what happens with Powell next week. And then this is another one where even in my own sources that I talked to here in New York at our last data center event, the conversation isn't about can I get the capital to build a data center? The question is, how am I going to get the power to power the data center once I build it? Building it is one thing, powering it is another.

Mark Bonner: 10:13

So I guess along those lines, Dan, in your opinion, just based on your reporting, what is the best case scenario for a reform timeline as we're looking at The U. S. Grid?

Dan Rabb: 10:23

Yeah, no, it's a good question. And, you know, it's I think there's disagreement about what we're talking about when we talk about, you know, reforms and the changes that are needed. You know, there's this the transmission organizations like PJM and utilities are dealing with a pretty difficult situation. Right? These are power demand in The United States was pretty much stagnant for decades.

Dan Rabb: 10:51

These are not organizations that are used to existing in an environment in which there's this surge of growth that they need to somehow fulfill. They're also dealing with this surge in demand while there is a transition towards renewable energy. Right? Most of the projects that are in what they call the interconnection queue, which is sort of the line waiting to be connected to the grid, you know, are solar largely solar, also wind battery projects, things like that as well. And those behave very differently from, you know, fossil fuel sources, like natural gas coal, that kind of thing.

Dan Rabb: 11:35

And so it's been a huge challenge for them to sort of figure out how to ensure reliability of the grid, ensure that costs stay down, and that was even kind of before you added the surge of demand into the picture. So there is a lot of disagreement though, between, you know, say the Trump administration, data center developers, activists or advocates for clean energy about, you know, not just what reforms are needed, but like what the end goals of those reforms are. Are we just trying to meet demand for data centers? Even if that means, you know, saying, okay, all you solar projects, you wait to the side for years. We're just gonna hook a lot of natural gas.

Dan Rabb: 12:21

You know, what are the end goals there? And so there's disagreement even at that level. So, you know, I'm not hearing a lot from folks talking about specific timelines yet. It's almost just trying to get the ball rolling, if that makes sense.

Mark Bonner: 12:33

Makes perfect sense. And you brought up Donald Trump. Let's talk about it. Earlier this week, Donald Trump unveiled his AI action plan. It explicitly encourages self powered campuses.

Mark Bonner: 12:43

Meta is investing in on-site natural gas generation in Ohio and Louisiana. Amazon is exploring modular microgrids. The logic is if utilities can't deliver, then the industry needs to build their own. As you know, more than six gigawatts of privately operated generation is already planned or under construction throughout the country and that number would triple by 2027. Dan, in your reporting on this this week, what are your sources telling you about whether or not this workaround could actually become the new normal?

Dan Rabb: 13:19

It's a good question. And, you know, it's definitely something we're seeing more of, right? Data centers, really data center campuses being built either with some form of power generation, almost always natural gas, you know, either on the campus or contracted directly with a, you know, energy developer as opposed to going through the grid, turns behind the meter in a in the industry jargon. And and we're definitely seeing more of that. Right?

Dan Rabb: 13:51

It's something you really saw none of, you know, a a year or two ago, and now a lot of, there's a lot of projects being pursued with that sort of thing. As far as whether it becomes the new normal is a different question. It's really easy to see the appeal of it, right? You can't get grid energy, why not just produce our own? A couple of things stand in the way of really widespread adoption.

Dan Rabb: 14:20

And just to name a couple of them, first of all, the large tech companies who are by far the largest data center users are the, they're the tenants who people are trying to bring on or get powered land so that they will build on that land. They still view utility power as like the gold standard, right? For cost reasons, really for reliability reasons, they will at least having heard from a couple of sources at companies like Microsoft, they'll wait a little longer for a project that will give them power from the grid as opposed to getting power from maybe on-site generation or behind the meter natural gas, even if that's a little bit faster. Again, reliability and cost being big reasons there. It's also, while it's easy to think about it as sort of a workaround, these projects also face their own sort of unique constraints.

Dan Rabb: 15:19

So just as power transmission infrastructure is constrained, right, so too is natural gas infrastructure, right? Like these, it's not a limitless supply of natural gas flowing through a gas pipeline. So the ability of a particular data center site to have as much gas as it needs to fuel itself, but, you know, to produce that power all the time is not always so clear. And it's not clear that will be a limiting factor in how many of these projects get built out. And then the final thing I'd say is a lot of these projects require or basically ask the data center firm to have expertise in an area where they're really experts.

Dan Rabb: 16:03

Know, these are companies that have, you know, not historically done their own, you know, on-site generation or even understood sort of some of the underlying issues. It's a very steep learning curve. And I think a lot of companies are just for good reason, uncomfortable sort of, going outside of their, well, outside of their comfort zone, so to speak.

Mark Bonner: 16:27

If you're just tuning in, we're talking with Dan Rabb, Business National Data Center reporter, about how the AI Gold Rush colliding with a very analog problem. The grid can't keep up. Dan, let's go to some questions from the audience. Microsoft has committed to hellion for power from the first power positive fusion generator. What does the rest of the industry think about this tech?

Mark Bonner: 16:50

What are your sources telling you?

Dan Rabb: 16:52

You know, it's interesting. So fusion, and I will admit, I'm not overwhelmingly familiar with the specific deal that you're talking about, but I will say fusion in general, I think it's viewed I'm gonna quote somebody from one of our BizNow data center conferences where they said fusion is the technology of the future and it always will be. That is just one perspective I've heard, but just basically what I the sense I get is that there are power issues right now, today that need to be dealt with. And so there are solutions that are out there maybe years in the future that there's a lot of intrigue around and interest in. But the focus is really on things that can have an answer in the next year, two years, three years.

Dan Rabb: 17:44

And, you know, I'll extend that out to, you know, we're talking about nuclear, you know, small nuclear reactors, right? There's a ton of buzz around what they call SMRs in the data center sector. These are, you know, a fraction of the size of a think more of like the nuclear reactors that power an aircraft carrier than, you know, your 3 Mile Island style nuclear power plant. And there's a bunch of companies trying to bring these SMRs to market. It's the technology isn't there.

Dan Rabb: 18:21

It's making it, it's bringing it to a price point where you can make it marketable and where it can be competitive. So that is something that I've talked about a lot, but in the best case scenario, what I hear is that, you know, it's five years out before the first of these SMRs are deployed and, you know, the ability to scale it up, you know, to use it in a more widespread way is, you know, ten years out minimum. So, you know, again, a lot of attention paid to these things, but think it's sort of being pushed to the back of people's minds because there's such an immediate need to address these power concerns.

Mark Bonner: 19:02

Right. And that's just another cost concern. And that's another timeline that's way out into the future where there seems to be this mad dash to getting things done now, but at every level of the government and in every level of finance, right? Case in point, tariffs. The US now has an average effective tariff of 15.5%, construction materials, servers, power infrastructure, they're all affected.

Mark Bonner: 19:27

Developers report a 1,000,000 to 1,200,000.0 cost increase per megawatt just from Trump's trade policy. Meanwhile, supply chain volatility continues, lead times are rough, and tariffs on Chinese steel and electrical gear remain in flux. How does that factor into the equation when we're talking about this other issue with power? And then now you layer on economic policy out of the White House on top of it.

Dan Rabb: 19:54

Yeah, it's interesting. In some ways, the power constraints end up being almost a saving grace because if that's your long pole in the tent, then, you know, if the supply chain constraints can, you know, they're not pushing project deadlines back just because there's this other factor that is pushing the project deadline back so much. But that said, you know, almost universally, you know, what I've heard from folks in the industry is that, you know, the tariff situation does create a meaningful impact and is making an already difficult supply chain situation a little more difficult to navigate. You know, most folks recall, you know, during the pandemic, global supply chains got scrambled quite a bit. For a variety of reasons, the data center sector has never really come out of that, right?

Dan Rabb: 20:50

You're still, for crucial items, transformers, things like that, down to basic building materials, You know, lead times of, you know, a year or more approaching two years, it shifts pretty rapidly, but you're still looking at two years for a generator and a transformer and things like that. And, and this, and the tariff situation has, you know, people were already pursuing really creative solutions to try to make sure that, you know, when you get power and it's go time, let's build that you actually have everything you need on-site to get the project done. And certainly tariffs have made that more difficult. You know, it has, I do hear from some folks that there has been the intended impact of the tariffs and a lot of companies looking to onshore some degree of manufacturing if possible. You know, obviously the amount of, it takes a long time to do that sort of thing, but it is something that a lot of

Mark Bonner: 21:52

I supply chain are looking mean, there seems to be a lot of shifting dynamics here, right? The Trump administration wants the near shore, onshore things into The United States, right? But then we have this tariff situation. We have these costs that are going up. It might actually be cheaper to do these things overseas.

Mark Bonner: 22:06

Does a data center have to be in The United States? Could it be in Asia? Could it be in Europe? Could it be in South America? The Trump administration made a strategic decision to allow Nvidia to sell its ships to Asia, China directly.

Mark Bonner: 22:19

Right? Are you hearing from your sources that maybe site selection is going to shift more aggressively overseas, or is this just more negotiation pain via the White House?

Dan Rabb: 22:32

So the answer is yes, but it's important not to overstate the case. Just by way of background here, a lot of data center site selection has to do with the particular computing workload that is going to be housed inside that data center. Like it's the reason why data centers tend to be clustered together in certain markets. Right? The term is latency.

Dan Rabb: 22:55

You know, the amount of time it takes data to flow from the data center to where the end user is and back again. You know, so it's unlikely, for example, that a data center that is being planned for Northern Virginia, which tend to be the most latency sensitive, it's there for a reason. You know, that's not just gonna, they're not gonna say, oh, it's too expensive to build here. Let's build this in Japan, right? Or South America.

Dan Rabb: 23:24

But that said, there are use cases that are more location agnostic, you know, particularly with AI, you know, certain AI workloads are less latency sensitive. And you can extend that out to, you know, some cloud providers, you know, today have data centers on the East Coast and on the West Coast that serve, you know, some markets for certain types of computing, you know, in Asia Pacific or in Europe for certain things. And so around the margins there with both of those cases, you know, you could see situations where, look, today The United States is by far kind of the cheapest and easiest place to build data centers. If that changes, which maybe tariffs do change that, Yeah, these use cases around the edges could shift, but it's around the edges. Like I said, you're not going to see things that were meant for these core markets suddenly going elsewhere.

Dan Rabb: 24:30

But AI, some of that for sure, possibly.

Mark Bonner: 24:34

Let's get another question from the audience. Dan, it was announced this week that there would be support on the federal level for developing data centers of 100 megawatts or larger on federal land. Given the recent pushback in local communities to scale down the size of data center projects in their respective areas, do you see a bottleneck forming in the push to develop on federal land?

Dan Rabb: 24:57

It's a really interesting question. And yeah, there was a, there was a just to give a little background here. So there was an executive order signed by president Trump on Wednesday that, among other things, it encourages data center development and development of energy infrastructure for data centers on federal land. It should be noted this continues a policy of the Biden administration. President Biden also signed an executive order doing that exact same thing.

Dan Rabb: 25:29

There are some differences between the two surrounding labor and hiring practices and a few other things and focus on renewable energy and things like that. But the idea of building on federal land is something that is has had bipartisan support behind it.

Mark Bonner: 25:46

Dan, when we talk about federal land, what kind of land is this? I mean, this isn't like national parks, is it? I mean, what are we talking about here?

Dan Rabb: 25:53

No, know, it's particularly in the Western U. S, there's a huge amount of federal land, you know, Bureau of Land Management. And I don't wanna get too far out over my skis when, you know, in terms of what I know about the specific types of, parcels they'd be looking. I know some of the specific policy documents from both administrations had talked a bit about sites near or adjacent to national laboratories, Idaho National Laboratory, things like that. But as far as specific sites on federal land, I don't have a ton of insight into that, unfortunately.

Dan Rabb: 26:34

I wish I did. But the question of pushback is a really important one. You know, I would say of the challenges facing the industry right now, one of the biggest is the rise of opposition at the local level, right? Until very recently, these were buildings that were most of all didn't know what they were, right? And they were only built in areas with a lot of industrial, things like that.

Dan Rabb: 27:00

Now, as power gets more scarce, they're increasingly going to wherever they can find power near these major markets. And that means near residential areas or into, you know, more rural communities that aren't used to having somebody build a giant industrial structure there. Right. And don't like what that does to

Mark Bonner: 27:17

their time. NIMBYism. They don't create a lot of jobs. They don't produce a lot of taxes for the community. Yeah, you've written about this for years, Dan, and that's still ongoing.

Mark Bonner: 27:28

And it's because a lot of these small communities around the country over the five or six years have gotten wiser about what data centers are and what they are not. And just because you see a big company like Meta or Google come in which that could get you excited about, right? It's not exactly what you think it is going to be once the data center is completed. Is that correct?

Dan Rabb: 27:50

Yeah. And you know, look, think it's a very under Regardless of where one falls on these issues, most people don't want a giant concrete structure built across the street from their house, right? It's an understandable perspective, know, at least I believe. But, you know, there's been a growing amount of kind of organized opposition. And like you said, understanding of some of the broader issues, the potential impact on like rising power prices, things like that.

Dan Rabb: 28:19

You know, there's some stuff that is true, some stuff that maybe there would be a lot of pushback to from a factual perspective, you know, maybe around water use and things like that. But the difference between today and five years ago is that pretty much everybody knows what data centers are. Everybody's read stories in their local paper about, you know, the person's well, stop producing water because the data center right there. And the industry, the data center developers have had to adjust to this. They have not been used to having to fight these battles at the local level.

Dan Rabb: 28:50

And it's been a big change and a big adjustment and a big challenge that they're just sort of getting their heads around right now. And it's only going to be more of an issue going forward. And, you know, to answer the listener's question, in terms of how that impacts federal lands and the move towards that, I mean, I think maybe the idea is that federal lands will have less of an ability to have that sort of local pushback. Right? But I'm not sure it's something that's very much worth, looking into.

Mark Bonner: 29:24

Okay. My producer's furiously telling me to wrap it up, but I do want to go to one more question from our audience. So it's kind of an interesting question for a reporter. So feel free to pass on this, but in your reporting, Dan, given the economic and political constraints, are hyperscalers expectations unrealistic given the moment? What are you hearing?

Dan Rabb: 29:45

So expectations in terms of how much they want to build out, like the amount of capacity they want to build?

Mark Bonner: 29:54

I'm going interpret this as the difference between what they can get financed and built versus what can actually come online. Right. I mean, we know the demand for data centers is we haven't met the demand yet. Right. We're still trying to meet the demand.

Mark Bonner: 30:08

Right. And this is one of the fastest growing things of the last ten years in the commercial real estate space. I think that's the question. Right.

Dan Rabb: 30:17

Yeah. So I I think it's a it's a really good question, actually. You know, I as a journalist, I'm sort of trained to not project my own opinions out there. What what I hear from folks, I don't hear folks saying this is unrealistic. You know, that it's that, you know, the planned CapEx or whatever they say their, you know, runway is for building out their computing capacity that, you know, that sort of market conditions and some of these constraints that we've been talking about will not allow that to happen at the pace they want.

Dan Rabb: 30:52

You know, I think there are questions, serious questions around, you know, when we look at some of these big projections of data center demand that you hear from utilities, you know, X number of gigawatts in the development pipeline, things like that. A lot of that probably won't materialize. You know, a lot of Microsoft, for example, I'm just using them as an example. I'm not saying them specifically, but might plan three projects in one market and then only build one, the one that gets power first. Right?

Dan Rabb: 31:19

So some of these pipelines for certain areas probably will not end up being as big as they are. I think there's widespread consensus on on that.

Mark Bonner: 31:31

Okay. That's all the time we have for today. Dan, thanks so much for being here.

Dan Rabb: 31:35

That was a lot of fun. Thanks for having me.

Mark Bonner: 31:37

Alright. We'll be back with another episode of First Draft Live next week, so don't miss out. You can sign up now on our event page. You can also find today's episode and all of our past conversations on your favorite podcast app. I'm partial to Spotify, Dan.

Mark Bonner: 31:50

You can also check us out on biznow.com. This is First Draft Live. Have a great weekend, everyone.