\n<\/p>\n
The AI revolution requires an unprecedented build-out of data centers. At least, that\u2019s how the narrative goes. A quick peek at the data reveals a funny detail\u2014most aren\u2019t being built. An energy shortage? Nah, most don\u2019t even apply for a connection to the power grid. This is about a little tax code change that sparked a stampede to become landlords of the internet. A multi-trillion dollar speculative bubble, complete with flippers. Seriously.\u00a0<\/p>\n
A scramble to build data centers is a bit of an understatement. In Canada, over 200 data centers have been announced or are in development. That includes 159 hyperscale facilities<\/a>\u2014those with at least 50 megawatts (MW) of capacity. Out of those, 116 are planning for over 100 MW of capacity. That\u2019s a big jump from the 5 hyperscale facilities in Canada today.\u00a0<\/p>\n The US is seeing a much bigger boom. Vancouver-based Aterio tracks 8,434 data centers<\/a>, from announcement to operations. Their data shows 2,145 in operation, 888 under construction, and 4,442 announced. \u201cThe remaining 959 are delayed, land banked, not approved or cancelled, which we keep tracking because they often come back,\u201d notes the predictive analytics firm.\u00a0<\/p>\n If that seems unrealistic, wait until you crunch some numbers.\u00a0<\/p>\n Big numbers are hard to appreciate, so let\u2019s make them relatable. The average home in Canada and the US uses ~11,000 kilowatt hours (kWh) of electricity per year, about 1.25 kilowatts (kW). A megawatt (MW) is 1,000 kW, equal to the power draw of ~800 households. A gigawatt (GW) is 1,000,000 kW or 1,000 MW, equal to the power draw of ~800,000 households. Easy peasy, right?\u00a0<\/p>\n Now let\u2019s apply that. Canada\u2019s 116 hyperscalers that need a minimum of 100 MW need 11.6 GW of power. That\u2019s equal to the power of roughly 9.28 million households in a country with only ~16.85 million households. Canada\u2019s Minister of Artificial Intelligence stated there are 20 GW in the pipeline.\u00a0<\/p>\n Just 750 large projects in the US will be using 45 GW of additional power<\/a>, equal to 36 million households. That\u2019s a lot of automated Realtor emails for our spam boxes.\u00a0<\/p>\n Does that sound a little unrealistic? Canada\u2019s government seems to agree. When asked about the AI minister\u2019s 20 GW claim, officials didn\u2019t just concede it was an exaggeration. They outright stated<\/a>, \u201cmost of this proposed capacity is not expected to proceed.\u201d\u00a0<\/p>\n Oh, cool. Wait\u2026 what? We\u2019ll circle back, but first, let\u2019s talk about the scramble to become landlords of the internet. That\u2019s not me being cute. It\u2019s in your tax code.\u00a0<\/p>\n The internet is synonymous with giants like Google and Meta, but they\u2019re mostly tenants. They\u2019re now building data centers, but for the most part, they pay rent to \u201cinternet landlords,\u201d a term coined by University of Maryland Associate Professor Daniel Greene.\u00a0<\/p>\n \u201cA tremendous amount of money and innovation may go into Google\u2019s advertising networks, but those networks are largely housed in cages rented from a third party,\u201d he explains.\u00a0<\/p>\n He argues that internet landlords extract rent through three primary asset types<\/a>: Internet Exchange Points (IXPs) for public network peering, co-location facilities where tenants rent space and server bandwidth, and managed storage. Internet companies may build products, but they have to rent infrastructure to get it to you.\u00a0<\/p>\n This isn\u2019t a happy accident but a long battle that only ended in 2016, which is why you\u2019re hearing about it now. \u201cTo secure their status as [Real Estate Investment Trusts] REITs, internet landlords had to prove that the internet was a physical place you could own, manage, and lease, like an apartment building or a storage unit,\u201d explains Greene.\u00a0<\/p>\n IRS Private Letter Rulings (PLRs) from 2007 to 2014 helped to close gaps, including classifying payments as \u201crent.\u201d The idea took off in 2015 after a PLR cleared the way for data center Equinix to become a Real Estate Investment Trust (REIT). Congress then codified the rules with the PATH Act (2015), and the IRS in 2016<\/a>. Data centers were fully cleared to become tax-advantaged, globally traded, liquid financial assets.\u00a0<\/p>\n What\u2019s so important about being a REIT? Until the 1960s, real estate was incredibly illiquid, reducing its value. To stimulate investment, REITs became eligible for a pass-through structure. Corporate profits are usually subject to \u201cdouble taxation.\u201d They pay income taxes on net profits, and then they can pay out dividends from the profits. Investors then pay their own income taxes on that additional income. REITs distribute virtually the entire net profit as dividends, and investors pay income taxes on that income.<\/p>\n Roughly 10 years ago, the internet\u2019s landlords secured the same treatment. It\u2019s relatively new, which is why you\u2019re only recently hearing about it. That and the recent rush to target retail investors with IPOs, such as Brookfield\u2019s Csquare and Blackstone Digital Infrastructure Trust (BXDC)<\/a>, the latter being a REIT itself.\u00a0<\/p>\n On that note, let\u2019s circle back to those data centers that are very unlikely.\u00a0<\/p>\n The announcements (and debt) to build data centers are booming, but the building\u2014not so much. In Canada, only 1 of 8 hyperscale facilities slated for a 2027 launch has actually broken ground. JP Morgan recently warned<\/a> that over 60% of US data center capacity for 2027 hasn\u2019t broken ground. Nearly\u00a0 5 data centers are announced for every one built<\/a>. That\u2019s excluding cancelled projects.<\/p>\n The media widely attributes the delays to NIMBYs, who don\u2019t want to share their energy. However, most data centers haven\u2019t even asked for energy. A recent study of\u00a0 252 active US data center announcements found 129<\/a> had no utility filings, SEC disclosures, or issued permits. That\u2019s like announcing you\u2019re going to bake a cake, but don\u2019t have flour, sugar, an oven, or a kitchen.\u00a0<\/p>\n Unproven and exaggerated data centers are so common that the industry has a term\u2014braggawatts. These are, um, inspirational announcements with virtually zero chance of being built. \u201cThe amount of power, and even the amount of financing required to meet these upper end projections, it doesn\u2019t exist,\u201d explained Chris Sharp<\/a>, CTO at Digital Realty, the firm that pioneered data REITs in 2004.\u00a0\u00a0<\/p>\n Sharp warns that developers are increasingly entering the space and overstating their abilities. Raw land of that scale is expensive. The cost to build out a hyperscale is almost unimaginable to most. Lucky for the speculators, they don\u2019t need to build it if they can flip it first.\u00a0<\/p>\n Is it really a real estate bubble without flippers? A whopping 72% of US AI data center power requests are phantom loads<\/a>. Phantom loads are speculative requests that require utility companies to set aside dedicated power. The artificial shortage pushes energy prices higher, but improves the project value. The flipper may not have the funds to build it out, but institutions that need to allocate investor funds do.\u00a0<\/p>\n The problem isn\u2019t going unnoticed. In Canada, B.C. Hydro now requires C$25k per MW in bid security, or C$2.5 million per 100 MW facility. Fail to build by the deadline, the funds are forfeited. It\u2019s a little light in contrast to what\u2019s emerging in the US.\u00a0<\/p>\n Earlier this year, Texas adopted a US$100k study fee plus a deposit of US$50k per MW<\/a>. A deposit of US$5 million is a sign of a pretty strong commitment. Though Ohio has the toughest test we\u2019ve come across. Applicants pay US$10k-US$100k per load study, and 85% of contracted capacity for 12 years<\/a>, even if less is used.\u00a0<\/p>\n The scale of debt in the pipeline suggests that it may be an underreaction. Canada\u2019s financing is more opaque, but experts have noted that debt raises \u201cstart at several hundred million dollars and exceed well over a billion dollars<\/a>.\u201d Though that\u2019s chump change compared to the mounting liabilities in the US.\u00a0<\/p>\n US data centers and related infrastructure are tied to US$1.3 trillion in debt, according to Atrium<\/a>. Morgan Stanley also estimates a US$1.5 trillion \u201cgap\u201d in financing for data centers through 2028<\/a>. Only the equivalent of Canada\u2019s GDP? I guess we all have to tighten our purse strings in this economy.\u00a0<\/p>\n AI has hit an inflection point, and that means more infrastructure is needed. But technological revolution and a bubble aren\u2019t mutually exclusive. The internet was revolutionary, but that didn\u2019t stop the Dot Com bubble. AI isn\u2019t different\u2014it\u2019s just wrapped around a real estate bubble and cushioned by more tax dollars.<\/p>\n The AI revolution requires an unprecedented build-out of data centers. At least, that\u2019s how the narrative goes. A quick peek at the data reveals a funny detail\u2014most aren\u2019t being built. An energy shortage? Nah, most don\u2019t even apply for a connection to the power grid. This is about a little tax code change that sparked […]<\/p>\n","protected":false},"author":1,"featured_media":7076614,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[99],"tags":[3550,986,14102,11603,4856,15575,16571,482,11218],"dealstore":[],"offerexpiration":[],"class_list":["post-7076613","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate","tag-boom","tag-bubble","tag-center","tag-data","tag-estate","tag-internet","tag-landlords","tag-real","tag-trillion"],"yoast_head":"\nData Center<\/strong> Energy Math Doesn\u2019t Add Up<\/h2>\n
The Scramble To Become Landlords of The Internet\u00a0<\/strong><\/h2>\n
One<\/strong> Weird<\/em><\/strong> Tax Trick That Ruined The Internet\u00a0<\/strong><\/h2>\n
Nearly 5 Data Centers Announced For Each Built & Braggawatts<\/strong><\/h2>\n
Data Center Flippers\u00a0<\/strong><\/h2>\n
You Might Also Like<\/em><\/h3>\n<\/p><\/div>\n\n","protected":false},"excerpt":{"rendered":"