Moody’s says data center component and semiconductor costs will continue to rise amid tight supply

New Delhi [India]January 16 (ANI): The cost of critical components used in data centers is expected to rise further as global supply constraints persist, a Moody’s report said.

The report also highlights that companies involved in the data center value chain will either adapt current operations or invest in new capacity to meet surging demand.

However, until this additional capacity is integrated into the supply chain, continued high demand will continue to push prices higher.

“As supply remains tight, the cost of critical components will continue to rise. Companies within the data center value chain will either adjust operations or invest in new capacity and products to meet high demand,” the report said.

The cost of critical components such as mechanical cooling systems, electrical equipment, semiconductors and computing equipment is increasing significantly, the report added. The situation has prompted developers and landlords to pass on rising costs to tenants by raising rents.

With vacancy rates at historically low levels in most markets, these increased costs are being absorbed by tenants, driving up operating expenses.

Moody’s also noted that demand for data centers is expected to increase in 2025, driven by the rapid growth of artificial intelligence (AI), cloud computing and data storage services.

The report notes that new colocation data centers are being developed to meet the needs of small and medium-sized tenants, who typically pay higher lease rates per kilowatt per month. While vacancy rates may briefly rise slightly in some markets as new colocation capacity becomes available, supply constraints may result in vacancy rates remaining low in the longer term.

To meet this surge in demand, developers are taking on more debt to build and upgrade data centers. Hyperscalers like Microsoft, AWS, Google, Meta, and Oracle are rapidly scaling their infrastructure around the world, including emerging and smaller markets. This growth requires significant capital, often funded by equity, bank loans, and corporate or securitized debt.

As developers accelerate their construction cycles, their financial leverage is expected to remain elevated in the near term. The revenue generated by these data centers will help offset costs, but only if the facilities are operational and available to tenants.

Delays in revenue generation are expected to temporarily weaken financial metrics, which are likely to stabilize over time.

Rising costs for data center equipment and semiconductors highlight the ongoing challenges the industry faces in meeting growing demand. Until supply issues are resolved, both companies and tenants will continue to feel the impact of rising costs. (Arnie)