By many measures, the timing seems perfect for investing in data centers. The artificial intelligence sector has generated heightened interest in expanding data center capacity, with hyperscalers investing billions into new projects. Reports indicate that companies like Digital Realty and Equinix are posting strong revenue figures, painting a picture of consistent growth. However, there is a counterargument suggesting that the optimistic outlook for the data center industry may not be as straightforward as it appears, particularly in the short-to-medium term.
This isn’t an outright dismissal of the investment potential in data centers. Instead, it’s essential to consider the potential downsides that could impact the industry’s financial returns in the coming years. By focusing predominantly on positive trends, the conversation has overlooked some key challenges that may hinder profitability for investors looking at the data center market.
Five Challenges That Could Make Data Centers a Poor Investment in 2025
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AI Boom Could Slow Down
Since generative AI entered the mainstream in late 2022, the prevailing belief has been that companies will need rapidly increasing data center capacity to manage the training and inference required by compute-intensive AI tasks. While it’s true that AI requires substantial resources, the demand for AI capabilities could decline sooner than many anticipate. Some experts suggest that AI firms are already hitting a data ceiling, meaning the need for extensive data center capacity may not sustain its upward trajectory. -
AI May Require Fewer Data Centers Than Expected
Even if the AI boom continues, it doesn’t necessarily guarantee proportional growth in data center investments. The recent introduction of AI models like DeepSeek, which demand fewer computational resources than typical enterprise-level models, indicates that not all AI advancements will translate into the previously expected boom for data centers. -
Recession Risks
The global economic climate currently appears uncertain. Influences like tariff wars and geopolitical conflicts have introduced instability, which could lead to reduced spending on digital services across the board. A contraction in the economy could markedly affect the data center industry, especially at a time when companies are in the thick of expanding their facilities. -
Delays in Bringing Data Centers Online
Investing in data center construction does not guarantee immediate financial returns. Even after the facilities are built, connecting to the electricity grid and other operational setups can take significant time. This lag can leave firms with increased capacity without the corresponding demand to fill it, especially if growth expectations are miscalculated. -
Rising Electricity Costs
One of the ongoing challenges for the data center sector is managing electricity costs, which represent a significant portion of operational expenses. These costs have increased from about 12% of revenue in 2020 to 16% in 2024, according to Equinix data. As global energy demands escalate and the push for renewable resources continues, expenses likely will continue to rise, negatively impacting profitability.
While it’s conceivable that increasing data center demand will enable operators to charge more to offset higher energy rates, there remains uncertainty regarding whether the capacity that needs to be filled will grow at the pace expected by investors. Thus, a nuanced and cautious approach to investing in data centers may be warranted in light of these potential challenges.
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