00:00This is a story about good fences making good neighbors.
00:03The promise of artificial intelligence has brought a wave of data center building across the country.
00:09And in success, we hope that AI will benefit the economy, investors, and the vast majority of Americans.
00:16A trillion dollars is an enormous amount of infrastructure.
00:20You have to have complete confidence that the trillion dollars you're putting down would be performant for as long as
00:27you could see.
00:27If you're building a multi-billion dollar data center in the U.S. or around the world, and you have
00:32a 15-plus year contract with a company with a $3 trillion market cap, that feels pretty good.
00:39If we knew how to get a trillion dollars right now, which we don't, would we be able to deploy
00:43that profit within the next few years?
00:46And I'm not sure about that, but I feel confident we can make $500 billion of value back.
00:50But while we all wait for the full benefits of AI to be realized, what does construction of these massive
00:57AI data centers mean for the people living around them?
01:00And how much of a say do residents have in the type of fences keeping things in or out?
01:06Not now, not ever.
01:09Push back today to a proposed AI data center.
01:11Amazon comes to town, starts emailing our town manager, and wants to build an enormous data center.
01:21And the citizens did not know about this, even though it was going to be a $500 million investment.
01:29That sort of massive capital investment brings with it the prospect that the data centers being built today will be
01:35with us for a long time to come.
01:37Ultimately, to be paid for the risk that we're taking, we're looking to get a lease that's somewhere in the
01:43neighborhood, David, between 13 years and 17 years.
01:46Mark Gansey is the CEO of DigitalBridge, an alternative asset investment firm specializing in data infrastructure.
01:54He's among the major players making long-term bets for AI, massive bets that are being distributed across a wide
02:01array of investors.
02:02So on the equity side, you're seeing the traditional players, the big infrastructure players.
02:07And so what we're seeing today is we're seeing the large megafunds, these big, big infrastructure players, really lean into
02:13the AI thematic.
02:15And as a part of that thematic, when they think about infrastructure, they think about putting billions of dollars of
02:20equity to work behind these large data center platforms and projects.
02:23On the debt side, it's actually really interesting today.
02:27Of course, we see bank syndicates, we see construction financing, club deals on the bank side.
02:32And now, David, you're beginning to see the emergence of private debt capital.
02:36So private debt capital financing projects that are a little tougher, perhaps less investment-grade exposure, or perhaps even more
02:43risk on the power side.
02:44Projected investments in data centers have climbed past $3 trillion.
02:49That's a $3 trillion long-term bet on the future, which requires a business plan with some pretty attractive returns.
02:57That is the long-term nature of the cash flows.
03:00So that we go to build that facility, we're getting an imputed yield.
03:03And today, most data center yields are somewhere between, David, on a cash-on-cash return basis, somewhere between 8
03:10% and 12%.
03:11It just depends on who the credit is.
03:13So if you're dealing with an investment-grade tenant like Amazon, you're going to be at the low end of
03:17that guidance.
03:18If you're dealing with a brand-new startup, or perhaps you're dealing with a quantum compute player that's non-investment
03:23-grade,
03:24you're looking at something more like an 11-to-12 cap rate.
03:27But you do need to be paid for the risk that you're taking.
03:30And that risk is measured in long-durated cash flows with some form of an escalator.
03:35But while investors anticipate that future payout over 15 or 20 years,
03:39in the communities where data centers are going up right now,
03:43there are immediate potential effects on the people who live near them.
03:47To say that I have significant concerns is sort of an understatement.
03:52Dana Nessel is the Michigan Attorney General,
03:54whose job includes looking out for the interests of Michigan taxpayers, ratepayers, and citizens.
04:00She is appealing the state's expedited approval of a very large data center
04:05set to be built in Saline Township, just south of Ann Arbor.
04:09Well, it appears as though the project is underway.
04:13The first that I learned about it was really on Halloween of last year,
04:19that this was going to be an enormous project,
04:22a project bigger than any of its kind we've seen.
04:25It's not that Attorney General Nessel denies the potential upside of data centers in Michigan,
04:30but she wants to test the projections and promises,
04:33weighing both the benefits and the burdens of things like changing electricity rates,
04:38land values, and water needs that her citizens will face,
04:41the sorts of things that may require some pretty good fences.
04:45If you talk to Michigan residents, they don't want these in their backyard.
04:50Nobody knows yet what it's going to mean for that community.
04:53They don't know what it's going to mean for their water.
04:56They don't know what it's going to mean in regard to noise pollution or other types of pollutants.
05:02Until we have some of those questions that can be more fully answered
05:05and better policies put in place at the state level,
05:09most people don't want to see these massive data centers continue to be erected.
05:16Michigan residents aren't the only ones with concerns.
05:19Pew Research Center found that an overwhelming share of Americans think data centers
05:24are mostly bad for the environment, home energy costs, and their overall quality of life.
05:29But Gansey says he's seen a version of this play before,
05:33and that it can be handled in a way that satisfies the need for growth and the concerns of citizens.
05:39Do you need to take into account the reaction of the community?
05:42A hundred percent it's a factor.
05:43I've been doing this for 32 years, building digital infrastructure.
05:47And where I got my sort of humble start was building cell towers, David, in 1994.
05:53And at that point in time, nobody wanted a cell tower in their backyard.
05:56And that was the rise of nimbyism, not in my backyard.
06:00Well, the sector got organized.
06:01We navigated through it.
06:03We explained the benefits of mobile communications, emergency services,
06:07and ultimately the fact that most Americans wanted ubiquitous mobile coverage.
06:12And so that carried through the early 2000s into 2010, 2020.
06:16And today you don't hear a lot of skirmishes around cell towers
06:19because largely the industry has made peace with the local community.
06:24State leaders like Nestle don't deny that things might work out for all concerned.
06:28But for that to happen, she believes we all need to know in advance
06:32the scope of data center construction,
06:33the effects it's likely to have on the community,
06:37and what commitments the developers and owners are making
06:39to address the possible local downsides.
06:42The request was made before our utility regulator,
06:48the Michigan Public Service Commission, for this contract.
06:52It was filed for an ex parte hearing,
06:56meaning a hearing that would take place behind closed doors
07:01that we wouldn't be allowed to be part of.
07:03So the contract that was posted publicly was heavily redacted,
07:08and that included redactions to some incredibly important information,
07:14you know, involving things like exit fees,
07:17what would happen upon the termination of the contract,
07:20even, you know, basic terms and definitions had been redacted,
07:25customer credits.
07:27Even the signatories to the contract had been redacted
07:32so that we can't even know who signed this contract
07:35or what company they're affiliated with,
07:39which is pretty insane when you think about it.
07:41How are we supposed to know whether or not
07:44ratepayers are getting a fair deal
07:46if we're not even allowed to see the contract itself?
07:49All of this comes against the backdrop
07:51of a rapidly evolving technology
07:53that is growing at a rate we've never seen before,
07:56raising questions about what happens if things evolve
07:59in ways that fall short of the best case.
08:01As an infrastructure investor, Gansey says they're ready for that.
08:06How do you anticipate the further growth
08:09as well as the obsolescence of some of the technology you're putting in?
08:13Well, I think the great part about being the owner of the railroad
08:16is you don't own the actual cars that run on the tracks.
08:21We own the land.
08:22We build the power plant.
08:23Sometimes, actually, we're building power adjacent to the data center.
08:27We build the physical real estate structure inside the four walls.
08:30We bring the fiber connectivity.
08:32We bring the cooling.
08:32We bring the backup power.
08:34We create the data hall conditions where the UPC units are in
08:38and the cooling is in and the cable trays.
08:40But eventually, David, our customers put in the technology.
08:44So what makes our business great is we are, candidly,
08:47we're GPU and TPU agnostic.
08:50And what I mean by that is we're not involved in the active compute.
08:54That is a bet that we don't make at DigitalBridge.
08:56What we are in the business of doing is providing
08:58that mission-critical real estate and infrastructure
09:00to the top technology providers in the world.
09:03And we let them make the decision what kind of server they're going to buy.
09:06That may take care of the investor risk.
09:09But what about community risk?
09:11In Michigan, abandoned auto plants still dot the landscape,
09:15a constant reminder of an earlier era of technological promise
09:19and the costs that followed.
09:21Who will bear the cost this time remains uncertain.
09:24In the event that the bubble bursts and something happens
09:28and this hyperscale center in Saline Township is no longer needed,
09:34somebody is going to have to pay all of the extra costs
09:39of this new infrastructure.
09:41And who's going to pay it?
09:43Well, it's either going to be borne by the rate payers in this state,
09:47and we already are subject to some of the highest rates
09:51and the worst reliability anywhere in the country,
09:55or it'll be the taxpayers.
09:56They'll have to bail out the utility companies
09:59who are making these, in some instances,
10:02terrible bets that AI is going to be around for a long time.
10:05If you look at these contracts,
10:07it's clear that the cost is supposed to be borne out,
10:12not over the course of a few years,
10:14but over the course of really a few decades,
10:17you know, up to something like 18 years.
10:19But we can't even see the exit fees in the next few years.
10:25Those that have encouraged these data centers to come here
10:29without any sort of guardrails at all,
10:32I think they've set us up for a very difficult future here.
10:37Which brings us back to those fences neighbors need.
10:41Gansey sees a way to build what's needed
10:43in a way that accommodates everyone
10:44and doesn't stand in the way of progress.
10:48You're seeing red states and blue states
10:50both look at the data center opportunity and quandary
10:53in the same way, which is it can't hurt consumers.
10:56So the industry has to get organized.
10:58It has to explain ultimately the benefits
11:01of why these data centers exist.
11:03Why are they creating jobs, not losing jobs?
11:06Why is it going to be good for them long-term
11:08from a property value perspective?
11:10And why it ultimately isn't going to rise their utility bill
11:13and take away all their water?
11:15We got a pretty big uphill challenge.
11:17We need data centers to build the technology of tomorrow.
11:21The long-term promises are big,
11:22but so are short-term costs
11:25that may fall on the shoulders of local communities.
11:28That's why we need to construct some fences carefully
11:31to protect our neighbors.
11:33And to do that, we need to bring everyone to the table.
Comments