The AI Boom Is Coming to Your Backyard

[00:00:00] Speaker 1: this is a story about good fences making good neighbors the promise of artificial intelligence has brought a wave of data center building across the country and in success we hope that ai will benefit the economy investors and the vast majority of americans a trillion dollars is an enormous [00:00:19] Speaker 2: amount of infrastructure you have to have complete confidence that the trillion dollars you're putting down would be performant for as long as you could see if you're building a multi-billion [00:00:29] Speaker 3: dollar data center in the u.s or around the world and you have a 15 plus year contract with a company with a three trillion dollar market cap that feels pretty good if we knew how to get a trillion dollars [00:00:40] Speaker 4: right now which we don't would we be able to deploy that profit in the next few years and i'm not sure about that but i feel confident we can like make 500 billion of value back but while we all wait for [00:00:52] Speaker 1: the full benefits of ai to be realized what does construction of these massive ai data centers mean for the people living around them and how much of a say do residents have in the type of fences keeping [00:01:04] Speaker 5: things in or out not now not ever push back today to a proposed ai data center amazon comes to town starts emailing our town manager and wants to build an enormous data center and the citizens did not know about this even though it was going to be a 500 million dollar investment [00:01:29] Speaker 1: that sort of massive capital investment brings with it the prospect that the data centers being built [00:01:34] Speaker 6: today will be with us for a long time to come ultimately to be paid for the risk that we're taking we're looking to get a lease that's somewhere in the neighborhood david between 13 years and 17 years [00:01:46] Speaker 1: mark gansey is the ceo of digital bridge an alternative asset investment firm specializing in data infrastructure he's among the major players making long-term bets for ai massive bets that are being distributed across a wide array of investors so on the equity side you're seeing the traditional players [00:02:05] Speaker 6: the big infrastructure players and so we're seeing today is we're seeing the large mega funds these big big infrastructure players really lean into the ai thematic and as a part of that thematic when they think about infrastructure they think about putting billions of dollars of equity to work behind these large data center platforms and projects on the debt side it's actually really interesting today of course we see bank syndicates we see construction financing club deals on the bank side and now david you're beginning to see the emergence of private debt capital so private debt capital financing projects that are a little tougher perhaps less investment grade exposure or perhaps even more risk on the power side projected investments in data [00:02:46] Speaker 1: centers have climbed past three trillion dollars that's a three trillion dollar long-term bet on the future which requires a business plan with some pretty attractive returns that is the long-term nature of the cash [00:02:59] Speaker 6: flows so that we go to build that facility we're getting an imputed yield and today most data center yields are somewhere between david on a cash on cash return basis somewhere between eight and 12 percent it just depends on who the credit is so if you're dealing with an investment grade tenant like amazon you're going to be at the low end of that guidance if you're dealing with a brand new startup or perhaps you're dealing with a quantum compute player that's non-investment grade you're looking at something more like an 11 to 12 cap rate but you do need to be paid for the risk that you're taking and that risk is measured in long-durated cash flows with some form of an escalator [00:03:35] Speaker 1: but while investors anticipate that future payout over 15 or 20 years in the communities where data centers are going up right now there are immediate potential effects on the people who live near them [00:03:47] Dana Nestle: to say that i have significant concerns is sort of an understatement dana nestle is the michigan attorney [00:03:54] Speaker 1: general whose job includes looking out for the interests of michigan taxpayers rate payers and citizens she is appealing the state's expedited approval of a very large data center set to be built in saline township just south of ann arbor well it appears as though the [00:04:10] Dana Nestle: project is uh underway uh the first that i learned about it was really um on on halloween of uh last year that this was going to be an enormous project a project bigger than any of its kind we've seen [00:04:25] Speaker 1: it's not that attorney general nestle denies the potential upside of data centers in michigan but she wants to test the projections and promises weighing both the benefits and the burdens of things like changing electricity rates land values and water needs that her citizens will face the sorts of things that may require some pretty good fences if you talk to michigan residents they don't want [00:04:48] Dana Nestle: these in their backyard nobody knows yet what it's going to mean for that community they don't know what it's going to mean for their water they don't know what it's going to mean in regard to noise pollution or other types of pollutants until we have some of those questions that can be more fully answered and better policies put in place at the state level most people don't want to see these these massive data centers continue to be erected michigan residents aren't the only ones with concerns [00:05:19] Speaker 1: pew research center found that an overwhelming share of americans think data centers are mostly bad for the environment home energy costs and their overall quality of life but gansey says he's seen a version of this play before and that it can be handled in a way that satisfies the need for growth and the concerns of citizens do you need to take into account the reaction of the community a hundred [00:05:42] Speaker 6: percent it's a factor i've been doing this for 32 years building digital infrastructure and where i got my sort of humble start was building cell towers david in 1994. and at that point in time nobody wanted a cell tower in their backyard and that was the rise of nimbyism not in my backyard well the sector got organized we navigated through it we explained the benefits of mobile communications emergency services and ultimately the fact that most americans wanted ubiquitous mobile coverage and so that carried through the early 2000s into 2010 2020 and today you don't hear a lot of skirmishes around cell towers because largely the industry has made peace with the local community state leaders like nestle don't [00:06:25] Speaker 1: deny that things might work out for all concerned but for that to happen she believes we all need to know in advance the scope of data center construction the effects it's likely to have on the community and what commitments the developers and owners are making to address the possible local downsides [00:06:43] Dana Nestle: the request was made before our utility regulator the michigan public service commission for this contract it was filed uh for an ex parte hearing meaning a a uh a hearing that would take place behind closed doors that we wouldn't be allowed to be part of so the contract that was posted publicly was heavily redacted and that included redactions to some incredibly important information you know involving things like exit fees what would happen upon the termination of the contract even you know basic terms and definitions had been redacted customer credits even the signatories to the contract had been redacted so that we can't even know who signed this contract or what company they're affiliated with which is pretty insane when you think about it how are we supposed to know whether or not ratepayers are getting a fair deal if we're not even allowed to see the contract itself [00:07:49] Speaker 1: all of this comes against the backdrop of a rapidly evolving technology that is growing at a rate we've never seen before raising questions about what happens if things evolve in ways that fall short of the best case as an infrastructure investor gansey says they're ready for that how do you anticipate the further growth as well as the obsolescence of some of the technology you're putting in well i think the great part [00:08:15] Speaker 6: about being the owner of the railroad is you don't own the actual cars that run on the tracks we own the land we build the power plant sometimes actually we're building power adjacent to the data center we build the physical real estate structure inside the four walls we bring the fiber connectivity we bring the cooling we bring the backup power we create the data hall conditions where the upc units are in and the cooling is in and the cable trays but eventually david our customers put in the technology so what makes our business great is we are candidly we're gpu and tpu agnostic what i mean by that is we're not involved in the active compute that is a bet that we don't make a digital bridge what we are in the business of doing is providing that mission critical real estate and infrastructure to the top technology providers in the world and we let them make the decision what kind of server they're going to buy that may take [00:09:07] Speaker 1: care of the investor risk but what about community risk in michigan abandoned auto plants still dot the landscape a constant reminder of an earlier era of technological promise and the costs that followed [00:09:21] Dana Nestle: who will bear the cost this time remains uncertain in the event that the bubble bursts and something happens and this uh hyperscale center in saline township is no longer needed somebody is going to have to pay all of the extra costs of this new infrastructure and who's going to pay it well it's either going to be borne by the the rate payers in this state and we already are subject to some of the highest rates and the worst reliability uh anywhere in the country uh or it'll be the taxpayers they'll have to bail out the utility companies who are making these in some instances you know terrible bets that ai is going to be around for a long time if you look at these contracts it's clear that the cost is supposed to be borne out not over the course of a few years but over the course of a really a few decades you know up to something like 18 years but we can't even see uh the exit fees in the neck in the next few years those that have encouraged these data centers to come here without any sort of guard rails at all um i think they've set us up for a very difficult future here which brings us back to those fences neighbors need [00:10:41] Speaker 1: gansey sees a way to build what's needed in a way that accommodates everyone and doesn't stand in the [00:10:46] Speaker 6: way of progress you're seeing red states and blue states both look at the data center opportunity and quandary in the same way which is it can't hurt consumers so the industry has to get organized it has to explain ultimately the benefits of why these data centers exist why are they creating jobs not losing jobs why is it going to be good for them long term from a property value perspective and why it ultimately isn't going to rise their utility bill and take away all their water we got a [00:11:15] Speaker 1: pretty big uphill challenge we need data centers to build the technology of tomorrow the long-term promises are big but so are short-term costs that may fall on the shoulders of local communities that's why we need to construct some fences carefully to protect our neighbors and to do that we need to bring everyone to the table.