Data centers are booming at a time where many other sectors are in decline.

The pandemic has upended other business models, while demand for digital services has shot through the roof. For those in the industry, this has proved lucrative. For those missing out, it has meant a mad scramble to buy a stake in the market, or invest in new opportunities.

I have covered this industry for more than half a decade, and in the past year I have seen exceptional investor growth. Every week brings a new partnership, a new blockbuster deal, and a new company promising to undercut the rest.

It all seems to be happening a bit too fast, with too few experienced hands in charge of many of these decisions. Curious to know what this could mean for the data center industry, I caught up with a respected data center builder and contractor to get a ground-level view of what’s happening.

Bad advice

“We’ve experienced this wave of new money pouring into the sector,” the person, who requested anonymity, said. “And a lot of that new money is being advised badly.”

He added: “You’re seeing on LinkedIn ‘So and so is now advising So&So fund,’ and you think ‘God help you So&So fund, I wouldn’t touch that person with a bargepole for their advice on entering a new sector.’”

Investors with little experience in this complex, dynamic, and difficult market are chasing easy returns. “I feel bad for them,” the builder said. “There’s an underappreciation of the risk during building the thing, and then operating the thing.”

This has impacted the wider market, he said, with the lower perceived risk leading to lower prices and skewed client expectations. “If the new prices are 15 percent less than what the market’s been floating out for the last five years, then it’s a real problem, because it’s a fake distortion of what’s going on,” he said.

“It’s highly improbable that, just because there’s a whole load of new money, someone has magically found a way to do things for 15 percent cheaper. Some of these folks will realize they can’t make money, or some assets will have gone distressed or won’t have finished construction.”

He pointed to one project now looking at two years of delays. “When these things go wrong, they go seriously bloody wrong.”

The rest of the industry will have to weather this storm - competing against artificial prices and timelines, while at the same time dealing with the added cost of more competitors fighting over land, equipment, and customers.

But in those potentially distressed properties, opportunity could lie. Just as the death of Enron led to the birth of Switch, with founder Rob Roy picking up his first data center for pennies on the dollar, the facilities funded by today’s dumb money could prove the acquisition targets of tomorrow.

This article appeared in Datacenter Dynamics magazine.