The Lone Star State of Data Centers After Historic Texas Midterms

As Jeopardy host Ken Jennings said after Tuesday’s midterm elections: “All my exes now live in Blexas.” Democrats won or led in every statewide race in Texas as of yesterday, turning the Lone Star State blue (hence Blexas) for the first time in three decades.

The upset victory in the gubernatorial vote by Democrat Gina Hinojosa, who has pledged to hit the brakes on new data center approvals, could alter the trajectory of the state’s nation-leading buildout. But Texas’ AI infrastructure buildout isn’t buzzard bait just yet.

Rodeo Circuit Breaker

Until earlier this year, data center development in Texas was as hot as a two-dollar pistol. The state’s vast supply of habitable and usable land combined with abundant rural and suburban real estate made it ideal for new projects. A deregulated electricity market, its own independent power grid, and direct access to liquified natural gas allowed developers to negotiate large-scale power deals and build on-site energy sources. Throw in a pro-business regulatory climate along with no traditional state taxes, and you’re fine as cream gravy.

With all those favorable factors, analysts at global real estate firm JLL earlier this year tipped Texas to leapfrog Virginia as the world’s largest data center market by 2030. Among those developing major campuses are Amazon, Google, Meta, Microsoft, OpenAI and Vantage. Recent months, however, saw momentum stall. Texans voiced increasing concerns about air quality, noise pollution, electricity and water bills. Polls showed a majority of them oppose having data centers in their communities. Politicians on both sides of the aisle responded. In September, outgoing Republican Governor Greg Abbott ordered a moratorium on new data center permits until the state grid operator completed an audit of existing applications. This put almost one fifth of the 253-GW data center development pipeline in all the United States at risk of delay. Hinojosa, set to be inaugurated on January 19, pledged to go one two-step further. She campaigned on a statewide moratorium on new data center approvals until the Texas Legislature passes a slate of new regulations: 

• Analysts at Jefferies wrote that a Hinojosa victory would mean greater political risk for data centers as it could translate to “tighter rules around who pays for grid infrastructure, water use and data center tax incentives.” However, they added it’s “more likely to increase development costs and requirements than materially restrict the Texas pipeline.”
• At the federal level, Yorkville Ives Managing Director Dan Ives wrote Wednesday that “there is no way to sugarcoat that Democrats taking control, especially over the Senate, will create some major hurdles for AI and tech legislation.” He forecasts the 800 to 1,000 data centers currently planned across the US will face delays and that 10% of them “will not happen now.”

Portfolio Swings: The election results slammed cloud providers CoreWeave and IREN, which closed down 9.9% and 11.2%, respectively, on Wednesday. Data center cooling and temperature systems makers Vertiv and Modine fell 12.9% and 21.4%, respectively. But post-election certainty gave the more diversified Big Tech hyperscalers, which are financing the AI buildout, a boost: Alphabet, Amazon, Meta and Microsoft rose 3.3%, 6.1%, 1.4% and 6.7%, respectively.