Midterm Results Force Pause on U.S. Data Center Expansion

Voters and new state leaders have moved to freeze data center construction across multiple regions, a development that Wall Street analysts say will slow the physical expansion of AI infrastructure. The shift follows Tuesday's midterm elections, where residents in 38 communities across states including California, Illinois, and Maine approved ballot measures restricting new facilities. In contrast, voters in Harwood, North Dakota, approved a local data center proposal.

Franklin Templeton chief market strategist Stephen Dover expects the results to trigger a slowdown in building activity. He noted that the changes will bring new regulations and costs for developers. Yorkville Ives & Co. technology analyst Dan Ives argued that the elections directly answer the question of whether the pace of planned construction will decrease. Ives stated in a report that the answer is a clear yes.

Texas represents the largest potential impact on the sector. The state accounts for 25% to 30% of the data center capacity expected to come online by 2030. Democrat Gina Hinojosa defeated Republican Greg Abbott in the gubernatorial race. Hinojosa campaigned on a temporary ban on data center construction. Abbott had already suspended approvals for new facilities during his tenure.

Gordon Johnson, CEO and founder of GLJ Research, noted that Hinojosa's victory could stall the addition of 13 gigawatts of data center power in Texas. Johnson explained that Abbott built the existing moratorium. He said the new governor does not need a new law to keep permits frozen; she only needs to maintain the status quo. Ives described Texas as the foundation of the AI buildout in the United States.

Georgia presents the second major shift. Keisha Lance Bottoms won the governor's race in the state, which is the third-largest data center market. Bottoms campaigned on pausing new construction. On Wednesday, she announced she would immediately sign an executive order to enact that pause. She said she would then determine what other administrative steps are needed to make the pause effective.

Bottoms also stated she plans to review the tax incentives offered in Georgia that have driven development. She said her team will examine what those agreements entail and determine remedies to enforce the pause. Bottoms predicted that local governments would offer little pushback, noting that many have already taken the first step toward restrictions.

Stock markets reacted quickly to the news. Semiconductor, hardware, and other stocks associated with data center construction fell sharply on Wednesday. Investors expressed concern over permitting delays. Seema Shah, chief global strategist at Principal Asset Management, said developers could face additional requirements to invest in electrical grids. She added that developers might lose tax incentives, which would raise their costs.

Shah noted in a research note that higher development costs for new facilities could increase the value of existing infrastructure that is already powered, permitted, and operational. Economists believe the moratoriums will delay construction but are unlikely to stop capital spending on AI entirely. Analysts with Oxford Economics said a more restrictive stance would stretch the timelines of future projects.

The Oxford Economics team stated that slower construction in the medium to long term would not necessarily be a bad outcome for the macroeconomy. Dover of Franklin Templeton said the AI trade and data center buildout was getting overheated. He suggested that this could dampen excessive investment that might not have a good return on capital. He concluded that unbridled expansion will be tempered, but probably not by a lot.