'Gumming Up The Works': Tariff Costs And Headaches Could Push Data Center Projects Overseas

The Trump administration’s trade policies are expected to raise data center development costs and scramble the industry’s already strained supply chains, potentially pushing more data centers overseas. 

Data center developers, suppliers and tenants are bracing for wide-ranging impacts from the tariffs that have defined the Trump administration’s trade policy.

Tariffs are expected to drive up the cost of building new data centers, a sudden shift in the industry’s development math that — paired with the uncertainty surrounding U.S. trade policy and its potential to shift with a single social media post — has sent shockwaves through the industry’s teetering supply chain. 

While tariffs may have their intended impact of bringing some parts of the data center supply chain to the U.S., developers say the increased costs and uncertainty could push some projects previously slated for the U.S. into international markets. 

“They're going to see what they can offshore. If it doesn't have to be in the U.S., they're going to find somewhere else to do it,” Stewart Title Vice President Brian Chen said at Bisnow’s DICE: National event last month. “I’ve seen deals that didn't happen because they found a cheaper, better way to do it outside the U.S., and we're losing that money now because of it.”

The specifics of the sweeping tariffs enacted by the Trump administration remain in flux. The effective U.S. tariff rate as of this month stands at 15.6%, according to the Yale Budget Lab, with a 10% overall tariff on all imports but higher rates targeting some countries like China and certain products like steel and aluminum. Many of the substantial tariffs announced in April aimed at dozens of the U.S.’ largest trade partners have been temporarily paused while the administration attempts to negotiate individual trade deals.  

For a data center industry reliant on a complex global supply chain that was already being pushed to its limits, this uncertainty has made the exact impact of tariffs hard to pin down. But the consensus of many industry executives is that it’s not a question of whether development costs will go up, but by how much.

From construction materials to server racks to critical data center equipment like generators and transformers, tariff impacts at every level of the supply chain could easily drive up data center development costs by more than $1M per megawatt, according to McKinsey & Co. partner Piotr Pikul. That’s roughly a 10% increase from 2024. 

Pikul said close to 75% of the electrical and mechanical equipment in the U.S., which accounts for around half of the capital spent on a typical data center, is sourced internationally. And it typically comes from places like China, India and the European Union that face — or are likely to face — elevated tariff rates.

And while some firms may be able to onshore elements of their supply chain to avoid tariffs, such measures don’t offer a reprieve from price increases due to higher domestic manufacturing costs. 

“The tariff impact will be there,” Pikul said at DICE: National. “If there's a tariff or you produce in the U.S., those prices will go up. That's just basic economics.”

These higher costs have thrown a wrench in the dealmaking machinery underpinning the unprecedented data center building boom.

Up and down the supply chain, manufacturers, vendors, data center providers and tenants describe scrambling to get a handle on not only what their cost increases will be but also the ability of their partners across the value chain to absorb these higher costs.

Both suppliers and developers say tariffs are forcing them to renegotiate longstanding supply chain relationships and find creative ways to make deals work despite higher costs and a lack of clarity on how significant those increases will be.

“There's some pretty serious horse trading going on right now about who's going to absorb these costs,” Serverfarm Chief Real Estate Officer Mario Calderone said at DICE: National. “One of the things that we're dealing with now as an owner-operator is trying to figure out how much of the cost increases can we pass through to our customer. I'm sure we're going to end up eating some of it.”

Even prior to the imposition of tariffs, the data center industry was facing acute supply chain woes, with widespread shortages and yearslong wait times for critical components a top constraint on the industry’s growth. Data center builders typically have to order key equipment like transformers and chillers a year or two in advance, with overall lead times triple what they were in 2019, according to McKinsey’s Pikul. 

Because of this supply chain pinch, most major data center builders had to develop sophisticated procurement operations to prevent equipment shortages from causing costly development delays.

Now, tariffs are forcing these firms to go back to the drawing board and reassess their supply chain and procurement strategies to mitigate cost increases, a massive challenge in an ecosystem already stretched to its limit. 

“It's interesting to watch the gymnastics that our procurement teams are going through to get equipment routed through the least tariff entry into the United States,” Calderone said. “It's occupying a lot of time and bandwidth within our company.”

Developers are scrambling to shift their supply chains toward U.S. manufacturers where possible and diversify their base of suppliers to create sourcing flexibility. But such options are limited, and it will take time for the manufacturing landscape to evolve to meet the industry’s needs. 

Some firms are looking to move away from project-by-project procurement and bulk-order critical equipment from lower-cost sources, a strategy that comes with its own costs and risks and requires huge amounts of available capital.

“It’s really gumming up the works,” Anthony Wanger, founder and CEO of data center investment firm Regnaw Capital, said of the tariffs. “It’s impacting every level of the supply chain.”

The tariffs proposed by the Trump administration last month, if enacted, would make the U.S. far less competitive from a pricing perspective for data center developers and their Big Tech tenants, PointOne Data Centers Vice President Dan Ephraim said.

The volatility around U.S. trade policy presents new risks for data center builders that may lead them to increasingly look to international markets where possible. 

“The U.S. is the cheapest place in the world to build a data center — now it might not be, and when that happens, it's going to just go elsewhere,” Ephraim said. “We should be prepared for that.”

The vast majority of data center demand isn't location-agnostic. End users typically have strict latency requirements that call for data center siting close to major population centers or major digital infrastructure hubs. 

But other workloads are more flexible, said Terry Rennaker, partner at Eagle Rock Partners.

Cloud providers have served customers in Asia and Europe from U.S.-based data centers for years, while demand for AI training has pushed data center development into remote U.S. locations that would never have been considered just three years ago. 

So while tariffs are unlikely to impact demand for data centers in primary hubs like Northern Virginia and Silicon Valley, Rennaker said the world’s largest tech companies may decide a data center planned for Kansas would be cheaper and easier to build overseas.

“Demand won’t go away, but it will be impacted,” Rennaker said. “I suspect more of the hyperscalers are basically force-ranking their decisions on data center locations. Where they have the flexibility, they're saying, ‘Fine, we'll just put that in APAC.’”