Democrats, rather than data center and real estate dollars, came out on top of Texas’ statewide midterm elections.
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Despite support from megadonors like Elon Musk and Harlan Crow, Gov. Greg Abbott lost his fourth reelection bid. Texas Attorney General Ken Paxton, who had $1.4M in real estate donations, compared to James Talarico’s $272K, also failed to overcome his controversies and be elected to the U.S. Senate.
The national blue wave is expected to slow the pace of data center build-outs across the country, and Texas is the state building the most, accounting for nearly 26% of planned data center capacity nationally.
Gina Hinojosa’s election as governor and plan for a development moratorium puts about 13 gigawatts of announced projects immediately at risk, according to Jefferies Equity Research. That is enough power to supply more than 10 million homes in the state. The Electric Reliability Council of Texas, the state power grid operator, said in June that data center projects have requested more than 400 GW of power.
And that is just the initial blow. The election may make data center financing more difficult to secure, limiting the pipeline of future projects, Northmarq Managing Director Warren Hitchcock said in a statement to Bisnow.
“Capital isn't going to disappear from Texas data centers, but lenders are going to put an even greater premium on certainty and execution,” Hitchcock said.
Hinojosa had called on Abbott to put in place an immediate moratorium on new data centers until the legislature could meet and pass protections. She doubled down on that message in the final weeks of her campaign, vowing to “stop the data center takeover.”
“We are a pro-business state, but these hyperscale data centers are having hyperscale impacts on our communities,” Hinojosa said in an interview with Houston’s KPRC.
Texas lost more than $1B in state sales tax revenue last year through an exemption for qualified data centers. That figure is projected to increase 33% in the next five years and total close to $8B during that time, according to state comptroller data.
Projects like OpenAI and Oracle's massive $3.5B Stargate artificial intelligence data center campus in Abilene received an 85% tax break from the local government last year. And in April of this year, Guadalupe County gave Cloudburst Data Centers a $500M tax abatement for its $14.5B campus in central Texas.
The Texas Legislature is scheduled to convene Jan. 12, and Hinojosa’s inauguration is slated for a week later, Jan. 19. But already on Wednesday, the election news reverberated through AI data center stock markets.
Although Abbott halted new data center connections to Texas’ power grid this summer as state agencies completed an audit, experts said the move wouldn’t do much to tarnish the state’s reputation as being friendly to data center developers.
But in a report issued last month, Jefferies assigned states to one of five tiers based on their level of acceptance of data center projects, with Tier 1 as the most welcoming. Jefferies analysts said an Hinojosa win and a subsequent statewide moratorium would immediately move Texas from Tier 3 to Tier 4.
Projects that have already secured power and approvals, with experienced sponsorship, will be much easier to finance than projects carrying significant entitlement or delivery risk, Hitchcock said. He added that smaller deals that are under the moratorium thresholds — Abbott’s directive froze projects requesting 75 megawatts of power or more — are still seeing robust tenant and buyer interest.
“We expect that to continue given the insatiable demand for compute,” Hitchcock said.
In a report Jefferies sent out Wednesday morning, its analysts said Hinojosa’s data center framework overlaps with the Public Utility Commission of Texas’ existing large-load rules and last year’s Senate Bill 6.
That law requires data centers to bear the cost of grid upgrades, establishes a standard system for requesting power from utilities, and mandates participation in grid stability programs.
Hinojosa said she would impose a moratorium until legislation is passed that ends tax incentives for data centers and protects household utility bills. But Jefferies said her biggest influence will likely be on the direction of the PUCT, as its members are appointed by the governor, though they would be replaced gradually over time.
“The incremental risks are a data center-specific moratorium, tighter treatment of shared transmission costs, sales-tax exemption changes and the definition of any rate freeze,” Jefferies analysts wrote.
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