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Hello, Reader.
Most of us know the story of Silicon Valley.
In 1939, Bill Hewlett and Dave Packard started their electronics company in a garage in Palo Alto. That little operation helped give rise to one of the greatest concentrations of technological innovation the world has ever seen.
But there’s another localized American technology story that never attracted as much attention.
It’s been taking place about 3,000 miles east, in the suburbs of Washington, D.C.
Back in the 1990s, an early internet exchange called Metropolitan Area Exchange-East, or MAE-East, helped turn Northern Virginia into one of the busiest crossroads of the young internet. Internet companies such as UUNET and America Online established major operations in the area, drawn by its communications infrastructure, proximity to the federal government, and growing concentration of technology businesses.
As more companies arrived, the region became an increasingly attractive place for still more companies to build. Internet connections were plentiful, skilled workers were nearby, and local officials welcomed the development.
Over the following decades, the area became known as Data Center Alley — one of the world’s largest concentrations of data centers.
But today, Data Center Alley is looking more like cul-de-sac. Growth is coming to a halt.
Just west of Data Center Alley’s heart in Loudoun and Prince William counties sits Fauquier County. With AI’s enormous appetite for computing power, Fauquier seemed a natural place for the next wave of development.
Developers introduced nine business-park data center proposals to Fauquier. But only one gained approval. The other eight did not.
Then, on October 8, the Fauquier County Board of Supervisors voted to adopt new zoning rules that make data center construction even more restrictive.
Not exactly the welcome mat developers were hoping to find.
And the obstacles don’t end with local opposition. Developers are also discovering that securing enough electricity can be just as difficult as securing permission to build.
Now, Fauquier hasn’t stopped the AI buildout completely. But its new zoning provide a glimpse of the future. Would-be data center builders face a growing list of obstacles and expenses: New projects will take longer, face continuous permitting roadblocks, and incur rising costs. And in an industry committing hundreds of billions of dollars to infrastructure and running on borrowed money, time is expensive.
In today’s Smart Money, I’ll walk you through what’s happening in this Virginia county, why it matters beyond the county itself, and how to position your portfolio for the next phase of the AI trade.
When Building Becomes the Hard Part
The obstacles facing developers in Fauquier fall into three categories. And each one creates a financial problem for the companies trying to build the infrastructure behind AI.
First, localities are cancelling projects before they ever get off the ground. One of the eight withdrawn business-park proposals in Fauquier featured a 2.2-million-square-foot campus near Remington. Another developer abandoned its data center plans and will build homes instead.
Second, projects face mounting delays. Amazon.com Inc. (AMZN) won approval for a $550 million data center in Warrenton in February 2023. Residents sued to block the project, and more than three years later, it remains tied up in court.
Third, projects are incurring rising costs. Remington Technology Park, approved back in 2018, still can’t get enough electricity from the local grid. In July, county supervisors approved a plan for hundreds of natural gas fuel cells and backup diesel generators. Without that workaround, the development could face delays until at least 2030.
Think about that. In the region that helped build the modern internet, developers are struggling to secure the land, legal approvals, and electricity needed to build its next generation of infrastructure.
Delays Cost Money, and Debt Doesn’t Wait
In my recent work, I’ve described how a two-sided vise squeezes the life out of every major tech boom…eventually .
One side is the Revenue Jaw: technological advances that make services cheaper to provide, pushing down what companies can charge.
The other side of the vise is the Expense Jaw: the rising cost of building and operating the infrastructure behind the boom.
And we’ve just seen three examples of that Expense Jaw tightening in Fauquier County.
Every year spent in court can mean another year before a project starts generating revenue. Every permitting hurdle also adds time and expense. Every dollar spent generating electricity on-site adds to the cost of construction. And every project that developers must redesign, or abandon completely, impairs the prospective return on investment.
Now, Fauquier isn’t an outlier. More than 300 towns, cities, and counties across America have adopted data center moratoriums or bans, according to research firm SemiAnalysis. And according to Gallup, 7 in 10 Americans oppose building a data center in their area.
A big reason is electricity bills. People understandably worry they’ll pay more for power to support a boom whose benefits they may never see.
Residents aren’t the only ones facing higher bills. The tech giants first funded the AI buildout from their considerable cash reserves. Increasingly, they’re borrowing to keep it going, and every delay makes that debt more expensive to carry.
And debt doesn’t wait. As the late Charlie Munger, longtime associate of Warren Buffett, bluntly said: “The liabilities are always 100% good; it’s the assets you have to worry about.” Debt shows up every day, rain or shine, and demands its payment on schedule.
In other words, the money you owe is real and unavoidable. The money you hope to earn from your investment is another matter entirely.
That’s an uncomfortable distinction when you’re spending billions on infrastructure that might not begin generating revenue for years.
To be fair, the buildout continues. Remington Technology Park got its power plan approved. The hyperscalers keep raising their spending budgets. And as AI becomes more efficient, demand for computing power will likely increase.
The demand for AI isn’t imaginary. Neither are the obstacles to supplying it.
But the Expense Jaw alone doesn’t end a boom…
Positioning Before the Vise Closes
There’s more danger ahead if the Revenue Jaw closes, too, As AI becomes cheaper to provide, competition could push down what companies can charge, even as construction costs keep climbing and debt payments come due.
Again, the AI buildout isn’t stopping. But it’s encountering delays and growing more expensive in places like Fauquier County. And those costs can fall hardest on the companies financing the infrastructure at the center of the boom: the “AI Builders.”
History suggests that even excellent companies can become disappointing investments when they spend too much building infrastructure that eventually becomes cheaper and more plentiful.
The internet was a tremendous success. That didn’t prevent investors in some of its most important infrastructure companies from losing fortunes.
The companies that come out ahead are often the “Appliers,” businesses that put the new technology to work once it becomes cheap and abundant. They don’t need to own the infrastructure. They just need to find profitable ways to use it.
That’s why I urge you to watch my recent presentation.
In it, I explain all this in more detail, reveal which companies sit within AI’s “vise,” and where I believe investors should look instead. I also name the No. 1 AI Applier to buy right now.
When the first internet companies arrived in Northern Virginia, few could have predicted that the region would become the world’s data center capital.
I believe the AI Revolution will prove every bit as consequential. But as the developers in Fauquier County are discovering, building the next technological empire can be a lot more expensive and complicated than anyone anticipated.
The technology may succeed spectacularly. That doesn’t guarantee that everyone financing its infrastructure will.
That’s why I’m paying close attention to who’s footing the bill… and who’s positioned to enjoy the benefits.
Regards,
Eric Fry
