Data Center Freeze Adds a New Risk for AI Investors: State Regulation

New York Governor Kathy Hochul’s immediate one-year moratorium on new data center construction, made via executive order on Tuesday, introduced an unexpected hurdle into the fast-growing business of building AI data centers.

Hochul’s move, which makes New York the first state to block data center construction, has private-market investors reassessing plans and sizing up potential downstream effects. The moratorium also comes as public opinion has turned staunchly against data centers, with Americans concerned about noise, pollution, and rising electricity and water costs.

Pivoting to another state for new data center construction comes with non-trivial complications for AI infrastructure companies, according to Ted Brandt, founder and CEO of investment bank Marathon Capital. Even red states have responded to the growing public outcry. Texas Governor Greg Abbott recently called for a ban on data centers in rural parts of the state, and he previously unveiled a new regulatory framework aimed at limiting their resource impact.

“It’s not at all clear which states are going to be data center central,” says Brandt, whose firm specializes in renewable energy and infrastructure deals, including data centers. “It’s an open question. And when you’re starting to see New York and Texas on the same side of an issue, it’s an extraordinarily weird situation.”

More recently, data centers and the electricity needed to power them have become the new hurdle for the AI industry. “The bottleneck stopped being chips a while ago,” explains PitchBook senior analyst Harrison Rolfes. “New York didn’t create that scarcity; it converted the constraint from a physics problem into a political one. Capital can eventually engineer around transformers and interconnection queues, but not permits and a governor’s signature.”

Of the roughly 241 gigawatts of US data center capacity in the pipeline by the end of 2025, only about a third is under active development, according to research firm Wood Mackenzie. The rest has stalled, largely due to power constraints. The New York executive order imposes a one-year moratorium on permits for new data center construction exceeding 50 megawatts of capacity.

Data center deal value, dominated by PE investment, hit a five-year high of $48.1 billion in 2025, according to PitchBook data.

A May Gallup poll found that 71% of Americans oppose data centers being built near them, outpacing the 53% who oppose new nuclear power plants in their backyards. In a January Pew Research survey, more Americans said data centers are more bad than good for the environment, home energy costs, and nearby quality of life.

“Data center development threatens to hike up utility bills, deplete our natural resources, and create uncertainty for New Yorkers,” Hochul said in a statement accompanying her executive order. It cites the strain data centers place on the state’s power grid and water system. There are nearly 12 gigawatts of data center load requests, with more than 8 gigawatts added in 2025 alone, the state said. A similar measure passed by the state legislature in June had not yet been sent to Hochul for her signature.

The key due diligence question emerging for VC and PE investors is the regulatory risk AI infrastructure companies face, according to Rolfes and Brandt. “The headline is a ban,” Rolfes says. “The actual event is that ‘time-to-power’ just became a valuable commodity in the AI stack. A state legislature, not a chip shortage, is now setting the price.”