Federalism Will Save the Data Centers

Happy Tuesday, and welcome to another edition of Rent Free. This week’s stories include: 

• How federalism, not preemption, will save the data centers.
• Modular builders’ new lawsuit challenging Oregon’s prevailing wage requirements.
• The failure of a condo “defect” reform bill in the California Legislature.

Federalism Is Data Centers’ Best Hope 

When it comes to liberalizing land use regulations to allow more housing to be built, housing advocates have generally settled on a standard maneuver: evolve more regulatory decisions to state governments.

Localities, the thinking goes, have more powerful incentives to oppose residential construction, whereas state lawmakers are more inclined to support growth.

Results vary from state to state, but thus far, this strategy has proved relatively successful.

Legislation limiting local governments’ ability to say no to projects is enabling more backyard accessory units, apartments on formerly commercial properties, and mixed-use developments in some of the most NIMBY areas.

State preemption would, however, appear to be of limited utility in counteracting America’s current moral panic over data centers.

A year ago, most of the public was completely uninterested in data centers. Polls found that when people did express an opinion, they were evenly split between supporting and opposing these facilities. 

No longer. Survey after survey shows large majorities opposing data center development in their communities. More people would rather live next to a steel mill than a boxy building full of computer servers.

Policymakers are moving right along with public opinion. Hardly a day goes by without a new local government proposing a flat moratorium on data centers or, at a minimum, onerous new land use controls.

And anyone hoping that state governments might ride to data centers’ rescue with preemption bills that override local restrictions will be disappointed.

A growing list of governors, including ones that were once enthusiastically in favor of data center development, are now issuing executive orders clamping down on these projects.

In the housing context, regulatory decisions are moving to the state level, and regulations are (to varying degrees) becoming less restrictive. With data centers, states and localities are joining in one crackdown.

One of the few major politicians to still support data centers appears to be President Donald Trump.

In a Truth Social post yesterday, Trump described data centers as the “Golden Goose” and said that communities that reject data centers will “end up being backwards and poor.”

“Let Data Reign,” he declared.

Trump defends data centers: “The only reason that communities throughout the U.S.A. should not want Data Centers is if they want to end up being backwards and poor. If they want to be successful and rich, with far lower taxes and jobs all over the place, let Data Reign.” pic.twitter.com/ZbiynIjLnO

— Sahil Kapur (@sahilkapur) August 31, 2026

It’s at the federal level that data centers would still seem to have some support.

While states’ pro-growth instincts have let data centers down as of late, national security concerns about winning the AI race still afford data centers some support from federal policymakers.

Last year, the Trump White House issued an executive order that called for streamlining federal permitting of these projects. Sen. Tom Cotton (R–Ark.) has proposed legislation that reduces federal regulation on data centers that supply their own power.

It would not be unprecedented for the federal government to take a more direct role in seeing that data centers aren’t shot down by local and state regulation.

The 1996 Telecommunications Act preempted local zoning regulations from blocking cellphone towers.

Even so, counting on federal preemption to save data centers seems like a long shot.

While their local and environmental impacts are overhyped, data centers are more intensive land uses than cellphone towers. Imposing a blanket federal preemption of state and local data center regulations would be a more challenging endeavor.

They’re also, as mentioned, incredibly unpopular. Who’s to say that federal data center regulations passed in this climate would actually be superior to what states and local governments are enacting?

While Trump wants to streamline data center development, Sen. Bernie Sanders (I–Vt.) wants a nationwide moratorium.

Where preemption will likely fail, federalism could succeed.

Trump was not wrong to say that data centers are massive fiscal boons to localities that accept them.

Headlines are full of once cash-strapped localities being able to repave their roads, build new police stations, and cut property taxes on the backs of data center tax revenues.

Localities often oppose housing because of fiscal concerns. More residential development means more property tax dollars. But it also means more residents who drive on the roads, call the police, and send their kids to local public schools.

Because data centers operate with very small permanent staffs, they consume little in public services. Absent crony subsidies, data centers are liable to be a major revenue generator for local governments.

Localities and states that say no to data center development will lose out on those tax dollars. Jurisdictions that say yes will be rolling in them. Data will make it rain, to paraphrase our president.

That fiscal incentive should be enough to prevent the current backlash against data centers from grinding construction to a halt in the same way that successive anti-growth backlashes in the 20th century whittled down housing production.

As Vox‘s Eric Levitz noted in a piece today, the data center backlash is happening in the context of a boom in data center construction.

The data center backlash is huge. But the boom is bigger.

Even as local bans mount, capacity keeps expanding at a dizzying pace. And that’s not changing anytime soon. The buildout will continue until morale improves (or demand for compute collapses) https://t.co/aJs3nPVhoZ pic.twitter.com/0be2obP1g9

— Eric Levitz (@EricLevitz) September 1, 2026

This isn’t to say that the backlash is harmless. Heatmap charts a continued rise in data center projects being rejected. Even if many more are being built, every “no” vote on a data center project costs the economy some level of productive investment.

So long as capital continues to flow to these projects, some localities will continue to say yes to them and get their slice of the pie.

When the panic about data centers eventually subsides, more communities and voters will be missing out.

Federalism isn’t enough to rescue every data center project. But it can save the industry from a comprehensive crackdown that voters, for the moment, say they want.

Modular Builders Challenge Oregon’s Prevailing Wage Requirements

In a new lawsuit, the modular construction industry is challenging an Oregon regulation that requires suppliers of modular building components for public works projects to pay prevailing wages, even if they perform their work out of the state.

As construction costs continue to mount, some builders and policy wonks are looking to modular construction to bring costs down. By constructing building components in factory settings and then snapping them together on-site, modular construction methods offer the potential to reduce costs and build times.

Modular construction also offers the potential to save on regulatory costs. Many states, including Oregon, have long required that publicly subsidized projects pay prevailing wages (i.e., union-level wage rates).

By purchasing modular components from out-of-state manufacturers, project sponsors can reduce some of the work that must pay those higher prevailing wages.

In 2025, Oregon eliminated this avenue for regulatory savings. That year, the Legislature passed a bill that expanded its prevailing wage requirement to assembly, fabrication, and preconstruction activity that’s done off-site.

A 2026 regulation implementing this new law applied those prevailing wage standards to “bespoke” work performed at satellite locations, even if that satellite location is out of state.

A lawsuit filed last month in federal court by the Modular Building Institute, a trade association, argues this regulation violates the U.S. Constitution’s restriction on states regulating interstate and international commerce.

Interstate commerce is the exclusive domain of Congress. States can’t regulate in a way that infringes on interstate commerce.

“States can’t do protectionist laws. Once the state has expanded its prevailing wage law to cover out-of-state factories, they’re essentially engaging in protectionist legislation,” says Wilson Freeman, an attorney with the Pacific Legal Foundation, which is representing the Modular Building Institute.

An exception in the final rule excludes standardized modular housing from the prevailing wage standards. Freeman says that the vagueness in the regulation over the definitions of bespoke and standardized modular production likely makes this a narrow exception.

“If a modular company provides a menu of options, it’s not entirely clear whether that would fit within the exception or not,” he says.

The Last-Minute Defeat of California Condo Defect Reform

A California bill attempting to limit frivolous lawsuits over condominium construction defects died in the waning hours of the state’s legislative session.

California law allows condo owners to sue builders when they identify damages caused by flawed construction.

Critics of the state’s current liability system argue that it has enabled condo owners to sue over minor, unproven, or theoretical construction flaws. They note that condo construction has fallen precipitously since California gave condo owners greater rights to sue builders in the early 2000s.

Assembly Bill 1903 proposed a series of condo “defect” reforms to limit builders’ post-construction liability. The bill would require that owners show actual damages and finish repairs before they can sue the builder. It also raised the standards of evidence of construction defects that litigants would have to provide in order to win these lawsuits. 

The bill passed unanimously in the Assembly back in May. The Senate passed an amended version of A.B. 1903 by a unanimous vote yesterday, but the bill was not transferred to the Assembly for a concurrence vote. With the legislative session now over, the bill is dead. 

Quick Links 

• A bill that would have capped prices, including rents, during U.S. military actions failed in the California Legislature.
• AI wealth is creating a “mansion shortage” in San Francisco, reports NPR. 
• New Orleans is experiencing some belated post–Hurricane Katrina redevelopment, reports CityLab.
• A developer’s plans to turn a D.C. gas station into housing have stalled. After the pumps have been removed, the gas station will now be redeveloped into…another gas station.
• In another loss for Trump’s Department of Housing and Urban Development, a federal judge blocks its attempt to restructure housing grants.