Fueled by advancements in artificial intelligence (AI), digital services, cloud computing, and 5G demand, the data center sector is experiencing unprecedented growth. Big tech companies, or hyperscalers, are driving much of this record expansion in the race to dominate AI and accelerate their speed to market.
REITs are well placed to benefit from this steady stream of demand. However, challenges exist, including navigating the power crunch—AI’s enormous demands are pushing power grids to the brink—and finding suitable land for larger and larger data centers.
REIT.com spoke with sector analysts, Nick Del Deo at MoffettNathanson, Vikram Malhotra at Mizuho, and Jonathan Petersen at Jefferies, to hear their views on data center REITs’ performance, sector opportunities and challenges, and trends they’re watching.
The U.S. data center sector has been booming, even more now with the emergence of AI. What does the outlook for 2025-26 look like?
Nick Del Deo: Key players, most notably the hyperscalers but also other large tech companies and enterprises, continue to drive robust demand. Several hyperscale executives have noted that the risks of underinvesting in AI are greater than the risks of overinvesting. And while AI has turbocharged data center demand, cloud adoption and digital transformation efforts continue to be large contributors.
That said, this has historically been a cyclical business, and there’s no reason to think that it will no longer be cyclical. Key to sustaining AI-driven demand will be the transition from AI training (creating models) to AI inferencing (using those models), and AI must deliver a demonstrable ROI to support this level of investment over time.
Vikram Malhotra: We see the sector poised for growth over the next 12 to 24 months, driven by hyperscale expansion and continued off-premises cloud migration. The favorable demand supply outlook is likely to continue, given most of the available space is pre-leased until 2027, especially at large data centers. That’s also supported by power constraints and supply chain issues forcing companies to make capacity decisions many years in advance. However, hyperscale players potentially pulling back on capital expenditure could be a risk that we continue to monitor, as they could reevaluate their growth plans based on evolving technology.
Jonathan Petersen: The outlook for demand will continue to be strong for the next few years as hyperscalers deploy more infrastructure in a race to dominate AI technologies.
What are some of the key opportunities for data center REITs in the next few years?
Malhotra: Key opportunities include capitalizing on the AI demand and expanding colocation services. High demand has resulted in strong pricing power, and we believe data center REITs could do more packaged deals, meaning when a lease comes up for renewal, other leases could be renewed at a better blended rate.
Additionally, we see opportunity in the colocation side as we transition to inference and services to the end consumer, which could be monetized and result in more interconnections and higher pricing.
Petersen: The data center REITs are uniquely positioned to capture enterprise data center demand, given the existing customer base of more than 5,000 for Digital Realty (NYSE: DLR) and more than 10,000 for Equinix, Inc. (Nasdaq: EQIX). Their demand funnel is about much more than just a handful of the large hyperscalers.
Del Deo: Data center operators can continue to lean into demand and secure attractive returns on new developments, ensuring that they are prudently financed with good counterparties, to create value for their owners. On a more forward-looking basis, operators can take steps to thoughtfully broaden their platforms into new markets where customer demand is coalescing. They can also consider how to support AI inferencing. A good chunk of inferencing demand is likely to land at the edge, whether in major metro areas or in secondary metros, and it may benefit from somewhat different data center designs.
Larger players with software-driven networking fabrics, most notably Equinix, Digital Realty, and CoreSite, which is part of American Tower Corp. (NYSE: AMT), may also develop new tools to help customers manage the complexity of AI deployments and the necessary movement of data. Savvy operators will also work to identify and land up-and-coming firms as customers, seeding their platforms for future growth and further diversifying their businesses.
What are the hottest U.S. markets for data centers and why?
Petersen: Northern Virginia is the largest data center market in the world, and the demand for any space that comes into the market remains quite strong. However, available capacity is very constrained, so we have seen a lot of spillover demand in Atlanta, which has quickly become a major tier one market in the past few years.
Malhotra: Northern Virginia, Phoenix, and Atlanta stand out as some of the best markets in the U.S. We have observed exponential growth in the past three to five years, leading to vacancy levels at around 1%. For data centers, the location proximity to other facilities, companies, and end users are key to minimizing latency and allow for flawless interconnectivity.
Del Deo: It’s hard to point to a data center market in the U.S. that hasn’t experienced elevated demand. Most customers historically had strong preferences for tier one markets, but many have widened their apertures given the power constraints in those geographies. Several markets have captured much of that spillover demand. If I were to define “hottest” as a mix of rapid percentage growth and sizable absolute growth, I might point to markets like Atlanta; Columbus, Ohio; West Texas; and Reno, Nevada.
While the data center sector is bullish now, are there challenges ahead?
Del Deo: Power constraints are a double-edged sword. On the one hand, power scarcity has helped data center pricing and returns. But on the other hand, it naturally limits the volume of data center space that developers can deliver to market. Significant improvements in power availability, or a further tightening of supply, could prove to have adverse headwinds. Not surprisingly, improving returns and substantial growth have attracted many new competitors and a flood of capital to the industry. Both could have negative consequences on pricing and development yields.
Petersen: Demand from hyperscalers tends to come in waves, so there will undoubtedly be upcoming quarters where those hyperscalers focus more on digesting recently leased capacity than leasing new facilities.
Malhotra: In the near term, power availability is the main challenge. Securing the power to meet the customer requirements could be extremely hard. The U.S., as a whole, might have enough power but in the wrong locations, so power transmission is facing challenges due to supply chain constraints. Over the long term, oversupply is one of the biggest risks in our view. Everyone is trying to capture the demand, but potential pullback on AI spending could have an adverse impact on occupancy and pricing.
What impact could the Trump administration have on the digital infrastructure industry?
Malhotra: Overall, the new administration is very supportive of developing the digital infrastructure in the U.S., which was highlighted by the $500 billion investment under the Stargate Project, which is a joint venture by OpenAI, SoftBank, and Oracle. However, tariffs could have a negative impact on the industry and increase construction costs, which could make development yields less attractive.
Del Deo: The administration appears to be taking a hands-off approach to AI, which could lubricate the wheels of investment. It’s also trying to facilitate the permitting and construction of power generation and transmission assets, which could help to mitigate power constraints. However, these are projects with inherently long lead times that span multiple jurisdictions.
Meanwhile, power constraints have been the key lever for data center operators to garner elevated prices and enjoy improved development yields, so a loosening of power supplies could weigh on both. Tariffs could have adverse consequences, too. Certain data center power and cooling systems are sourced from overseas or contain components from overseas, and many of the chips, memory, storage systems, and other IT gear on which AI models run are manufactured in East Asia. Tariffs could raise construction costs, disrupt supplies, and/or suppress demand from customers.
Data center M&A deals have been on the rise. How much M&A activity are you expecting in the following year and what impact could that have?
Petersen: Many of the new entrants into the data center development industry, which are sitting on large plots of land with lots of power access, will likely sell that land to experienced data center developers, who can execute on leases with hyperscalers.
Malhotra: There has been a tremendous increase in the demand for data center capacity while power and even land availability is not enough to meet the demand. There was a fair amount of M&A activity in the last several years. Looking forward, we expect M&A to center around filling white space or being more strategic. The flip side is perhaps several private entities may go public.
Del Deo: Over an extended period, it’s not unreasonable to think that many of the newer, less experienced, more levered entrants into the space could eventually run into trouble, especially if there’s a demand air pocket or capacity digestion period. A shakeout could present larger, more established players with opportunities to pick up select assets at distressed prices.
To what extent are global markets contributing to growth for U.S. data center REITs?
Malhotra: More than half of their revenue comes from international markets, making them an important part of the growth trajectory. We note that some markets have growth similar to the U.S., while others, like Asia, have even outpaced the domestic growth in terms of revenue.
Petersen: Digital Realty and Equinix both have very large international portfolios. This allows the companies to provide all-inclusive solutions to multinational enterprises. Additionally, outside the U.S., the hyperscalers are much more likely to lean on third-party developers to solve their data center needs.
Del Deo: Overseas data center markets tend to be less mature than the U.S. They’re not as far along the adoption curves of digital services that require supporting data center infrastructure, so global data center operators have historically generated faster growth rates from their overseas units than from their domestic ones. However, the AI boom has been most pronounced in the U.S., causing growth here to reaccelerate.
How will the high energy appetite of AI impact the work that data center REITs are already facing in terms of meeting energy demand?
Malhotra: Power requirements have certainly become more complex. Securing long-term power and transmission remains difficult, and data center REITs could look at alternatives such as gas plants to provide bridge power until they are “hooked” to the grid. Additionally, higher power requirements result in a need for a more efficient cooling process (liquid cooling), and data center REITs could be forced to retrofit some of their older facilities to meet the higher-density requirements.
Petersen: Data centers today are built with much higher power requirements in mind, which changes the design of the facility to accommodate a higher density of power and includes the option for liquid cooling.
Del Deo: By far, the number one constraint facing data center developers today is securing access to power. Graphics processing unit (GPU) clusters amplify this issue by requiring significant power capacity at a single site, and cluster sizes are growing. GPUs also increasingly require liquid cooling to dissipate the heat they generate. Therefore, data center operators need to take steps to secure access to large quantities of power.
That includes working with utilities or power suppliers well in advance of construction, considering on-site power generation, and exploring unconventional approaches like repurposing industrial sites or reactivating generation options like mothballed nuclear power plants. Long lead-time activities like these need to be prudently financed to mitigate risk. Additionally, facilities need to be designed with the flexibility to offer liquid cooling as time goes on.
What other trends or developments are you keeping an eye on in terms of how they might impact data center REITs?
Malhotra: We continue to closely monitor hyperscalers’ CapEx budgets as a signal of future demand. Additionally, we monitor the REITs’ location selection for new data centers, which could signal a shift from tier 1 to potentially tier-2 and -3 markets. New technology is another key focus post- (Chinese startup) DeepSeek, as it could result in more efficient AI models and drive power density requirements lower, resulting in reduced space needs.
The ability of landlords to see market rent growth, and how that translates into renewal spreads, is another area we’re watching.
Del Deo: New financing arrangements could help to alleviate some of the financial burden associated with sustaining capital-intensive growth. The normalization of joint ventures with deep-pocketed financial partners, like what Digital Realty has done with Blackstone and Equinix with GIC, is one approach.
Asset-backed financing is another tool that players could use to raise debt at relatively low interest rates, at least against stabilized assets. With some private data center operators considering going public, we could see development company (DevCo)/operating company (OpCo) structures used to make public entities more palatable to public equity investors, with private investors continuing to fund much of the development costs and holding land banks.