A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for the real estate investor, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future editions, straight to your inbox.
Calls for a slowdown in the pace of AI development have hit related stocks in recent days and could have broad ramifications for every industry involved. Real estate is no exception.
While cloud, storage, enterprise IT and internet services all require data center capacity, artificial intelligence has quickly become the dominant driver of demand. AI could account for about 70% of global data center capacity demand by 2030, according to a report from McKinsey. The report said the capital outlay needed to meet total data center demand by 2030 will be nearly $7 trillion. Just the real estate portion of that could account for $3 trillion in investment in the next five years, according to JLL, which provides end-to-end data center real estate services globally.
Digital Realty and Equinix, two of the largest data center REITs, saw their stocks slump on Monday following the weekend warnings over AI advancements.
Digital Realty CEO Andrew Power, however, said the pledges for a slowdown by major AI players Anthropic, OpenAI and xAI do not mean "pencils down" for AI and the real estate that supports it.
"There's tremendous digital transformation happening that is not connected to AI," said Power in an exclusive interview with Property Play. "There is tremendous cloud computing growth. Frankly, from my business lens, my seat, I think those demand trends, which are massive drivers of our business, have been stifled in these days of AI."
Power said hyperscalers have had to choose between growing their commercial cloud businesses or allocating capacity to AI labs. He also said not all markets will be impacted equally.
Digital Realty's markets include Northern Virginia, Dallas, Chicago, Singapore, Tokyo, Frankfurt and Amsterdam, where Power said customers are competing for the same space.
"Our markets' demand has been outpacing supply now for several years. There's pent-up need for infrastructure in those markets. There's locational sensitivity. Those workloads can't choose any one of the 50 states," said Power. "We have a global company portfolio, so we've got data sovereignty and support in other countries as well."
Analysts agree that a slowdown would not directly impact the physical needs of AI, especially given what a change of pace would actually affect, which is training in new models.
"The real growth in data centers over the next handful of years is in inference — that's the adoption by businesses and citizens of the tool into daily workflow," said Andrew Batson, global head of data center research and strategy at JLL.
"Only 1 in 4 Americans use AI daily, so even if models are slow to be released, there is significant runway for adoption to grow and data center demand to increase," he said.
Batson pointed to institutional money from Blackstone, BlackRock and KKR, which he said "have high conviction in this space."
"That, on paper, still looks quite strong, despite some of the headlines here," he added.
Power said that while data center REIT stocks get punished, his message to shareholders is that the company has been ready for this.
"The first, most important part is, make sure that the daily gyrations, our stock price, don't affect our strategy, our business," said Power. "We evolved our funding model a couple of years ago. We are an incredibly capital-intensive business."
Digital Realty's development pipeline totals $20 billion under construction, up from $10 billion at the end of 2023, according to the company.
"We're on to the next iteration of that in raising private capital. We've also done one-off joint ventures, and we positioned the balance sheet in probably the most liquidity, the lowest leverage, the best place it could be in any potential storm," Power said. "And I'm not suggesting today is an end-of-the-world storm or anything like that."
