The AI boom is reshaping the U.S. commercial real estate market, with spending on data center construction expected to surpass that of office buildings next year, attracting over a trillion dollars in investments from Blackstone, Brookfield, and tech giants. Amidst challenges such as single-tenant reliance, stringent operational terms, and power supply constraints, investors' risk exposure has reached historic highs. Should AI demand retract or project deliveries face delays, this high-stakes gamble will confront severe tests.
The underlying logic of U.S. commercial real estate investment is being reshaped by the AI boom, a trend that, while offering investors substantial potential returns, also exposes their portfolios to unprecedented levels of risk concentrated in a single industry.
According to a report by The Wall Street Journal on the 23rd, citing data from the U.S. Census Bureau, spending on data center construction could surpass office building construction as early as next year. Driven by AI demand, data centers have emerged as the top-performing asset class in terms of investment returns. According to the National Council of Real Estate Investment Fiduciaries, this category delivered a return of 11.2% last year, outperforming all other real estate sectors except mobile home parks.
This frenzied construction wave is being reflected through staggering financial investments. JLL, a real estate services firm, predicts that new data center developments in North America could reach a scale of $1 trillion between 2025 and 2030. Facing an urgent need to expand computing power, tech giants are shifting strategies from self-building to leasing; for instance, $Oracle (ORCL.US)$ one company alone has future lease commitments as high as $248 billion at present.
However, this shift has raised concerns about an 'AI bubble' and its impact on physical assets. Unlike the relatively stable performance of commercial real estate during the dot-com crash of 2000, today's real estate sector is more intertwined with the tech industry than ever before. As investors bet on AI technologies generating trillions of dollars in new revenue, any demand pullback or shortfall in construction delivery could severely test real estate funds with significantly increased risk exposure.
A Trillion-Dollar Infrastructure Boom Amid the Decline of Office Buildings
The surge in data center construction spending comes as U.S. cities grapple with decades of accumulated office space oversupply. Currently, new office construction has virtually ground to a halt, with vacancy rates hovering near historic highs. In contrast, the insatiable demand for computing power makes the expansion trend of data centers unlikely to reverse in the short term.
In order to accelerate the construction of artificial intelligence networks, $Meta Platforms (META.US)$ 、$Amazon (AMZN.US)$、$Oracle Corp Japan (4716.JP)$hyperscale cloud computing companies like Oracle are increasingly leasing data center space from owners rather than relying solely on self-construction. According to McKinsey estimates, 40% of U.S. hyperscale data center capacity this year was obtained through leasing, up from 35% in 2023.
This tilt toward data centers represents not just a shift in capital flows but a fundamental transformation in the nature of commercial real estate investment. Traditionally, office buildings, apartments, and shopping malls were viewed as diversified and stable assets capable of hedging against volatility in the tech sector. During the tech stock sell-off from 2000 to 2002, despite the Nasdaq index plummeting nearly 80%, commercial real estate values remained largely flat or experienced only modest declines. Today, this decoupling no longer exists.
Capital Influx and Tech Giant Bets
The infrastructure and real estate divisions of major asset management firms, such as $Blackstone (BX.US)$ and $Brookfield (BN.US)$ Brookfield, have significantly increased their exposure to data center assets in recent years. According to the National Association of Real Estate Investment Trusts (NAREIT), publicly traded real estate companies increased their investments in data centers by 15% in 2024 while reducing allocations to traditional sectors like office buildings and apartments. Private capital is also following suit; a CBRE survey of 92 major investors, including private equity and pension funds, shows that 95% of respondents plan to increase their investments in data centers.
Oracle has been particularly aggressive in this round of expansion. According to recent public filings, the company carries $248 billion in future lease commitments off its balance sheet. This massive capital expenditure plan also caused market turbulence earlier this month, leading to a significant drop in Oracle's stock price after the announcement of increased spending on AI infrastructure.
Green Street analyst David Guarino noted that despite the enormous sums involved, hyperscale enterprises possess balance sheets robust enough to support these transactions. To hedge risks, property owners and lenders have implemented special structural designs for deals. For example, Meta's upcoming Hyperion data center in Louisiana is being developed by a partnership where Blue Owl holds a majority stake. Its 20-year lease is divided into five four-year terms, and if Meta wishes to terminate the contract after the first term, it must repay the outstanding debt at that time and pay additional cash to Blue Owl.$Blue Owl Capital (OBDC.US)$
New Risks from Single Tenants and Stringent Terms
The long-standing appeal of commercial real estate lies in its 'diversification' attribute; for instance, office buildings are typically leased to various companies across different industries. However, as artificial intelligence becomes the primary growth driver for data centers, this asset class is becoming highly reliant on a single type of tenant, whose business models have yet to achieve full profitability.
In addition to market risks, the risk of technical defaults caused by operational disruptions cannot be overlooked. Sharon Haran, Chief Commercial Officer at Parametrix Insurance, noted that many lease agreements include provisions to protect tech tenants. For instance, if monthly power outages exceed a certain threshold, property owners may face penalties equivalent to several months’ rent; prolonged issues with electricity, cooling, or connectivity could even grant tenants the right to terminate the entire lease. Such technical metrics may result in significant financial losses and are among the reasons why many conservative investors have yet to enter this sector.
Despite strong demand, the supply side is facing multiple challenges. The data center industry is grappling with a sluggish labor market, which could lead to shortages in construction teams. Additionally, supply chains for building materials are under threat from tariffs, while access to electricity remains a major question mark in many regions.
These operational hurdles may cause delays during construction, potentially triggering provisions that lead to lease termination. Wes Cummins, CEO of Applied Digital, warned that many projects are expected to encounter issues during actual delivery. He stated: $Applied Digital (APLD.US)$
"If you deliver too late, it usually triggers cancellation clauses."
This means that in this trillion-dollar infrastructure gamble, execution will be the decisive factor determining whether investors 'make a fortune' or 'catch a falling knife.'
Editor/Doris