AI jitters knock data center REITs, but demand math still looks huge

What happened and why it matters

Fresh pleas to slow the pace of AI hit stocks tied to the theme in recent days, and the chill reached data center landlords. Shares of Digital Realty and Equinix fell Monday after warnings about AI progress surfaced over the weekend. That matters because AI has quickly become the biggest reason companies are adding servers and space, while demand also persists from cloud platforms, file storage, enterprise IT, and internet service providers.

The demand picture behind the headlines

McKinsey estimates that by 2030, AI will be responsible for roughly 70% of the projected demand for worldwide data center capacity, and it adds that meeting total needs by then would require nearly $7 trillion in capital. JLL projects the real estate slice alone could absorb $3 trillion of investment over the next five years. Analysts also note that a slower rollout of new AI models would mostly touch training, not the ongoing compute that powers everyday usage, so the physical footprint AI needs is unlikely to shrink in the near term.

How the industry is positioning

Digital Realty CEO Andrew Power said pledges from Anthropic, OpenAI and xAI to slow AI development do not mean "pencils down" for AI or the facilities behind it. "There's tremendous digital transformation happening that is not connected to AI," he said in an interview. "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."

According to Power, hyperscalers are being forced to decide whether to prioritize expansion of their commercial cloud operations or to dedicate capacity to AI labs, and he noted the effect will differ by market. He cited Northern Virginia, Dallas, Chicago, Singapore, Tokyo, Frankfurt and Amsterdam as core markets where customers are chasing the same sites.

"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," he said.

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"We have a global company portfolio, so we've got data sovereignty and support in other countries as well."

Power added that while data center REITs may get punished in the market, Digital Realty's playbook does not change with price moves. "The first, most important part is, make sure that the daily gyrations, our stock price, don't affect our strategy, our business," he said.

"We evolved our funding model a couple of years ago. We are an incredibly capital-intensive business." According to the company, its development pipeline totals $20 billion currently under construction, compared with $10 billion at the close of 2023.

"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."

The investor lens

"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, who heads JLL's data center research and strategy team. "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 also pointed to big allocators like Blackstone, BlackRock and KKR that, he said, "have high conviction in this space." In short, while headlines can rattle prices, the buildout story is still being written in billions.

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