Investors Turn Cooler on Data-Center Debt

What It Means for Investors

As businesses pile into AI-related borrowing, debt investors are becoming more cautious. The repriced deals included offerings from KKR & Co.-backed CyrusOne Holdco LLC and Blackstone Inc.-backed QTS Realty Trust Inc. This caution fits into a broader pattern. In the US high-grade corporate bond market and elsewhere, large technology firms are now paying more to borrow. Doubt is appearing in other corners too, such as data-center CMBS, with volume around $5.7 billion so far this year, and Nordic high-yield debt, where Pure Data Centres Group scrapped a planned €1 billion ($1.1 billion) bond sale last month and turned to bank loans.

The resistance shows the competition facing technology firms as they chase AI profits. Some bond fund managers are stepping back from this kind of exposure. Even with pockets of demand, the pricing pressure in the latest transactions shows that data-center CMBS buyers are becoming more selective. Rather than accepting terms simply because a deal is backed by AI-related property, investors are weighing tenant quality, leverage, and the ability to refinance if issuance remains heavy.

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"The AI luddite trade is pouring over into the data center CMBS financing market," Stephen Buschbom, who leads applied research and analytics at Trepp Inc., said. He specifically cited QTS, which he said also carried relatively high leverage. Buyer resistance could dampen sales in this market, he added.

Data-center CMBS remain niche but are taking up a larger slice of securitized commercial real estate, accounting for 7.3% of CMBS issuance so far this year, according to Trepp data through July 28. The flood of AI-linked transactions has helped lift capital costs. JPMorgan Global Research puts AAA spreads on single-borrower data-center deals at 168 basis points above SOFR as of July 28, compared with 153 basis points 12 months earlier. BBB- spreads also climbed, reaching 332 basis points on July 28 versus 321 basis points a year earlier.

The recent pricing pressure comes as technology companies sharply expand their use of debt markets. That helps explain why investors are scrutinizing terms such as leverage, tenant quality, and whether a facility is leased to a hyperscaler.

That broader supply is growing quickly. Global technology borrowing for AI has already exceeded $385 billion this year, and US AI-linked high-grade issuance has surpassed $200 billion. With more debt in the pipeline, investors can afford to demand stronger protections and clearer paths to refinancing.

Some Deals Still Work

Some transactions are still finding buyers. Blue Owl Capital Inc. sold a data-center CMBS in June at the same levels initially discussed. At less than half the size of the QTS and CyrusOne transactions, it was collateralized by a Virginia facility whose tenant is an investment-grade hyperscaler.

"We think sentiment shifted during the past month, with investors turning incrementally more cautious on potential thematic risks," Morgan Stanley strategists said.

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