Data centers are becoming a bigger piece of the commercial real estate debt market, forcing investors to rethink what it means to underwrite a property.
About $17 billion of data center commercial mortgage-backed securities has been issued since the start of last year, more than three times the amount issued over the preceding two years, Bloomberg reported. The sector accounts for roughly 8 percent of new commercial property bond deals; substantially more issuance is expected as developers race to build capacity for artificial intelligence.
That growth is bringing a different set of risks to a market more accustomed to financing offices, apartments, retail and industrial properties. Investors have to scrutinize everything from power availability and transmission capacity to cooling systems and computing density, all of which can determine whether a facility remains competitive long after a loan is originated.
Tenant risk is also getting more complicated. Data centers frequently rely on a small number of hyperscalers, whose identities and lease terms can be closely guarded. Lease provisions governing power costs, minimum capacity commitments and downtime can materially affect a property’s cash flow and its ability to service debt.
And unlike a conventional commercial property, replacing a tenant may not be straightforward. A facility built around a particular customer’s electrical and cooling requirements could require substantial capital to accommodate a different occupant. If the building becomes obsolete, a lender could face higher capital costs, longer downtime and weaker recovery values.
Technology adds another wrinkle. Rapid advances in AI chips can increase power and cooling requirements, potentially making facilities outdated far faster than traditional real estate. That creates a particularly difficult refinancing question for investors underwriting loans that could remain outstanding for years.
The market is already demanding a higher risk premium. AAA-rated data center CMBS now carries an average spread of 1.65 percentage points over its floating-rate benchmark, compared with 0.93 percentage points for office, 1.05 for retail and 1.25 for industrial, according to Barclays data.
Citigroup expects data center CMBS issuance to rise roughly 50 percent next year to as much as $20 billion. But a growing supply pipeline could eventually test investor appetite, particularly if AI demand cools.
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