Wall Street is touting data centers as a bet on real estate. the risk is increasing

Data centers have divided America. Public anger continues to grow, with enthusiastic and deep-pocketed Wall Street investors betting that artificial intelligence will become the economic engine of the future. And as data centers providing the answer to Google’s Gemini, Meta’s Muse, Anthropic’s Claude, and OpenAI’s ChatGPT spread across the United States, financial firms are pitching AI infrastructure to investors as part of real estate allocations that can diversify their portfolios.

The bulk of the money from alternative investment companies, which promise investors pieces of the physical infrastructure that powers the AI ​​economy, remains in the hands of institutional investors such as pension funds. However, this trend has also penetrated the individual investor market, albeit to a limited extent. Alternative investment giant Blackstone is at the forefront. Blackstone Digital Infrastructure Trustis a newly formed real estate investment trust (REIT) that began trading on the New York Stock Exchange earlier this year.

“We saw this as an opportunity to capture the entire stabilized data center market and establish a place in the public market where we think we belong,” CEO Nick Pell said in an interview on CNBC’s “Squawk on the Street” in May.

While many new data center projects across the U.S. are still subject to changing public opinion and political opinion and various moratoriums, including in New York and Texas, Blackstone REIT is primarily focused on data centers in already mature markets such as Northern Virginia and Dallas, where sprawling data centers had a significant presence even before the AI ​​boom.

“This is the least risky strategy,” Pell said, adding that Blackstone can cherry-pick the data centers it offers to investors in what it claims is a $300 billion market. The company sold 87.5 million shares at $20 each in its debut in mid-May. But the fund has fallen about 16% since then, with shares closing below $17 on Thursday.

Blackstone declined further comment.

Equinix and Digital Realty TrustThe data center development company, which trades as a REIT, has fared well in the long run, although its stock price has been depressed since BXDC’s launch.

The REIT sector has performed better than usual this year in a period of rising interest rates and bond yields, but the real estate sector is typically volatile in this context due to rising financing costs and investors’ lack of attraction to sectors of the stock market associated with income-producing assets. But most of the gains occurred early in the year, before bond market stress intensified, with many REIT investments selling off since August.

Pell called the opportunity “huge, with the total addressable market for our business expected to exceed $1 trillion over the next few years,” Pell said in the company’s recent earnings call.

Data centers represent a growing portion of construction spending nationwide. In fact, construction spending across the United States is being supported by AI construction while construction spending in many other sectors is declining.

Blackstone isn’t the only alternative investment firm offering data centers as an investment opportunity. Blue Owl, which already operates a private digital infrastructure fund for sophisticated investors, is reportedly considering launching a public REIT worth $6.5 billion that would roll existing data center investments into a new fund. The company says it owns more than 130 data centers in 32 markets around the world and has assets of more than $18 billion. In contrast, Blackstone’s BXDC has not yet committed capital to the investment.

Blue Owl declined to comment to CNBC, but Blue Owl co-CEO Mark Lipschultz made the case for the space in a recent LinkedIn post, calling data centers one of the strongest long-term investment opportunities in decades and citing attractive, low-risk return characteristics. “These projects have delivered consistent results while mitigating credit risk. The contracts are structured with protections that will keep us safe even if a tenant exits early,” Lipschultz said.

Although not a REIT, it is a major real estate asset management company. Brookfield Asset Management List data center service providers, sea ​​squareas an independent trading vehicle on the NYSE in July. The company’s stock price has fallen nearly 16% since its debut.

But the investment deal faces the same headwinds that Blackstone faced when it launched the fund: a rapidly growing political backlash. A national Gallup poll found that 70% of Americans oppose building data centers in their area, and that opposition is bipartisan. A New York Times/Siena poll this fall found that nearly two-thirds of people across party lines opposed it.

New York became the first state to pass a moratorium on new hyperscale data center approvals in July, followed by Texas in August, when Gov. Greg Abbott (who just a year ago called the state an “epicenter” for AI) ordered a moratorium on new approvals after already calling for an audit of grid connections in August. The risk for investors is not just whether data centers will be built, but whether local or state politics will slow down or projects already factored into the fund’s revenue assumptions will fall through.

Oracle stock fell 4% in late September after the company sent a force majeure notice related to Project Jupiter, a data center campus in New Mexico and part of the broader Stargate AI buildout developed by Blue Owl. Oracle is seeking to delay payments for the project if it is not operational by 2028, citing regulatory hurdles and local opposition. However, the project is said to be progressing smoothly.

These risks are also global to investors who own and finance projects around the world. An Australian data center company backed by Nvidia and Blackstone has just called off its planned IPO due to overwhelming investor interest.

Broad economic changes are also increasingly relevant to AI trade. Many AI stocks fell on Thursday after it was reported that OpenAI’s revenue forecast was nearly $20 billion below prior revenue estimates.

Saber Moller, a finance professor at Gettysburg College, said the growing demand for cloud computing, AI, digital services and data storage can make data centers an attractive long-term investment.

“High-quality properties have the potential to generate relatively stable rental income through long-term lease agreements with large technology companies,” Mora said, adding that the main potential rewards include sustained rental income, exposure to the structural growth of the digital economy, and diversification beyond traditional real estate sectors.

However, Mora said the sector is highly capital-intensive and highly dependent on reliable access to power, cooling systems and network connectivity. Also, the hype and excitement around AI may blind some investors.

“Key risks include overvaluation due to excessive enthusiasm around AI, high development and maintenance costs, dependence on a limited number of key technology tenants, and limited power availability,” Mora said.

Additional concerns include technology obsolescence, refinancing risks, construction delays, and the need for ongoing capital expenditures.

Data center dangers transcend markets and politics

A number of factors can come into play when investing in data centers, said Patrick Datz, digital risk practice leader, and Rachel Nixon, co-lead of data center practice, at insurance brokerage and risk advisory firm IMA.

“From a non-market risk perspective, natural disasters are ‘acts of God’ that you can’t control,” Datz said, adding that in the past data centers were typically built in Virginia’s “data center array” because of the frequency of natural disasters and the location. But now there’s a push to build them everywhere, which puts them at even more risk.

“There’s always a risk that your assets will go offline,” Datz says, and that’s where insurance comes in.

“If your uptime goes down, you’re just not achieving the uptime you promised, and whoever you’re contracting with could potentially have other problems down the road. There’s a lot of risk,” Nixon said.

Still, both said they think data centers are a safe option overall.

“We’re big believers in this space,” Datz said, adding that data centers offered to investors are typically vetted and insured for $3 billion to $5 billion.

“A lot of thought has gone into the design. This is not going to be built overnight and the insurance companies involved will be playing it safe rather than assuming any risk,” Datz said.

Traders on the Calci prediction market platform are increasingly bullish on the continued ramp-up of AI across the U.S. despite the risks, seeing a 75% chance that there will be more than 5,100 data centers planned or in operation by 2027 (up from about 4,700 today). This prediction is up from 60% two weeks ago.

Retail interest is limited to the present. Even in Blackstone REIT, which can be bought and sold like any other stock, about 94% of ownership is held by institutional investors, according to market data.

But the trend to bring more individual investments to retail investors is likely to accelerate, with Securities and Exchange Commission Chairman Paul Atkins announcing last week a proposal that would increase retail investors’ access to retail investing and introduce aspects of fund management long associated with the institutional and wealthy worlds (such as hedge fund performance fees) to a broader range of investing.

As Oracle’s announcement illustrates, experts warn that, as with any new asset class, especially one that often involves institutional investors, investors need to tread carefully.

First of all, liquidity is a big issue. If you think you can use your data center investment as a kind of ATM, you may be disappointed.

“The infrastructure behind these investments was built for a relatively small number of institutional investors with large amounts of money, not millions of individual investors with small amounts of money,” said Andrew Tarver, president of Altic (Private Markets) at InvestCloud, an asset management technology platform.

Tarver describes it as a “post office” model, a system designed for slower, manual transactions rather than continuous retail activity. Before investing in anything other than publicly traded securities, such as REITs or REIT funds that are liquid daily on major exchanges, investors should understand how the redemption periods, liquidity limitations, and underlying assets work, as access to the fund does not necessarily mean immediate access to cash. Even sophisticated investors can see how such restrictions could become problematic in a battle between private credit fund managers (many of whom also manage data center investments) and shareholders over the 2026 redemption, as investors rush for the exit due to concerns about the SaaSpocalypse.

Overall, data center funds may be a good conservative long-term portfolio allocation, but Jake Falcon, CEO of Falcon Wealth Advisors, said investing in data centers and other similar products should not be done on a whim.

He said public REIT funds are a suitable investment vehicle for many individual investors. “I’m not against them compared to private funds because they provide liquidity,” he said. “Retail investors need to triple their understanding before investing in alternative funds. … They should look at their entire portfolio and ask themselves whether the investments they are considering are necessary to meet their financial goals,” Falcon added.

If you’re not sure, you should do more research or find a fiduciary advisor to guide you, he said.