Data center REIT CEO says real estate ‘not in an oversupply state’

As major tech players like Nvidia, Amazon, Google, and Meta ramp up their data center initiatives, discussions about potential overbuilding in the sector have intensified. Critics argue that the data center market is still developing, with many uncertainties lurking ahead. Additionally, there are worries about the financial viability of some of these expansive projects. However, Andy Power, the CEO of Digital Realty—the world’s second-largest data center REIT—holds a contrary view. With 25 years of experience at the company, Power expressed confidence that construction levels in the sector are justified. "Based on the actual real demand from real customers with real long-term, 15-year contracts, we are not in an oversupply state today," he remarked. The outlook for the global data center market is one of remarkable growth, with projections indicating capacity could soar from 103 gigawatts to 200 gigawatts by 2030, as reported by JLL. This surge is largely propelled by advancements in artificial intelligence, with JLL estimating that AI workloads may account for half of all data center capacity by the end of the decade. JLL points out that property metrics do not suggest a bubble in the market. In fact, the firm anticipates that achieving this growth will require around $3 trillion in investments over the next five years, which includes $1.2 trillion in real estate asset value and approximately $870 billion in new debt financing. They describe this trend as an "infrastructure supercycle." Matt Landek, JLL's global division president for data centers and critical environments, stated, "We're witnessing the most significant transformation in data center infrastructure since the original cloud migration. The scale of demand is extraordinary. Hyperscalers are allocating $1 trillion for data center spending between 2024 and 2026, while supply constraints and lengthy grid connection delays are reshaping our development strategies and energy sourcing." Power emphasizes that the sector is evolving alongside robust technology trends like cloud computing and digital transformation, which are expected to continue driving demand. "There will certainly be fluctuations along the way, but these are trillion-dollar companies with substantial cash flows investing in innovation," he noted. He added that the long-term durability of digital infrastructure helps position them favorably in the market. Power also highlighted the strategic importance of location in data center investments, noting that Digital Realty is focusing on areas with high demand for data processing, such as Northern Virginia, Chicago, Dallas, Singapore, Tokyo, Frankfurt, and London. Despite the optimistic outlook, concerns linger regarding tenant creditworthiness, particularly for companies like Oracle, which are heavily involved in AI initiatives. Barry Sternlicht, chairman of Starwood Capital Group, raised alarms about the financial health of tenants connected to high-risk AI projects. Nevertheless, Power reassured that most companies, including Oracle, have strong business foundations outside of AI and tend to prefer owning their real estate assets. Currently, those companies own about half of their data center facilities, indicating a commitment to the market.