CMBS Investors Resist Data Center Debt Amid AI Surge

Investors in commercial mortgage-backed securities are increasingly avoiding debt tied to data centers, a trend some market participants call a 'Luddite trade.' This skepticism comes despite a global surge in AI-related borrowing, with big tech companies securing over $385 billion this year. The shift is evidenced by widened pricing and higher risk premiums for recent offerings from operators such as CyrusOne Holdco LLC and QTS Realty Trust Inc.

Wellington Management Company and other firms are largely avoiding the sector, citing concerns over property valuation uncertainties and potential supply gluts. In contrast, some investors view these wider spreads as an attractive buying opportunity. Research from Trepp indicates that data center CMBS now account for 7.3% of all CMBS issuance this year.

To counter this resistance and attract capital, some issuers are adopting flexible repayment structures common in asset-backed securities to protect against technology obsolescence. While some firms like Blue Owl Capital successfully sold data center CMBS in June, others have pivoted their strategies. Pure Data Centres Group recently abandoned a planned €1 billion bond sale in the Nordic market, opting for bank financing instead.