Wall Street is making data centers a real estate bet. The risk increases

Data centers have divided America. The anger of everyday citizens continues to increase against the backdrop of enthusiastic and deep-pocketed Wall Street investors who are making artificial intelligence the economic engine of the future. And as the data centers that power the answer to Google Gemini, Meta Muse, Anthropic’s Claude and OpenAI’s ChatGPT spread across the US landscape, financial companies are trying to make investors in AI infrastructure part of real estate allocations that can diversify their portfolios.

For the most part, funds from alternative investment firms that promise investors a piece of the physical infrastructure that powers the AI ​​economy remain the province of institutional investors like pension funds. But the trend should be limited as well as dip in the market of retail investors. Alternative investment giant Blackstone has been in the front, making it Blackstone Digital Infrastructure TrustThe newly formed real estate investment trust, or REIT, traded on the NYSE earlier this year.

“We see this as an opportunity to capture the entire stable data center market and build a home in the common market that we’re thinking about,” CEO Nick Pell said in a CNBC “Squawk on the Street” interview in May.

While many new data center projects in the US remain subject to changes in public and political opinion – and various moratoriums including in the states of New York and Texas – Blackstone REIT mainly focuses on data centers in mature markets such as Northern Virginia and Dallas, where widespread data centers already had a significant presence before the AI ​​boom.

“It’s the least risky way to play,” Pell said, adding that Blackstone can then hand-pick data centers to offer investors from what he says is a $300 billion market. The company sold 87.5 million shares at $20 each in its mid-May debut. But the fund is down about 16% since then, with shares closing at $17 on Thursday.

Blackstone declined to comment further.

Equinix and Digital Realty Trustdevelopers of data centers that are traded as REITs, have also fared long-term, although shares have stalled in the period since the launch of BXDC.

The REIT sector has performed better this year than usual during a period of rising rates and higher bond yields, the situation in the real estate sector is usually volatile due to rising credit costs and investors find the stock market sector associated with income-generating assets less attractive. But most of the gains came early in the year before bond market stress intensified, with many REIT investments selling off since August.

Pell described the opportunity on the company’s latest earnings call as “enormous, with the total addressable market for our business expected to exceed $1 trillion over the next several years.”

Data centers are a large part of national construction spending. In fact, construction spending in the US has been boosted by construction AI while many other sectors’ construction spending has declined.

Blackstone is not alone among alternative investment firms offering data centers as an investment opportunity. Blue Owl, which already runs a private digital infrastructure fund for sophisticated investors, is reportedly considering launching a $6.5 billion public REIT that would roll over existing data center investments into a new fund. The company said it has more than 130 data centers in 32 global markets with more than $18 billion in assets. In contrast, Blackstone’s BXDC has not deployed capital for investment.

Blue Owl declined to comment to CNBC, but Blue Owl co-CEO Marc Lipschultz made the case for the sector in a recent LinkedIn post, calling data centers one of the strongest long-term investment opportunities in decades and citing a lower risk-return profile. “These projects have produced consistent results with reduced credit risk. Contracts are structured with protections that make us whole even if the tenant leaves early,” said Lipschultz.

While not a REIT, it is a real estate asset management giant Brookfield Asset Management list of data center service providers, Csquareas an independent trading vehicle on the NYSE in July. Its stock has fallen as much as 16% since its debut.

But the investment case turned into a less powerful headwind when Blackstone launched the fund: a political backlash that grew quickly. A national poll from Gallup found 70% of Americans oppose data centers being built in their area, and that opposition is bipartisan — a New York Times/Siena poll this fall found roughly two-thirds opposed regardless of party.

New York became the first state to pass a moratorium on the agreement of new hyperscale data centers in July, and Texas followed in August, with Gov. Greg Abbott – who called the state of AI “epicenter” just a year earlier – to put a stop to the new agreement after having called for an audit grid-connection in August. For investors, the risk is not only whether the data center will be built, but whether the local and state politics slow down or derail the project has baked into the idea of ​​funding.

Oracle shares fell 4% in late September after the company posted a force majeure notice related to Project Jupiter, a New Mexico data center campus and part of the Stargate AI buildout developed by Blue Owl. Oracle is seeking to delay payments on the project if it is not operational by 2028, citing a mix of regulatory hurdles and local opposition. But he said the project remains on track.

The risk is also global for investors who own and finance projects around the world. An Australian data center company backed by Nvidia and Blackstone has just pulled its planned IPO due to low investor interest.

There is also greater economic volatility associated with AI trading. On Thursday, many AI-themed stocks fell when it was reported that OpenAI’s revenue forecast was close to $20 billion below previous revenue projections.

Sabur Mollah, professor of finance at Gettysburg College, said data centers could represent an attractive long-term investment because of growing demand for cloud computing, AI, digital services, and data storage.

“Quality facilities can generate relatively stable rental income through long-term rental agreements with large technology companies,” said Mollah, adding that the main potential rewards include continuous rental income, exposure to the structural growth of the digital economy, and diversification beyond the traditional real estate sector.

However, Mollah said, the sector is capital intensive and highly dependent on reliable access to electricity, cooling systems, and network connectivity. And the hype and excitement around AI can cause some investors to put blinders on.

“The main risks include overvaluation driven by excessive enthusiasm around AI, substantial development and maintenance costs, dependence on a limited number of key technology tenants, and limitations on power availability,” Mollah said.

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

Data center dangers go beyond markets and politics

Many factors come into play with data center investments, said Patrick Datz, digital risk practice leader, and Rachel Nixon, data center practice leader at IMA, an insurance brokerage and risk advisory firm.

“From a non-market hazard perspective, natural disasters are an ‘Act of God’ that you can’t control,” said Datz, adding that data centers were typically built in “Data Center Alley” in Virginia in the past, due to the location and infrequency of natural disasters. But now there is a push to build them everywhere, and this brings more risks.

“There’s always a danger that the asset will be stripped,” Datz said, and that’s where the insurance comes in.

“If the uptime goes down, it just doesn’t have the promised uptime, whoever the contract is with can create another problem down the line. There’s a lot of risk,” said Nixon.

Still, the two say they generally see data centers as a safe bet.

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

“A lot of thought is going into the design, it’s not built overnight and the insurance operators involved don’t take risks, they’ll play it safe,” said Datz.

Traders on the Kalshi prediction market platform are increasingly bullish on the continued development of AI in the US despite the risks, as there is a 75% probability that there will be more than 5,100 data centers planned or operating (from about 4,700 now) before 2027. The bet has increased from 60% two weeks ago.

Retail interest has been limited so far. Even in Blackstone REIT, which can be bought and sold like any stock, about 94% of ownership is institutional, according to market data.

But the trend of bringing more personal investments to retail investors is set to accelerate with the Securities and Exchange Commission Chairman Paul Atkins revealed proposals last week to increase access to retail investors for private investments, and bring aspects of long-term fund management associated with institutions and high-net worth world (eg Fees for the performance of hedge funds) to a wider range of investments.

Experts warn, as illustrated in Oracle’s announcement, that investors should tread carefully, as new asset classes and especially those often associated with institutional buyers.

For starters, liquidity is a big issue. If you think you can use your data center investment as a type of ATM, you may be disappointed.

“The infrastructure behind these investments is built for a relatively small number of institutional investors who make large commitments and not for millions of retail investors who invest smaller amounts,” said Andrew Tarver, president of Altic (Private Markets) at InvestCloud, a wealth management technology platform.

Tarver describes this as a “post office” model: a system designed for slower manual transactions, not continuous retail activity. Before investing in anything outside of publicly traded securities like REIT funds or REITs with daily liquidity on major exchanges, investors should understand how the redemption window, liquidity limits and underlying assets work, because access to funds does not mean direct access to cash. Even sophisticated investors have seen how these restrictions could become a problem with the battle between private credit fund managers – many of whom also manage data center investments – and shareholders over redemptions in 2026 as investors rush out for fear of a “SaaSpocalypse.”

Overall, data center funds may be suitable as a long-term portfolio allocation, but Jake Falcon, CEO of Falcon Wealth Advisors, says that investing in data centers and similar instruments is not something that should be done quickly.

He said public REIT funds are ideal investment vehicles for many individual investors. “Because they offer liquidity, I’m no different than private funds,” he said. “Individual investors should triple their understanding before investing in alternative funds. … One should look at the overall portfolio and ask himself if the investment he is considering is necessary to achieve any goal for his money,” added Falcon.

If they don’t know, they say, they should do more research or find a fiduciary advisor to guide them.