AI slowdown fears hit data center stocks

Major data center REITs, Digital Realty and Equinix, experienced stock declines following recent pronouncements suggesting a slowdown in artificial intelligence development. However, industry leaders are signaling continued robust demand for data center infrastructure. Digital Realty CEO Andrew Power indicated that pledges for a slower pace of AI advancement by companies like Anthropic, OpenAI, and xAI do not signify an end to AI's impact or the need for supporting real estate.

Power elaborated that broader digital transformation and cloud computing growth, separate from AI, are substantial drivers for his business. He noted that hyperscalers have been balancing capacity allocation between commercial cloud operations and AI development. Data center demand is expected to represent approximately 70% of global capacity needs by 2030, according to McKinsey, potentially requiring nearly $7 trillion in capital outlay. JLL estimates that real estate alone could attract $3 trillion in investment over the next five years.

Andrew Batson, global head of data center research and strategy at JLL, highlighted that the primary growth area for data centers in the coming years will be inference—the widespread adoption of AI tools by businesses and consumers. He pointed out that with only a quarter of Americans currently using AI daily, there is substantial room for increased adoption and, consequently, greater data center demand. Batson also cited strong institutional investor confidence in the sector.

Power assured shareholders that Digital Realty's strategy remains solid, with a development pipeline of $20 billion under construction. The company has evolved its funding model and is raising private capital, alongside joint ventures, to ensure financial stability amidst potential market volatility.