Data center bonds are in high demand, but DoubleLine has decided to "take a detour"? Big shots say the risks are unclear.

DoubleLine Capital hopes to join the ranks of investors and better control the risks of investing in data centers by investing in commercial mortgage-backed securities supported by these properties. DoubleLine portfolio manager Morris Chen, in an interview, stated that the risks of investing in securitizations backed by data centers are more ambiguous than investing in well-known commercial real estate such as office buildings, and require more caution. "At this critical moment, we can only stand by and watch," Chen said. "What happens if an asset really defaults? Apart from a large amount of empty shell space tied to the underlying assets for me, what do you actually have? These are questions I cannot answer myself." In recent years, data centers have become a hot asset class as technology companies invest more in infrastructure to run artificial intelligence models. Investors are increasingly purchasing assets in this area in the form of commercial mortgage-backed securities, which split the cash flow of data center corporations' tenants into bonds of different sizes and risks. Unlike other types of real estate, investors in data center-backed debt must consider less-known factors, such as how technological advancements (still rapidly evolving) will impact future demand. Chinese AI startup DeepSeek recently stated that it has developed an effective language model at a training cost only a fraction of models from companies like Claude or OpenAI, highlighting this risk. This has raised questions about the fundamental drivers of data center demand. "Given that data center transactions are similar to new office building transactions, with the latter using traditional long-term leases with fixed rentsI can understand office buildings, but I don't fully understand data centers," Chen said. "Therefore, in terms of related risks, some of these bonds should have additional risk premiums." Mr. Chen manages a $2.31 billion DoubleLine Real Estate Mutual Fund, which holds short-term, investment grade commercial mortgage-backed securities. Since its launch in March 2023, the fund has had a total return of approximately 13.4%. Currently, Mr. Chen sees opportunities in the "very mature" CMBS related to industrial, retail, and multifamily properties. Additionally, as the trend of working from home during the pandemic gradually diminishes, the sentiment in the office building market is improving. "We are not shying away from these spaces," Chen said. "Even if you walk around New York City today and look at the Park Avenue corridor and Grand Central Station area, you will see the high productivity and utilization of these buildings."