Data center boom reshapes US commercial real estate debt market, leaving investors facing risk pricing challenges.

For a long time, commercial mortgage-backed securities (CMBS) have been an important pillar of financing for US office buildings, apartments, and shopping malls. Now, this market is being reshaped by a surge of data center deals, forcing investors to confront a series of entirely new risks. From power supply and grid capacity constraints to rapidly changing cooling and computing density requirements, CMBS buyers are being pushed into areas of risk assessment that previously had little to do with commercial real estate. Even traditional concerns such as tenant demand and operational stability are quietly changingdata centers rely heavily on a handful of hyperscalers, whose future demand is difficult to judge. If these tenants leave after their leases expire in the coming years, the cost of retrofitting these highly specialized buildings could be extremely high. Data center bond issuance wave hits, risk assessment becomes a challenge Since the beginning of 2025, data center CMBS issuance has reached about $17 billion, more than three times the total issuance over the previous two years. During this period, data centers have accounted for about 8% of new commercial real estate bonds. With billions of dollars more in projects queued to enter the market, industry veterans are rapidly revising their risk assessment playbooks in hopes of avoiding blowup deals. "Real data centers are measured in compute units and megawattsfor real estate investors, this is a completely unfamiliar world." said Alex Killick, senior managing director at CWCapital Asset Management. "These metrics are hard to fit into the analytical frameworks we are used to. Reassessing these data centers a few years from now is very difficult. We reassess office or hotel CMBS every day. But two years from now, how am I supposed to redo a credit assessment on a data center?" Killick said CWCapital is developing an entirely new stress-testing model for this sector in an attempt to answer that question. Axonic Capital is facing the same dilemma. Its portfolio manager Steven Jury has chosen a relatively cautious strategy: keeping data center assets at a low proportion of the firm's portfolio and emphasizing diversification across tenant types, use cases, and geographic distribution. Most data center CMBS use a single-asset, single-borrower (SASB) transaction structure, in which a large mortgage loanusually corresponding to a single facility or campusbacks the bonds. "What will these assets really be worth in 5, 10, or 20 years, and who will need themthat is the hardest question to answer." Jury said. "Technology, tenant demand, and the supply landscape can all change significantly over that period." Old risks, new logic: leases, site selection, and tenant concentration are changing Many of the risks CMBS buyers have long had to weigh still exist, but in the case of data centers, the factors driving those risks are already very different. Take lease agreements, for example. Provisions on power costs, minimum capacity commitments, and downtime liability determine who bears unexpected expenses, which in turn affects cash flow available for debt service. Reviewing these terms is also more difficult, because tenants often insist on confidentiality regarding their identity and other lease details. Ben Hunsaker, a portfolio manager at Beach Point Capital Management, said: "Traditional commercial real estate investors know how to evaluate office buildings, apartments, warehouses, and retail properties, because leases tend to be relatively standardized and tenant information is more transparent. Data centers, by contrast, are much more opaque." Site selection logic has likewise been rewritten. In the past, property value was judged by transportation convenience, amenities, or proximity to a city core; today, value is judged by access to cheap power and sufficient transmission capacity. These advantages will determine how competitive and how valuable a data center facility remains when the loan matures. Tenant concentration and lease expiration risk have also changed. For office buildings or apartments, re-leasing risk is simply a matter of finding another tenant; but for data centers, the more critical question is whether customized power and cooling systems can actually be adapted for other companies. If not, how large will the ultimate cost of renovation and conversion be? For CMBS investors, this means higher expected capital expenditures, longer vacancy periods with no income, and weaker recovery rates if borrowers run into trouble. "These granular risks are really, really hard for me to fully digest." said Stephen Buschbom, head of applied research and analysis at data research firm Trepp. "These projects look more like infrastructure and some complex technology projects than traditional real estate projects." Obsolescence cycles shrink sharply: from "decades" to "a few years" In addition, there are considerations that are almost unheard of for CMBS buyers. The rapid iteration of AI chips may bring sharp increases in power and cooling demand. A facility designed and built around one generation of hardware may become obsolete within just a few years, shrinking asset value and making debt refinancing much more difficult. "The obsolescence cycle for traditional real estate can be modeled in units of decades. But data centers are completely different." Killick said. "The chips you installed six months ago may soon be replaced by other unknown chips. That alone makes due diligence extremely difficult." At the same time, data centers have already become an important political issue from the local to the national level, and the industry faces public opposition rarely seen in commercial real estate. Market observers note that concerns about utility costs and pressure on local infrastructure have already sparked calls in some communities to restrict new projects, making the future regulatory environment especially difficult to predict. Oversupply concerns: spreads have already quietly widened Some well-worn concerns remain, especially oversupply. Large technology companies have already issued more than $429 billion in bonds globally this year to fund AI buildouts. Although this financing spans multiple fixed-income markets beyond CMBS, investors' fatigue with the financing boom has also spread to real estate bonds. Just last week, for a $356 million bond backed by a 30-megawatt facility near Elk Grove Village, Illinois, the pricing spread on the highest-rated portion was noticeably wider than initial guidance. This was already the third such case in recent months. Data from Barclays shows that since the start of the year, risk premiums on AAA-rated data center deals have widened and are now on average 1.65 percentage points above their floating-rate benchmark, compared with 0.93 percentage points, 1.05 percentage points, and 1.25 percentage points for offices, retail, and industrial properties, respectively. With a large number of projects soon needing financing, Citigroup expects data center CMBS issuance to jump about 50% next year to $18 billion to $20 billion. "We expect supply to increase next year, which will bring longer-term mark-to-market risk, especially if demand becomes more fragile." Jeffrey Berenbaum, head of global market research at Citigroup, wrote in a report this month. Still, compute demand continues to far exceed available supply, which helps support investor confidence in the sector. He said: "Right now it looks like you may have AA-rated tenants with about 15 to 30 years left on their leases, but if those tenants all move out, all you have left is the world's largest pickleball court."