Episode summary
Data Center Real Estate in High Demand on AI Boom
Bloomberg Surveillance
· · 7 min · Guests: Rich Hill, Woo Jin Ho
Summary
Commercial real estate has gone through a broad reset, with private valuations in the U.S. and Europe down 20% to 25% and public values falling by roughly the same amount. The guest argues this is a normal cycle rather than a collapse: listed real estate troughed first in October 2023, private valuations lagged by 12 to 18 months, and distress usually peaks after valuations bottom because banks avoid selling into weak markets.
On interest rates, the guest pushes back on the usual call for lower long-term rates. He says commercial real estate investors should want stability more than cuts, because materially lower rates could signal a weaker economy, tighter financial conditions, and wider credit spreads.
Office is looking better in some markets, especially New York City and parts of San Francisco, but the guest says the real problem is class B and C buildings, not the sector as a whole. He is bullish on office over the medium to long term and sees office-to-residential conversions as attractive but difficult and limited to a relatively small set of buildings.
The clearest opportunity, he says, is data centers tied to AI. Demand is constrained by land and power, and he distinguishes between cloud, AI inference, and generative AI. He is most bullish on cloud and inference, calling them real existing demand, and says development economics in that niche can be highly attractive.
Key takeaways
- The guest says U.S. and European commercial real estate valuations are down 20% to 25%, but calls it a normal cycle reset rather than a structural crash.
- He argues investors should prefer stable long-term interest rates over lower ones, because cuts could reflect weaker growth and tighter financial conditions.
- Office weakness is concentrated in class B and C buildings, while New York City is rebounding and San Francisco is starting to improve.
- Office-to-residential conversions are an attractive thesis, but the guest says only about 150 to 200 buildings in the U.S. are actually feasible candidates.
- The guest is most bullish on data centers serving cloud and AI inference, not generative AI, because demand is real and current while land and power remain constrained.
Notable quotes
“Private real estate valuations are down 20 to 25% in the US and in Europe”
“We think this is a cycle going through a normal reset”
“What we're rooting for here is stability. That's what we think the market needs to see”
“Data center demand is constrained by land and power”
How the episode opens
Commercial real estate's one of the few asset classes in the world where valuations have significantly reset. Private real estate valuations are down 20 to 25% in the US and in Europe. Public valuations are down around the same amount.
We think this is a cycle going through a normal reset. Um that's hard to understand because there's a lot going on and a lot of noise. But let me explain what I think that means.
Listed reads trough first because they're leading indicators in both downturns and recoveries. Listed reads trough in October of 2023 and they're up more than 35% from those levels. Private valuations trough 12 to 18 months later.
We've now seen five consecutive quarters in the United States where total returns are higher at six quarters in Europe. There's actually something that happens though on a lagging indicator that I think confuses a lot of people. Distress in the commercial real estate markets doesn't peak out until after private valuations trough.
Why is that happening? Well, it's part of the grieving process. Banks don't like to sell distressed loans into distressed markets.
They like to sell distressed loans into stabilized markets. So, that's where we think we are. Um, uh, you bring up a good question, though.
What about interest rate cuts? U, you hear a lot of commercial real estate professionals saying, "We want lower interest rates. That's not our view.
We want stable interest rates. Um, and the reason I say we don't want lower interest rates, and I'm really talking about long-term interest rates, because commercial real estate borrowers finance themselves with long-term interest rates. If you have meaningfully lower interest rates, be careful what you wish for.
That actually might mean a weaker economy. That might mean tighter financial conditions, wider credit spreads.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai data centers
- data center reits
- semiconductors for llms
- data center networking and fiber
- data center real estate investment
Companies and tickers mentioned
- PFG
- NVDA
- AVGO
- AMD
- GLW
- ANET
- CLST
- DELL
- EQIX
- DLR
- AMZN
- GOOGL
- GOOG
- AMT
- CCI
- Principal Asset Management
- Nvidia
- Broadcom
- Advanced Micro Devices
- Corning
- Arista Networks
- Celestica
- Dell
- Penguin Solutions
- Equinix
- Digital Realty Trust
- Amazon
- American Tower
- Crown Castle
Watch the episode
Watch “Data Center Real Estate in High Demand on AI Boom” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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