Data centers 2025 Outlook – Developer leverage, regulatory risk to rise as growth surges

Executive Summary

Demand for data center capacity to support artificial intelligence (AI), cloud computing and data storage services will intensify in 2025. Large tech companies, or hyperscalers, such as Microsoft Corporation (Aaa stable), Amazon.com Inc.'s (A1 stable) Amazon Web Services (AWS) unit, Alphabet Inc.'s (Aa2 stable) Google business, Facebook parent Meta Platforms Inc. (Aa3 stable) and Oracle Corporation (Baa2 stable), are rapidly building and leasing new data centers and expanding into newer and smaller markets. This growth requires data center developers and landlords to raise substantial development capital in the form of equity, bank loans, corporate and securitized bonds, or project finance vehicles. Leverage levels will likely increase for developers focused on hyperscale buildouts to be completed in 2026-28.

» Global data center capacity to surge again in 2025. Most of the new capacity coming online is preleased to Microsoft, Google, AWS, Meta and Oracle, which will limit the risk of introducing a significant surplus of unoccupied capacity into the market. Additionally, new colocation data center capacity is being developed for small to medium-size tenants who pay higher lease rates on a per kilowatt per month basis. Vacancy rates may briefly uptick in some markets until this newly available colocation capacity is fully leased. But they will remain low given supply constraints in most markets.

» Private equity to provide capital for growth, while hyperscalers invest in related technologies. Medium-size and large data center REITs and developers have been eagerly snapped up by major private-equity investors. Even larger mega partnerships have formed in recent months, such as the $100 billion Global AI Infrastructure Investment Partnership involving Blackrock Inc. (Aa3 negative), Microsoft, and MGX, as well as KKR and Energy Capital Partners' $50 billion partnership to invest in data centers and power generation over a number of years. After this recent surge in investment activity, the pace of M&A transactions will remain high in emerging markets but is likely to moderate in established markets.

» Data center projects to face resistance in some markets; regulatory actions could constrain demand as well as supply. Public concerns about data centers' urgent need for massive amounts of electricity will increasingly come to the fore. Even as state and regional governments continue to offer tax incentives to attract new data centers, the industry is coming under greater political and regulatory scrutiny. Despite growing public pushback, large data centers will continue to proliferate in established markets and spread to new markets. While political and regulatory actions threaten to limit the supply of data center capacity in some markets, legal restrictions on the use of certain social media platforms or the training of AI models have the potential to constrain demand as well.