Artificial Intelligence (AI) needs data. It relies on large data sets to feed algorithms that generate predictions, solutions, and other results. As AI becomes more mainstream, it will drive exponential growth in data usage.
Companies will need a place to store all this data so AI programs can access and process the information used to generate outputs. Data centers will likely play a crucial role in supporting this data. That bodes well for the companies that own and operate this essential real estate.
The real estate powering AI
Leading global commercial real estate service company CBRE (CBRE) recently released a report on how AI will impact data center markets. CBRE noted that data center capacity in primary markets has tripled (as measured in megawatts) since 2015. The primary driver is digital transformation as companies move more of their business processes from on-premises to the cloud.
AI could drive the next wave of data center growth. CBRE noted that AI processes require different data centers. AI training doesn't need proximity. Data centers in rural areas with lower land costs could be ideal for these processes. On the other hand, AI interfaces require proximity for speed. These AI applications will need data centers near urban areas.
Power is also a challenge for AI because it uses a lot of it. Similarly, it will require a lot of water to cool the processors needed to run AI applications. As a result, AI data centers will need to be near low-cost energy (preferably renewable) and water sources.
Positioned to capitalize on the AI opportunity
Data center REIT Digital Realty (DLR 0.67%) mentioned AI on its fourth-quarter call. CEO Andy Power stated that the launch of ChatGPT is a "seemingly important milestone" for driving incremental demand for data centers. With tech titans Microsoft, Alphabet, and Baidu all recently launching AI applications, it suggests "we are on the forefront of the broader introduction of AI, which could spawn a wave of adoption and a proliferation of use cases and ultimately drive demand for compute infrastructure at scale," according to Power.
He further stated:
We are in the very early days of this technology and its potential and have yet to see the effects of its introduction in the data center sector, but we are well-positioned to support our customers and partners, and we are working diligently to understand how their requirements will evolve and making sure to incorporate these into our latest designs. Importantly, as we experience with the cloud, the advent of new technology can play out over a very extended time frame. We have built Digital Realty with these time frames in mind and plan to be there to support our existing and growing customer base across the globe in the future.
As the CEO points out, while it's not yet clear how AI will impact the data center sector, Digital Realty is already working to ensure it can capitalize on the opportunity as it materializes. AI could be an enormous long-term growth driver for the company.
Escalating demand from AI
Leading global alternative asset manager Blackstone (BX -2.33%) is one of the world's largest real estate investors. It focuses on owning properties in sectors benefiting from long-term growth tailwinds. Data centers are one of its highest conviction investing themes. That's led it to invest heavily in the space over the past few years.
For example, funds managed by Blackstone spent $10 billion to buy data center operator QTS Realty in 2021. QTS is a leading global data center company with over 7 million square feet of mega data center space across the U.S. and Europe. Meanwhile, entities affiliated with Blackstone Real Estate recently invested $250 million to form two joint ventures with Corporate Office Properties Trust. The joint ventures acquired 90% interests in five single-tenant data center shell properties with 1.1 million square feet of space.
Blackstone's data center business is currently doing very well. It's benefiting from the digital transformation as it powers growing demand for data center capacity.
It sees a new demand tailwind coming from AI. CEO Steve Schwarzman stated on the first quarter conference call with investors:
We own one of the largest data center companies in the world. The growth in that area as a result of the changes with AI are going to be really, really substantial. The need for data centers is going to escalate.
AI: A potential massive catalyst for data centers
We're still very early in the AI revolution. The technology will likely drive significant demand for additional data center capacity. It could be a major growth catalyst for companies that own data centers, like Blackstone and Digital Realty. That makes them exciting potential AI-powered stocks to watch.
