Eric McConnell
4 min read
In This Article:
Data centers have been one of the most pleasant surprises in the real estate sector, generating strong returns for real estate investment trust investors for the last several years. The massive facilities are mission-critical pieces of AI infrastructure, which explains why many of the world's biggest tech companies have multi-billion-dollar data center investments. However, Lux Capital partner Josh Wolfe is concerned that the data center sector is showing signs of a bubble ready to pop.
Data center spending is on pace to exceed $405 billion in 2025, which is a 23% increase over 2024, according to Statista.com. This sector used to be dominated by data center REITs like Equinix (NASDAQ: EQIX) and Digital Realty Trust (NYSE: DLR). However, they now face competition from tech titans like Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), and Meta (NASDAQ: META), who would rather own and operate facilities than rent them in perpetuity.
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Runaway data center construction drives AI's ever-expanding capabilities, but Wolfe also believes it may be creating "irrational" demand. In May, he told the Axios AI summit that he sees parallels to tech booms of the past. Cloud computing and fiber optic network investments created lots of millionaires in the 1990s and early 2000s. Wolfe remembers that many of those investors were left holding the bag when production outpaced demand.
“I think that you’re going to have the same phenomenon now,” said Wolfe. He noted the potential danger of groupthink in the tech sector, where building data centers seems prudent for individual companies. However, he fears that multiple companies building hyperscale data centers simultaneously, “collectively becomes irrational.” “It will not necessarily persist,” he warned.
Wolfe also said thinks the potential fallout from the bubble popping extends to other sectors. Data centers consume incredible amounts of power, which has driven rapid growth in the nuclear energy sector. “One take that is related to that is the demands for energy, which is presumed that, because you need all these data centers," Wolfe said. "Then you need small modular reactors, and so you’re getting speculative capital that’s going into the energy provision therein.”
