Brendan Lynch, co-head of U.S. equity REIT research at Barclays, discussed data center REITs on the latest REIT Report episode, noting that the sector is rebounding as enterprise AI demand accelerates, leasing pipelines grow, and investors seek more direct exposure.
Lynch said the recent Blackstone Digital Infrastructure Trust (NYSE: BXDC) IPO shows “there are investors who are looking for a specific type of exposure,” in the data center sector, notably stabilized assets.
Meanwhile, record demand should support revenue growth, margin expansion, and cash flow growth as operators scale, he said. Development yields have improved from 6% to 7% in 2021–2022 to low double digits and, in some cases, the mid-teens, although customers’ ability to self-build limits the upside.
Power remains a key constraint, Lynch observed, but operators are getting more creative through retrofits, grid solutions, and behind-the-meter options. On regulatory pushback, “a lot of the things that are the cause of NIMBYism, I think, are misunderstandings about how data centers can fit into a given environment," he said.
Some opposition, he added, can be addressed by “engineering or investing a greater dollar amount down into the capacity to make it more acceptable to the community. There are certainly other situations where there's just such a kind of a fever pitch of backlash that it will be challenging to bring incremental capacity online.”
Looking ahead, Lynch said sector leaders will have interconnection-rich ecosystems that create pricing power. “The best data centers are the ones that have an ecosystem of clients which attracts additional clients. The more that you can cultivate the type of tenant that is going to want to be in a facility because of the other tenants that are there, the more pricing power you're going to have,” he noted.
Supply constraints and AI-driven capital spending are also creating demand tailwinds. “When we look at the AI trajectory and the capex that is anticipated from the largest hyperscalers in the market now, there does seem to be a very long runway of additional spending and investment in data center demand. So I do think over the long term, these are still relatively attractive investment opportunities,” Lynch said.
As for data centers in space, Lynch said he does not see them posing a material risk to terrestrial data centers on any time frame that investors would be looking to at present. “To the extent that does materialize as a risk, it's 10-plus years in the future,” he noted.