April 2025
Data centers are the backbone of the internet. The “cloud” is in fact a network of physical facilities that store, process and distribute millions of gigabytes per second. They make technologies like 5G, big data, real-time analytics and video streaming possible.
Cloud computing has been a key driver of the data center build-out in recent years. As 89% of large businesses embark on digital and AI transformations, migrating in-house computing systems to cloud providers has become a key step.2 Companies can lease anything from data center shelf space (known as retail “colocations”) to entire buildings (known as “hyperscale” data centers). Asset-backed securities (ABS) deals tend to be secured against leases from multiple tenants and other assets while commercial mortgage-backed securities (CMBS) deals tend to be secured against a single borrower’s mortgage on a hyperscale property.
The next phase of investment is being driven by computationally hungry generative AI systems like ChatGPT. For example, the Trump administration’s “Stargate” initiative explicitly seeks private data center finance for AI development.4 Energy generation may be a limiting growth factor but could still bode well for fixed income investors given potential for rising rental premiums.
Notably, however, the development of China’s competitor model DeepSeek raised questions on whether generative AI programs can run more efficiently than previously thought, negating some of the investment needed around data centers and the energy to power them. If it is the case, we believe it would impact newer properties, particularly those in areas with questionable energy infrastructure. Our focus is instead on areas with well-established leases and infrastructure — particularly North Virginia, the undisputed “data center capital of the world” with over four times as much data center inventory, and an advanced fiber optic infrastructure network.5
Conclusion
Data centers and cloud computing may offer investment opportunities not typically seen within traditional fixed income. We believe a core plus strategy has the potential to offer attractive yields through exposure to securitized sectors and may provide a way for investors to add value to their portfolio while being intentional with their fixed income investments.
1 Artificial Intelligence (AI) refers to computer systems that can perform tasks typically requiring human intelligence, such as visual perception, speech recognition, decision-making, and language translation.
2 McKinsey, March 2024.
3 Bloomberg, Insight, February 2025. Big 3: Amazon Web Services (AWS), Microsoft Azure and Google Cloud Computing.
4 The Stargate initiative, announced by President Trump in 2025, calls for several major technology companies to invest at least $500 billion in artificial intelligence and data centers at a number of US locations.
5 CBRE, North America Data Center trends, August 2024.
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