Commercial mortgage-backed securities (CMBS) investors are increasingly wary of debt tied to artificial intelligence (AI) data centers, leading to wider risk premiums and more selective investment. This caution has been particularly evident in recent transactions, with two of the three most recent data center CMBS deals, including offerings from KKR-backed CyrusOne Holdco LLC and Blackstone Inc.-backed QTS Realty Trust Inc., being repriced at wider levels before finding sufficient demand. Risk premiums for data center CMBS have risen over the past year, with AAA spreads on single-borrower data center deals at 168 basis points above SOFR as of July 28, up from 153 basis points a year prior, and BBB- spreads reaching 332 basis points from 321 basis points.
Despite this growing caution, data centers are becoming a significant part of the CMBS market. Annual securitized loan issuance for data centers, which was rarely above $500 million before 2020, surged to approximately $10 billion in 2021 and reached all-time highs of roughly $30 billion last year in asset-backed security and single-asset, single-borrower transactions. Global originations are projected to hit $50 billion this year. This surge in issuance has led developers to the CMBS market due to insufficient capital elsewhere. For example, Blackstone's QTS Data Centers refinanced three campuses with over $2 billion in CMBS debt.
However, the rapid growth and evolving technology in data centers are raising red flags for special servicers who manage problem loans. Concerns include a lack of transparency, the concentration of value in energy contracts and personal property rather than real estate, and significant tenant risk from hyperscalers. Data center contracts often contain unusual terms, such as termination clauses if developers cannot deliver sufficient power, which could become a greater issue as AI capabilities expand. Analysts like Stephen Buschbom from Trepp Inc. suggest that some facilities might quickly become obsolete. To mitigate risks, hyperscaler leases are becoming shorter, spanning four to six years, and landlords are negotiating guarantees for renewals or payments if tenants vacate, although much of these commitments, estimated at over two-thirds of nearly $1 trillion from the five major hyperscalers, are unreported on balance sheets.
The overall CMBS market is experiencing substantial growth, with issuance on track to surpass $140 billion this year, up from $108 billion in 2024 and $126.6 billion in 2025. A significant portion of this growth, about $69 billion or 75% of the approximately $92.6 billion in private-label CMBS issuance this year, comes from single-asset, single-borrower deals, preferred by institutional buyers for precise portfolio management. While data center CMBS remains a niche, it accounts for 7.3% of CMBS issuance year-to-date. The recent clustering of data center deals in June and July led to subscription issues and spread widening, but it's unclear whether this reflects broader sector concerns or simply a temporary oversupply. Nevertheless, investors are now scrutinizing terms like leverage, tenant quality, and the ability to refinance more closely, rather than accepting deals solely based on AI-related collateral.
