Wall Street is pitching data centers as a major real estate bet. The risks are piling up

Data centers have divided America. The ire of everyday citizens continues to increase against a backdrop of enthusiastic and deep-pocketed Wall Street investors betting artificial intelligence is the economic engine of the future. And as data centers that power the answers for Google's Gemini, Meta's Muse, Anthropic's Claude and OpenAI's ChatGPT spread across the U.S. landscape, the financial firms are attempting to pitch investors on AI infrastructure as part of a real estate allocation that can diversify a portfolio.

For the most part, the funds from alternative investment companies promising investors a piece of the physical infrastructure powering the AI economy remain the province of institutional investors like pension funds. But the trend has to a limited degree also dipped into the retail investor market. Alternative investments giant Blackstone has been at the forefront, creating the Blackstone Digital Infrastructure Trust, a newly formed real estate investment trust, or REIT, that trades on the NYSE, earlier this year.

"We saw this as an opportunity to capture the whole market of stabilized data centers and build a home in the public market where we think it belongs," CEO Nick Pell said in a CNBC "Squawk on the Street" interview in May.

While many new data center projects across the U.S. remain subject to shifts in public and political opinion — and various moratoriums including in the states of New York and Texas — the Blackstone REIT is primarily focusing on data centers in already mature markets such as Northern Virginia and Dallas, where sprawling data centers have had a significant presence that predates the AI boom.

"It is the lowest risk way to play," Pell said, adding that Blackstone can then hand-select data centers to offer investors from what it says is a $300 billion market. The company sold 87.5 million shares at $20 apiece in its mid-May debut. But the fund is down roughly 16% since then, with shares closing under $17 on Thursday.

Blackstone declined to offer further comment.

Equinix and Digital Realty Trust, data center developers that trade as REITs, have fared well longer-term, though their shares have stalled in the period since the BXDC launch.

The REIT sector has performed better this year than it typically does during periods of rising rates and higher bond yields, a situation in which the real estate sector is typically volatile due to the increased cost of lending and investors finding sectors of the stock market associated with income-generating assets less attractive. But most of the gains came earlier in the year before the bond market stress intensified, with many REIT investments selling off since August.

Pell described the opportunity on the company's most recent earnings call as "massive, with a total addressable market for our business expected to eclipse $1 trillion over the next several years."

Data centers are an increasingly big part of construction spending nationally. In fact, construction spending across the U.S. has been propped up by AI construction while many other sectors' construction spending has been on the decline.

Blackstone is not alone among alternative investment firms offering up data centers as investment opportunities. Blue Owl, which already runs a private digital infrastructure fund for sophisticated investors, is reportedly considering the launch of a public REIT with a value as high as $6.5 billion which will roll up existing data center investments into the new fund. The company says it owns over 130 data centers in 32 global markets representing over $18 billion in assets. By contrast, Blackstone's BXDC has not yet deployed any capital into investments.

Blue Owl declined to comment to CNBC, but Blue Owl's co-CEO Marc Lipschultz made the case for the sector in a recent LinkedIn post, calling data centers one of the strongest long-term investment opportunities in decades and citing an attractive, lower risk-return profile. "These projects have delivered consistent results with reduced credit risk. Contracts are structured with protections that make us whole even if a tenant exits early," Lipschultz said.

While not a REIT, real estate asset management giant Brookfield Asset Management listing its data center services provider, Csquare, as a stand-alone trading vehicle on the NYSE in July. Its shares have declined close to 16% since debuting.

But the investment case is running into a headwind that was less intense when Blackstone launched its fund: a fast-growing political backlash. National polling from Gallup found 70% of Americans oppose a data center being built in their area, and that opposition is bipartisan — a New York Times/Siena poll this fall found roughly two-thirds opposed regardless of party.

New York became the first state to pass a moratorium on new hyperscale data center approvals in July, and Texas followed in August, with Gov. Greg Abbott — who called the state the AI "epicenter" just a year earlier — ordering a halt on new approvals after already having called for a grid-connection audit in August. For investors, the risk isn't just whether a data center gets built, but whether local and state politics slow down or derail projects already baked into a fund's return assumptions.

Oracle's stock fell 4% in late September after the company sent a force majeure notice tied to Project Jupiter, a New Mexico data center campus and part of the broader Stargate AI buildout developed by Blue Owl. Oracle is seeking to delay payment on the project if it isn't operational by 2028, citing a mix of regulatory hurdles and local opposition. But it says the project remains on track.

These risks are global as well for investors that own and finance projects around the world. An Nvidia and Blackstone-backed Australian data center company just pulled its planned IPO due to underwhelming investor interest.

There is also the broader economic volatility increasingly linked to the AI trade. On Thursday, many AI-themed stocks sank when it was reported that an OpenAI revenue forecast was close to $20 billion below a prior revenue projection.

Sabur Mollah, professor of finance at Gettysburg College, said data centers can represent attractive long-term investments because of the growing demand for cloud computing, AI, digital services, and data storage.

"High-quality facilities may generate relatively stable rental income through long-term lease agreements with large technology companies," Mollah said, adding that the principal potential rewards include sustained rental income, exposure to the structural growth of the digital economy, and diversification beyond traditional real estate sectors.

However, Mollah said, the sector is highly capital intensive and depends critically on reliable access to electricity, cooling systems, and network connectivity. And the hype and excitement around AI can cause some investors to put blinders on.

"The key risks include overvaluation driven by excessive enthusiasm surrounding AI, substantial development and maintenance costs, dependence on a limited number of major technology tenants, and constraints on power availability," Mollah said.

Additional concerns include technological obsolescence, refinancing risk, construction delays, and the need for continuing capital expenditure.

Data center dangers beyond the market and politics

Many factors can come into play with data center investments, said Patrick Datz, digital risk practice leader, and Rachel Nixon, data center practice co-lead at IMA, an insurance brokerage and risk-advisory firm.

"From a non-market danger standpoint, natural disasters, 'the Act of God' that you have no control of," Datz said, adding that that is why data centers were typically built in "Data Center Alley" in Virginia in the past, because of the location and infrequency of natural disasters. But now there is a push to build them everywhere, and that exposes them to more risk.

"There is always that danger of the asset being taken off line," Datz said, and that is where insurance comes into play.

"If the uptime goes down, just not having the uptime they have promised, whoever their contract is with can create other problems down the line. There are a lot of risks," Nixon said.

Still, both said that overall they see data centers as a safe bet.

"We are big believers in the space," Datz said, adding that the data centers held out for investors are usually vetted and underwritten by $3 to $5 billion in insurance.

"A lot of thought is going into the design, this isn't an overnight build and the insurance carriers involved are not risk takers, they will play it safe," Datz said.

Traders on the Kalshi prediction markets platform are increasingly bullish on the AI buildout continuing across the U.S. despite the risks, seeing a 75% likelihood that there will be more than 5,100 planned or operating data centers (up from roughly 4,700 now) before 2027. That bet rose from 60% two weeks ago.

Retail interest is limited to date. Even in the Blackstone REIT, which can be bought and sold like any stocks, roughly 94% of ownership is institutional, according to market data.

But the trend of bringing more private investments to retail investors is set to accelerate with Securities and Exchange Commission Chair Paul Atkins unveiling proposals last week to increase retail investor access to private investments, and bring aspects of fund management long associated with the institutional and high-net-worth world (e.g. hedge fund performance fees) to a broader range of investments.

Experts caution, as the Oracle announcement illustrates, that investors should tread carefully, as with any new asset class and especially one often associated with institutional buyers.

For starters, liquidity is a big issue. If you think you can use a data center investment as a sort of ATM, you might be disappointed.

"The infrastructure behind these investments was built for a relatively small number of institutional investors making large commitments and not for millions of retail investors investing smaller amounts," said Andrew Tarver, president of Altic (Private Markets) at InvestCloud, a wealth management technology platform.

Tarver describes this as a "post office" model: a system designed for slower, manual transactions, not continuous retail activity. Before investing in anything outside a publicly traded security like a REIT or REIT fund with daily liquidity on a major exchange, investors should understand how redemption windows, liquidity limits and the underlying assets work, because access to a fund doesn't necessarily mean immediate access to their cash. Even sophisticated investors have seen how these limits can be an issue with the battle between private credit fund managers — many of whom also manage data center investments — and shareholders over redemptions in 2026 as investors rushed for the exits over fears of the "SaaSpocalypse."

Overall, a data-center fund may be appropriate as a modest, long-term portfolio allocation, but Jake Falcon, CEO of Falcon Wealth Advisors, said investing in data centers and other similar instruments isn't something that should be done on a whim.

He did say the public REIT fund is an appropriate investment vehicle for many individual investors. "Since they offer liquidity, I'm not as opposed to them versus private funds," he said. "The individual investor needs to triple their understanding before investing in alternative funds. ... One should look at their overall portfolio and ask themselves if the investment they are considering is necessary for them to hit whatever goal they have for the money," Falcon added.

If they don't know, he said, they should research more or seek out a fiduciary advisor to guide them.