The global economy is becoming increasingly digital. Every streamed movie, online transaction, cloud application, and artificial intelligence model depends on physical infrastructure operating behind the scenes. At the center of this transformation are data centers, the facilities responsible for storing, processing, and transmitting the world’s rapidly expanding volume of information.
For institutional investors, data centers have evolved from a niche real estate category into a critical component of digital infrastructure. While artificial intelligence has become the dominant narrative surrounding data centers, the investment opportunity is supported by a much broader set of long-term demand drivers. These include cloud computing, enterprise digitalization, e-commerce, streaming, and growing data consumption across nearly every industry. At the same time, the ability to build new supply has become increasingly constrained, creating a powerful combination of durable demand and limited availability.
Myth-Busting Data Centers
Demand Growth Extends Beyond Artificial Intelligence
Artificial intelligence has captured headlines and capital markets attention over the past several years. However, AI represents only one component of a broader demand story supporting data center growth.
Traditional enterprise workloads continue to expand as businesses migrate applications and data to the cloud. Hyperscale cloud providers continue to invest heavily to support customer growth, while the continued adoption of digital services across healthcare, finance, manufacturing, and consumer industries is increasing infrastructure requirements across the economy.
AI acts as an accelerant on top of these existing trends. For investors, understanding these multiple demand drivers may provide a more complete framework for evaluating long-term market growth and tenant demand beyond AI alone.
Importantly, investors should understand that AI demand itself is evolving. Today, much of the focus centers on training large AI models, an activity requiring enormous computing power and highly specialized facilities. Over time, however, many industry participants expect inference workloads to become increasingly important. Inference is the process through which trained AI models are deployed and used in real-world applications. Because these applications often require low latency and fast response times, they may need to be located closer to end users, supporting demand across established data center markets.
Questions about whether AI represents a speculative bubble frequently arise in discussions about data centers. Many of these concerns focus on technology company valuations and whether future monetization will justify current investment levels. Yet the underlying fundamentals supporting data center demand differ from previous periods characterized by speculative overbuilding.
Unlike past cycles, today's market faces significant physical constraints. Power shortages, permitting challenges, land limitations, and equipment bottlenecks restrict how quickly new capacity can be delivered. At the same time, AI is not the sole source of demand. Cloud computing, enterprise digitalization, streaming, e-commerce, and broader data consumption continue to drive infrastructure needs, creating a diversified demand base supported by multiple long-term trends.
Investors evaluating the sustainability of current market growth should consider both demand drivers and supply constraints rather than focusing exclusively on AI adoption trends.
The key question facing many markets is no longer whether demand exists, but whether sufficient power and infrastructure can be delivered to meet it.
The result is a multi-layered demand profile that extends beyond a single technology cycle and reinforces the growing importance of digital infrastructure.
Is There an AI Bubble?
Learn more about Principal’s perspective on digital infrastructure investing.
Why Supply Cannot Keep Pace
Strong demand alone does not necessarily create attractive investment opportunities. What makes today’s environment particularly notable is the growing difficulty of delivering new capacity.
In previous real estate cycles, developers could often respond relatively quickly to favorable market conditions. Data centers operate differently.
Bringing a new facility online requires access to land, permitting approvals, specialized equipment, utility coordination, fiber connectivity, and substantial capital investment. Many of these inputs have become more difficult to secure.
Power availability has emerged as one of the most significant constraints.
In many markets, utility infrastructure was not designed to accommodate the scale of power consumption now required by data centers. Utility interconnection timelines have expanded considerably, and developers frequently face multi-year waits before sufficient power becomes available.
These limitations restrict how quickly new supply can enter the market, even as tenant demand remains strong. For investors, this has increased the importance of evaluating not only where demand exists, but also which markets and projects have a realistic pathway to securing power and delivering capacity on schedule.
As a result, many major data center markets continue to experience historically low vacancy rates, while substantial portions of new capacity are leased before construction is completed.
The Power Factor
If there is one theme defining today’s data center market, it is power.
Access to reliable electricity has become a primary determinant of development success. While demand continues growing, power infrastructure expansion has not always kept pace.
This dynamic has transformed power availability from an operational consideration into a strategic competitive advantage.
Developers that establish strong utility relationships, identify suitable sites early, and secure power access ahead of competitors may be better positioned to deliver projects on time. Conversely, projects that lack a clear pathway to power may face significant delays.
For investors, evaluating power availability has become a critical component of underwriting and market selection.
Key considerations may include the amount of power secured, anticipated delivery timelines, required transmission upgrades, and the strength of relationships with utility providers.
The question is no longer simply whether demand exists, but whether a project can realistically be delivered.
As opportunities grow, so does complexity.
Data center investing requires expertise that extends beyond traditional real estate disciplines. Successful execution depends on understanding utility infrastructure, tenant requirements, development processes, local regulations, and market-specific dynamics.
Relationships also play an important role.
Long-standing partnerships with developers, utilities, contractors, and hyperscale tenants can support project execution and help reduce uncertainty throughout the development process.
As barriers to entry rise, experience may become an even more important differentiator between market participants.
Investors evaluating opportunities should consider not only demand fundamentals, but also the operational capabilities and execution track records of investment managers.
Assessing an investment manager’s ability to source opportunities, secure critical infrastructure, and successfully execute development projects may be particularly important in a constrained supply environment.
Looking Ahead
The digital economy continues to expand, creating growing demand for the infrastructure that supports it.
Data centers sit at the intersection of several powerful secular trends, including cloud adoption, enterprise digitalization, artificial intelligence, and data creation. At the same time, supply remains constrained by power availability, permitting requirements, and development complexity.
This imbalance between accelerating demand and limited supply has helped create one of the most compelling growth stories within digital infrastructure today.
While data centers face challenges ranging from sustainability considerations to regulatory scrutiny, these same dynamics often contribute to higher barriers to entry and reinforce the importance of disciplined execution.
For investors seeking exposure to the long-term growth of the digital economy, understanding how data center markets are evolving may be increasingly important.
A disciplined approach that incorporates market selection, power availability, development execution, and tenant demand may help investors better evaluate opportunities across a complex and evolving digital infrastructure landscape.
As digital activity continues to accelerate, the physical infrastructure supporting it may become just as critical as the technologies driving it.
Our Experience Investing in Data Centers
