Increasing community resistance and regulatory hurdles for new AI data center developments are creating a potential tailwind for established Real Estate Investment Trusts (REITs) like Equinix, Digital Realty Trust, and Iron Mountain. These REITs, which own and operate existing data infrastructure, are positioned to benefit from constrained supply and rising demand for computing power.
Despite facing challenges such as permitting delays and increased costs, these companies offer attractive dividend yields and robust growth prospects, making them a compelling investment within the AI infrastructure sector.
Data Center REITs Gain as AI Boom Faces Community Backlash
The increasing resistance to new AI data center developments could unexpectedly benefit established Real Estate Investment Trusts (REITs) specializing in data infrastructure.
The Growing Opposition to AI Data Centers
The rapid expansion of artificial intelligence is driving a surge in demand for data centers. However, these massive facilities are increasingly facing public opposition due to their significant land use, enormous consumption of electricity and water, and noise pollution. This backlash is expected to intensify as the midterm elections approach, with a recent NBC News poll indicating that 69% of respondents oppose the construction of AI data centers in their local areas.
The United States already hosts over 4,700 data centers, a number projected to grow exponentially. PwC forecasts that annual data center spending will nearly double from approximately $800 billion in 2026 to $1.8 trillion by 2050. In response to these concerns, some states are enacting legislation to restrict or ban new construction, with New York already implementing a moratorium.
REITs as a Play on AI Infrastructure
While tech giants like Amazon, Apple, and Oracle are at the forefront of AI development, Real Estate Investment Trusts (REITs) offer an alternative avenue to invest in the booming data center sector. These REITs function as landlords, developing, owning, and leasing space to various tenants, including major tech companies.
Vikram Malhotra, an analyst at Mizuho, noted that while new projects might face delays due to political and community pushback, this could positively impact existing data center REITs. "It could be a positive for existing projects/DC [data center] REITs which have pricing power driven by continuously expanding compute demand," he stated.
Data center REITs constitute 13% of the total U.S. REIT market capitalization, valued at $1.5 trillion. According to the National Association of Real Estate Investment Trusts (Nareit), public REITs own approximately 275 data centers in the U.S., representing less than 10% of the total owner/operated and leased data centers nationwide.
Key Data Center REITs to Watch
Three prominent data center REITs are listed in the FTSE Nareit Equity REITs Index:
- Digital Realty Trust (DLR): With a market cap of $71 billion, DLR offers a dividend yield of 2.59% and has seen a year-to-date performance of 23.3%. The company reported adjusted Funds From Operations (AFFO) above estimates and raised its full-year guidance in July.
- Equinix (EQIX): The largest player with a market value of approximately $102 billion, Equinix boasts a 1.99% dividend yield and has climbed about 37% year to date. Equinix recently partnered with Nvidia and also raised its full-year guidance after exceeding expectations in its second-quarter AFFO report.
- Iron Mountain (IRM): This REIT offers a 2.96% dividend yield, has appreciated 42% this year, and holds a market cap of $34.7 billion. Its second-quarter AFFO beat expectations, leading to an upward revision of its full-year guidance.
Data Source: FactSet. Note: Performance data is for the year 2026 as per the original article's context.
Potential Tailwind for REITs Amidst Challenges
Amanda Martinez, an analyst at Wells Fargo Investment Institute, suggests that the resistance to data centers could act as a tailwind for REITs, although the situation is complex. On one hand, restricted new supply could increase the value of existing capacity. REITs with substantial, permitted development sites and secured power sources are likely to gain a relative advantage.
Conversely, permitting restrictions and moratoriums could impede future growth by lengthening development timelines and increasing costs. However, analysts like David Guarino from Green Street and Alex Pettee from Hoya Capital Real Estate remain bullish on leading REITs such as Equinix and Digital Realty.
Guarino highlights that the size and established infrastructure of these REITs allow them to pivot to alternative markets if faced with local restrictions, ensuring continued growth. Their extensive experience and established relationships with municipalities also provide a competitive edge over newer entrants.
Pettee emphasizes that even if zoning and power procurement become more challenging, existing data centers will inherently become more valuable. While data center REIT stocks may appear expensive compared to other REITs, their strong earnings growth, tangible assets, recurring revenue, and attractive dividend yields (around 2%-3%) make them a compelling option within the broader AI investment landscape.
