Why data center finance is diversifying

Boosted by AI requirements, demand for new data centers shows no signs of waning.

JLL estimates that in Europe alone, there is 1.7GW of space currently in development and a further 2.5GW in the planning stages.

Globally, data center assets valued at a combined total of $170 billion will need to secure construction lending or permanent financing in 2025.

“Hyperscale occupiers are growing exponentially and that's driving new construction demand,” says Luke Jackson Co-Head of Data Centers, Capital Markets. “Yet as data centers get larger, they're also getting more capital intensive and complex to develop.”

Up to 80% of data center development funding is reliant on debt, according to JLL. And given rising investor demand, the traditional pool of project-finance lenders are being selective about the projects they finance and terms they offer.

“More real estate banks and credit funds are becoming active, complementing and competing with the wider infrastructure lender landscape,” says James Davies, Director of Debt and Structured Finance, International Capital Markets EMEA. “Our client base is aggressively pursuing development opportunities across global markets, and we’ve tracked a huge cross-section of lenders looking to deploy into the space.”

Debt funds and real estate lenders have long focused on traditional commercial real estate such offices, living and warehouses. But many are considering data centers in order to spread risk among other sectors and take advantage of an ability to deploy at scale.

“Globally we expect to see a rise in more sophisticated structuring across the capital stack,” says Jackson.

He explains that real estate debt funds are an increasingly competitive alternative lender pool, while more creative and structured financing products like asset backed securitization, SASB (single-asset, single-borrower loans tied to the financial performance of a specific property), and Credit Tenant Lease financing agreements (CTLs) are on the rise.

Data center tenants are among the biggest investment grade companies in the world, making them perfect for CTLs, which typically involve long-term leases with a stable tenant that allows for higher loan-to-value ratios.

However, not all tenants or data centers are created equal, and location can impact occupier profile, significantly influencing the investment's risk and return profile for lenders.

“The highest liquidity and best pricing is for data center assets and developments within cloud regions” Jackson says.

On the investment side, activity is expected to rise as new developments are finished.

Take APAC, which saw data center investment surge 114% year-on-year to $2.8 billion in the third quarter of 2024, fuelled by buy-outs and mergers. In the past five years, however, the U.S. has seen the most activity, with 58% of all data center investment globally.

“We expect to see more joint venture activity in future, particularly in developing countries,” says Jackson.

But matching the right capital with the right asset involves complex variables, making it more important than ever to consider all options, especially given lender appetite is evolving quickly.

“The right lender for any given scenario depends on many factors, including size, the nature and credit worthiness of underlying lease or operator agreements, desired tenure and leverage requirements,” says Davies.

Geopolitical challenges will also impact capital flows and investment decisions in the months ahead, with strong market conditions fueling growth in emerging hub markets such as Mumbai, Madrid, and Atlanta.

“One thing’s for sure: the data center sector will continue to be subject to the fast pace of innovation and disruption, which will have a corresponding impact on diverse financing opportunities,” Jackson says.