US Data center real estate outperforms as development expands into new markets
The US data center sector continues to expand as cloud computing and AI drive demand for compute.
US data centers have defied the broader commercial real estate slowdown, delivering an annualized 7.1% return over the past three years, more than triple the 2.1% for all commercial properties, according to NCREIF.
More recently, data center returns have moderated, reaching just 0.4% in Q3 2026 and 2.4% over the past 12 months, as an elevated construction pipeline and higher costs to build, upgrade, and power facilities likely weighed on property valuations despite relatively stable income.
The Bloomberg consensus projects capital spending of the five major hyperscalers will reach $1.17tn in 2027, nearly three times its 2025 level of $412bn, reflecting accelerated investment in AI infrastructure.
Secondary markets in the Midwest, Southeast, and Mountain West are gaining importance for data center supply as power constraints, high costs, and local permitting hurdles limit expansion in established hubs. Less latency-sensitive AI training can occur farther from population centers, reinforcing this shift.
Rising development, equipment, and property improvement costs are putting greater pressure on data center investors. Property capital expenditures nearly doubled to $161 per square foot in 2025, highlighting the expense of maintaining and upgrading existing facilities.
Institutional interest has strengthened in recent years, with large portfolio and entity acquisitions lifting data centers’ share of US commercial real estate transaction volume to nearly 10%, compared with less than 2% historically, according to MSCI.
