Powering the digital age: Data center trends and opportunities

October 23, 2025 | 7 min read

Rich Hill

Global Head of Real Estate Research & Strategy

Executive Summary

Data centers remain underrepresented in many institutional real estate portfolios despite strong historical performance in both the public and private markets. They offer stable, long-term cash flows, relative insulation from economic cycles, and strong growth potential driven by cloud adoption, AI, and the explosion of digital data.

Growth in the sector is fueled by rising digital activity and AI demand. For instance, the U.S. colocation market doubled between 2020 and 2024 according to JLL Mid-Year 2024 U.S. Data Center Report, and AI-driven applications could multiply data center needs up to 100-fold over the next decade according Dell’s Founder and CEO, Michael Dell at the South by Southwest (SXSW) conference in March 2024. Rising demand is pushing vacancies in major markets to historic lows according to DataHawk. But you can’t build a data center anywhere: key site factors include access to low-cost, reliable power, robust network connectivity, disaster resilience, and renewable energy. AI and generative AI workloads are increasingly shifting new builds to non-traditional, power-rich markets.

Data centers are evolving. Traditional hyperscale and colocation definitions have become more nuanced based on the property serving cloud, AI inference, and generative (i.e, training) AI workloads, each with distinct power and density requirements. We see the most attractive risk-adjusted returns in cloud and AI inference data centers in both the U.S. and Europe, as they address established, durable demand. An investment in a data center located in an Availability Zone (AZ) may help mitigate exposure to fluctuations in cloud demand, while offering potential benefits from continued AI advancement. By contrast, generative AI data centers are more speculative, driven largely by forecasts of future AI adoption, and are a key source of today’s near-term oversupply. We may pursue land acquisitions and site preparation for potential generative AI development but would avoid building these facilities ourselves. We also see emerging opportunities in the shift towards edge computing.

Power, cooling, and sustainability. Power remains a major cost, though efficiency has improved—average PUE fell from ~2.5 in 2007 to ~1.5 in 2024, with some facilities performing better. Liquid cooling is becoming essential for high-density AI workloads while sustainability is now a core priority, driven by regulation, tenant demand, and renewable integration that lowers both costs and environmental impact.

Looking ahead, future-proofing is essential. Many older facilities are being redeveloped to support higher-density workloads and meet new regulatory requirements, while new data centers are designed for flexibility to adapt to evolving AI and cloud demands. With land and power increasingly constrained in major markets, these assets remain key drivers of long-term value.

Key theme #1: Location matters

Critical factors include: low-cost, reliable power; low natural disaster risk; strong network connectivity; favorable tax regimes; renewable energy access; and sites outside FEMA 500-year floodplains. Simply put, data centers are complex and can’t be built just anywhere. Leading U.S. hubs include Northern Virginia, Dallas-Fort Worth, Phoenix, Atlanta, and Chicago. In Europe, FLAP-D markets (Frankfurt, London, Amsterdam, Paris, Dublin) dominate, with emerging hubs in Madrid, Warsaw, Milan, Zurich, and Stockholm.

Power costs to market size comparison (U.S. only)

Chart displaying U.S. cities and the size of the markets in MWs by the cost of electricity in said market

Source: Green Street. Includes labor and direct personnel, repairs, and maintenance.

Generative AI is shifting the landscape further. Unlike traditional cloud and enterprise data centers that cluster in major metro areas, AI data centers require enormous power and land, pushing them into smaller, non-traditional markets. U.S. examples include Mount Pleasant, WI; Kuna, ID; Council Bluffs, IA; Papillon, NE; and Umatilla, OR. In Europe, AI facilities are moving to power-rich regions like Northern England, Hamina (Finland), and Murcia (Spain).

Key theme #2: Evolving data center types

Traditionally, data centers were categorized based on ownership and tenancy:

Enterprise: Single-tenant facilities with limited scalability requirements, typically used to handle organizations’ internal data and IT workloads. For instance, a bank that runs its own data center to manage customer transactions. Many enterprises have or are shifting away from building / owning facilities and instead lease from colocation provides or have moved workloads to public cloud. According to Synergy Research Group, they accounted for 56% of data center capacity in 2018 compared to 34% today and it’s expected to drop to 22% by 2030.
Hyperscale: Single-tenant facilities, typically leased for 15 years with options to extend. Usually leased by large global technology companies. They account for nearly 44% of the worldwide capacity of all data centers according to Synergy Research Group. Over half of that hyperscale capacity is built and owned by large cloud providers (known as Cloud Service Providers or CSPs) with the balance being leased according to Synergy Research Group. Looking ahead to 2030, hyperscale will account for 61% of all capacity.
Colocation: Multi-tenant facilities where companies lease space (usually 5–7 years) to house their IT equipment. This accounts for 22% of data center capacity in 2024 and, while colocation share of total capacity will slowly decrease by 2030 according to Synergy Research group, colocation capacity will continue to increase each year at nearly double-digit rates.

We focus our attention on leased hyperscale properties and colocation since they are income producing real estate. Green Street estimates that 50% of data centers in the U.S. are owned by third-party landlords (based on % of live mega-watt) compared to 65% in Europe and 80% in Asia-Pacific. As a rule of thumb, the more complex the business environment, the more likely a data center is to be third-party leased.

Data center capacity trends

Source: Synergy Research Group

Key theme #3: Cooling and energy efficiency

Cooling has become increasingly important, as rising electrical loads generate more heat. This trend is accelerating with AI workloads, which operate at far higher densities. For example, Nvidia’s Hopper GPU architecture (2024) was designed for ~41 kW per rack, while its Blackwell generation (2025) is built for 120 kW. A roadmap announced in 2025 projects racks reaching 600 kW by 2027.

Historically, two main cooling methods have been used:

Closed-loop air-cooled chillers: Reject heat to ambient air using refrigerant loops and fans. They consume less water but require more energy.
Evaporative systems (cooling towers, adiabatic, direct/indirect evaporative cooling): More water-intensive but generally more energy-efficient.

In regions with water constraints, or abundant renewable power, developers are increasingly adopting air-cooled chillers, which circulate water in a closed loop to remove heat from data halls and release it outdoors.

However, rising rack densities are pushing these systems beyond their limits. Liquid cooling, which delivers coolant directly to server racks, is becoming essential for handling the extreme heat of AI and other advanced workloads. Unlike air systems, liquid cooling supports significantly higher power densities.

AI calls for massively denser rack deployments

Chart showing data center density slowly increasing from 2011 to 2020 and then rapidly increasing from 2021 to forecasted 2027

Source: 2011, 2017, and 2020 data points reflect average density per rack as reported by Uptime Institute in December 2020. 2024, 2025, and 2027 data points reflect Nvidia GPU architecture specifications.

Conclusion

Data centers remain a relatively new asset class for many institutional investors, with most portfolios still underweight. They have delivered strong performance in both public and private markets, driven by stable, long-term cash flows and robust growth from cloud adoption, AI, and broader digital trends. The long-term growth prospect remains strong given the emergence of a secular mega trend, but the sector also faces new considerations as AI innovation may alter data growth patterns and there’s been rapid capital inflows. This puts a focus on several key considerations including location, type, power, and sustainability, with successful sites offering reliable, low-cost power, strong connectivity, and access to talent.

Traditionally data centers were defined as either hyperscale or colocation based on tenant size, but properties are now increasingly separated into cloud, AI inference, and generative AI centers based on their workloads. Each has distinct risk-return profiles. We are focused on cloud and AI inference data centers that have durable demand given the rapid and sustained expansion of AI applications but are cautious on generative AI data centers that we view as more speculative given uncertainty around the long-term scale of training demand. By contrast, the rapid and sustained expansion of AI applications is driving significant growth in both inference and storage requirements, positioning AI inference data centers as the more durable and attractive segment of the market. We also see emerging opportunities to identify and retrofit existing assets to meet the requirements of edge computing, presenting a unique investment opportunity in a rapidly changing landscape.

Energy efficiency and cooling are critical, with innovations like liquid cooling enabling higher-density AI workloads while sustainability initiatives, including renewable integration and energy-efficient design, offer operational and competitive benefits. Looking forward, future development emphasizes flexibility and future-proofing, with new and retrofitted facilities designed to adapt over a 20+ year lifespan, supporting both high-density AI training today and lower-density inference in the future, thereby preserving long-term asset value and operational resilience.

For more on the under allocation of the data center sector and how to navigate the next phase of data centers, access the full report here .

Real estate

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Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate.

Data center properties and will only be attractive to a unique type of tenant. A limited tenant base increases the risk of vacancy. Additionally, a property designed to be a data center property, may be difficult to relet to another type of tenant or convert to another use and will be more likely to become functionally obsolete when compared to other properties. For example, if converted to industrial use, the expected rents would be lower than that projected for data centers. Thus, if operating a data center were to become unprofitable, the liquidation value of properties may be substantially less than would be the case if the properties were readily adaptable to other uses.

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"These Terms & Conditions explain certain legal and regulatory conditions and restrictions in relation to the Principal Global Investors (Europe) Limited website, and in relation to the Principal Global Investors Funds (‘the Funds’). This information may be changed by Principal Global Investors at any time without notice.

In these terms and conditions, references to 'Principal Global Investors' means Principal Global Investors (Europe) Limited or any affiliate of the Principal Financial Group, Inc. or Principal Global Investors, LLC.

Before you proceed, you must acknowledge that you have read, and agree to, our terms and conditions.

Information in relation to the Principal Global Investors Funds is available through this web site to institutional investors resident in the following countries of: Belgium, France, Finland, Germany, Guernsey, Ireland, Italy, Jersey, Netherlands, Spain, Sweden, Switzerland and the United Kingdom. By proceeding this far you are representing and warranting that you are an institutional investor resident in one of these countries. Not all of the Funds are available in all these jurisdictions, and investors are directed to the Country Registration document for detailed information. What follows is not an offer or invitation to acquire an investment to, and should therefore not be relied upon by, any person anywhere other than the countries noted. Persons in respect of whom such prohibitions apply must not access this web site. This web site is reserved exclusively for non-U.S. persons and should not be accessed by any person in the United States.

Yes, I certify to be an institutional investor and resident of a country listed above.

Cookies
Use of cookies on this site is outlined in the Privacy and Security Policy. In accepting these terms and conditions, you accept the terms of the Cookie Policy and the use of cookies from this site.

Legal Entity Disclosure and Regulation
In Europe by Principal Global Investors (Ireland) Limited, 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland. Principal Global Investors (Ireland) Limited is regulated by the Central Bank of Ireland.

In the United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered in England, No. 03819986, which is authorised and regulated by the Financial Conduct Authority (“FCA”).

In Switzerland by Principal Global Investors (Switzerland) GmbH. This website is considered as advertising and information contained herewith be treated as such. Investors can obtain free of charge the prospectus, trust deed, the prospectus, the key investor information document (KIID), and the annual and semi-annual reports from the representative in Switzerland.

In Europe and United Kingdom, this website is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by the MiFID and FCA respectively). If you are viewing the material as a retail investor, you should seek independent investment advice before deciding whether the products and services in question are suitable to meet your investment needs and objectives, as the language has not been complied to a retail client standard.

Principal Global Investors Funds
Principal Global Investors (Ireland) Limited is the issuer of the Funds. Investments may only be made on an application form attached to a current prospectus and following receipt by the investor of the KIID in respect of the Fund in which they intend to invest. The latest version of the prospectus of the Funds is dated 14 December 2012.

For Real estate investors in the European Economic Area (“EEA”), this website and the information on it is only directed at persons who are professional investors for the purposes of the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”), professional clients or eligible counterparties for the purposes of the Markets in Financial Instruments Directive (Directive 2014/65/EU) (“MiFID II”) or as otherwise defined under applicable local law and regulation and at whom this website and the information on it may lawfully be directed in any relevant jurisdiction (“Eligible Persons”). In relation to each member state of the EEA (“Member State”) which has implemented AIFMD (and for which transitional arrangements are not/ no longer available), this website may only be accessed and interests in Funds may only be offered or placed in a Member State to the extent that: (i) the relevant Fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD (as implemented into the local law/regulation of the relevant Member State); or (ii) this website and its information may otherwise be lawfully distributed and the interests in Funds may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). In relation to each Member State of the EEA which, at the date of accessing this website, has not implemented AIFMD, this information may only be distributed and interests in Funds may only be offered or placed to the extent that this information may be lawfully distributed and the interests in Funds may lawfully be offered or placed in that Member State (including at the initiative of the investor).

Persons who are not Eligible Persons, including but not limited to those individuals or other persons who fall within the FCA’s definition of ‘retail clients’, should not use or rely upon this website or the information contained therein and may not engage the services of Principal Real Estate or any of its affiliates, or invest in any Fund. Potential investors are advised that all or most of the protections provided by the UK regulatory system will not apply and that the UK Financial Services Compensation Scheme may not be available in relation to an investment in a Fund or separate account.

The contents of this website have not been verified or approved by any competent regulatory or supervisory authority. No liability, whether in negligence or otherwise, arising directly or indirectly from the use of the information or any part of it on this website is accepted and no representation, warranty or undertaking, whether express or implied, is or will be made at any time by Principal Real Estate or its affiliates or any of their respective advisers, directors, officers, employees, representatives or other agents (“Principal Agents”) for any information or any of the opinions contained herein or for any errors, omissions or misstatements.

None of Principal Real Estate or its affiliates or any Principal Agents makes or has been authorised to make any representation or warranties, whether express or implied, in relation to Principal Real Estate or regarding the truth, accuracy or completeness of any of the information contained on this website at any time. No representation or warranty is given by Principal Real Estate, its affiliates or the Principal Agents as to the achievement or reasonableness of, and no reliance should be placed on any projections, targets, estimates or forecasts contained in the information on this website. Furthermore, nothing contained on this website is or should be relied on as a promise or representation as to the future. No reliance may be placed by any person for any purpose whatsoever on the information or opinions contained on this website or on its completeness, accuracy or fairness at any time.

Principal Global Investors (Europe) Limited is not authorised by the FCA to directly deal with retail investors; any distribution of the Fund to retail investors in Europe is facilitated by fund distributors with which Principal Global Investors (Europe) Limited has entered distribution arrangements, pursuant to advice provided to investors by those distributors, based on the documents Principal Global Investors (Europe) Limited provides. Retail investors should not be provided with access to this website.

The name of the Swiss representative is ACOLIN Fund Services AG, Stadelhoferstrasse 18, CH-8001 Zürich. The name of the Swiss paying agent is Banque Cantonale de Genève, 17, quai de l’Ile, 1204 Geneva. Investors can obtain the prospectus, trust deed, the simplified prospectuses and the annual and semi-annual reports free of charge from the representative in Switzerland.
The value of units and the income from them may fall as well as rise.

Investments in the Funds are neither insured nor guaranteed by the US Government or the Federal Deposit Insurance Corporation and are not deposits or obligations of, or guaranteed by, Principal Global Investors.

No Solicitation
Nothing contained in this website shall constitute an offer or solicitation, in relation to units in the Funds or generally, in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

In particular, shares issued by the Company, and units in the Funds, have not been and will not be registered under the United States Securities Act of 1933 as amended or the securities laws of any state or political subdivision of the United States and may not, except in a transaction which does not violate US securities laws, be directly offered or sold in the United States or to any US Person. The Company will not be registered under the United States Investment Company Act of 1940 as amended.

This website is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

No Investment Advice
The information in this website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision.

You should also inform yourself as to (a) the possible tax consequences, (b) the legal requirements and (c) any foreign exchange restrictions or exchange control requirements which you might encounter under the laws of the countries of your citizenship, residence or domicile and which might be relevant to any investment, including the subscription, holding, transfer or disposal of units in the Funds

Delegation of Investment Management to Affiliates

Products upon which composite results contained in this material, if any, are based may not themselves be available in the United Kingdom and certain other jurisdictions; however, the underlying investment management capability can be made available to institutional investors subject to all applicable local regulations and restrictions. In connection with its management of client portfolios, PGIE may delegate management authority to affiliates that are not authorised and regulated by the Financial Conduct Authority. In any such case, the client may not benefit from all protections afforded by rules and regulations enacted under the Financial Services and Markets Act 2000.

Disclaimer
The information on this website is given by Principal Global Investors in good faith and has been derived from sources believed to be reliable and accurate as at their date. However, Principal Global Investors makes no representation or warranty of any kind for the accuracy or completeness of the information and it is under no obligation to update or correct any errors in the information after the date of publication. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

Subject to applicable law, Principal Global Investors and its affiliates and their respective directors, employees and associates do not accept any responsibility arising in any way (including by reason of negligence) for errors in, or omissions from, the information and do not accept any liability for any loss or damage, however caused, as a result of any person relying on any information on the website or being unable to access the website.

The Internet is not a totally reliable and secure medium of communication. Principal Global Investors accepts no liability for the security or confidentiality of information transmitted in this way and any such transmission of information shall be at your own risk.

The entire content of this website is subject to copyright with all rights reserved. You may not copy, reproduce, distribute or modify the content of this website without the prior written permission of Principal Global Investors.

No instructions for investment purposes will be accepted directly from this website or by e-mail.

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You may view, download for caching purposes only, and print content from the website for your own personal use, subject to the restrictions set out below and elsewhere in these Terms of Use.

No Guarantee of Timeliness
This website may contain videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions. The information and materials contained on this website, and the terms, conditions, and descriptions that appear, are subject to change. All content on this website is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.

No Warranties
The information on this website has been developed internally and/or obtained from sources believed to be reliable; however Principal Global Investors and its affiliates do not independently verify or guarantee its accuracy or validity. The information and services provided on this website are provided ""AS IS"" and without warranties of any kind, either expressed or implied. To the fullest extent permissible pursuant to applicable law, Principal Global Investors disclaims all warranties, including, but not limited to, any warranty of non-infringement of third-party rights and any implied warranties of merchantability and fitness for a particular purpose. Principal Global Investors does not warrant, either expressly or impliedly, the accuracy or completeness of the information, text, graphics, links or other items contained on this website and does not warrant that the functions contained in this website will be uninterrupted or error-free, that defects will be corrected, or that the website will be free of viruses or other harmful components. Principal Global Investors expressly disclaims all liability for errors and omissions in the materials on this website and for the use or interpretation by others of information contained on the website. Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions on this website.

If you have questions, please email us.

Click ""Accept"" to indicate your acknowledgement and acceptance of Principal Global Investors Terms of Use and to continue."

This website contains general information only on investment matters and nothing in this website is intended to constitute or form part of any offer or inducement to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Information in this website is not directed at you if we are prohibited by any law of any jurisdiction from making the information on this site available to you and is not intended for any use that would be contrary to local law or regulation. Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be available in all jurisdictions. Accordingly, persons are required to inform themselves of and observe any such restrictions.

The information in this website is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE or elsewhere in the Middle East.

The information in the following website should not be construed as investment advice or a recommendation for the purchase or sale of any security. The value of investments and the income from them may fall as well as rise. Member firms of Principal (collectively, the “Firms”) do not guarantee any investment results and there can be no assurance that the strategies employed will improve investment performance, and make no guarantee that a client’s investment objectives will be achieved and no warranties or representations, expressed or implied, are made by the Firms concerning the benefits of these strategies discussed herein. The information in this website has been developed internally and/or obtained from sources that the Firms believe to be reliable; however, the Firms do not guarantee the accuracy, adequacy or completeness of such information and are not responsible for any errors or omissions. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

This website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information it contains does not take account of any investor’s investment objectives, particular needs or financial situation. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision. You should consider whether an investment fits your investment objectives, particular needs and financial situation before making any investment decision.

Nothing in this website should be construed as investment, tax, legal or other advice.

The content of this website has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority.

Access to this website is only permitted for “Professional Clients” as defined in the Conduct of Business of the Dubai Financial Services Authority’s Rulebook. If you are not a “Professional Client”, you may not access this website and you should select the “Decline” link below.

By selecting the “Accept” button below, and entering this website, you agree to these terms and confirm and represent that you are a “Professional Client”.