For decades, commercial mortgage-backed securities (CMBS) have served as a vital financing pillar for American office towers, apartment complexes, and shopping centers. Now, this market is being fundamentally reshaped by a surge of data center transactions, forcing investors to confront an entirely new set of risks.

From electricity supply and grid capacity constraints to rapidly evolving cooling and computing density requirements, CMBS buyers are being pushed into risk assessment territory that historically had little connection to commercial real estate. Even traditional concerns like tenant demand and operational stability are shifting—data centers rely heavily on a handful of hyperscale cloud providers whose future requirements remain highly uncertain. If these tenants depart after lease expirations in coming years, retrofitting such highly specialized buildings could prove prohibitively expensive.

Data Center Issuance Wave Hits, Risk Evaluation Becomes Daunting

Since the start of 2025, data center CMBS issuance has reached approximately $17 billion, more than triple the combined total of the previous two years. During this period, data centers have accounted for roughly 8% of new commercial property bonds. With tens of billions of dollars in additional projects queued up, seasoned industry professionals are rapidly revising their risk assessment playbooks to avoid troubled deals.

"A true data center is measured in computing units and megawatts—this is a completely foreign world for real estate investors," said Alex Killick, senior managing director at CWCapital Asset Management. "These metrics are difficult to fit into our traditional analytical frameworks. Re-evaluating these data centers in a few years is extremely challenging. We re-evaluate office or hotel CMBS every day. But two years from now, how do I conduct a credit assessment on a data center?"

Killick revealed that CWCapital is developing a new set of stress-testing models for this sector to address such questions. Axonic Capital faces the same predicament. Portfolio manager Steven Jury has adopted a more cautious strategy: keeping data center assets at a modest share of the firm's portfolio while emphasizing diversification across tenant types, application scenarios, and geographic regions. Most data center CMBS utilize a single-asset, single-borrower (SASB) structure, where one large mortgage—typically backed by a single facility or campus—secures the bonds.

"What these assets will be worth in 5, 10, or 20 years, and who will need them—that is the hardest question to answer," Jury said. "Technology, tenant demand, and supply dynamics can all shift significantly over that period."

Old Risks, New Logic: Leases, Locations, and Tenant Concentration Undergo Transformation

Many of the risks CMBS buyers have long weighed remain present, but for data centers, the drivers behind them are fundamentally different. Take lease agreements—provisions governing electricity costs, minimum capacity commitments, and downtime liability determine who bears unexpected expenses, which in turn affects debt service cash flow. Scrutinizing these clauses is also more difficult, as tenants typically insist on keeping their identities and other lease details confidential.

"Traditional commercial real estate investors know how to evaluate office buildings, apartments, warehouses, and retail properties because lease contracts tend to be relatively standardized and tenant information is fairly transparent," said Ben Hunsaker, portfolio manager at Beach Point Capital Management. "Data centers are far more opaque."

Location logic has also been rewritten. Previously, property value was judged by transportation access, surrounding amenities, or proximity to urban cores. Now, the standard for value is access to low-cost electricity and adequate transmission capacity. These advantages will determine how competitive and how valuable a data center facility remains when the loan matures.

Tenant concentration and lease expiration risks have also evolved. For offices or apartments, re-leasing risk simply means finding another occupant. But for data centers, the more critical question is whether customized power and cooling systems can actually accommodate other enterprises. If not, what will the ultimate cost of retrofitting be? For CMBS investors, this implies higher capital expenditure expectations, longer vacant periods with no income, and weaker recovery rates if borrowers run into trouble.

"These granular risks are really, really difficult for me to fully digest," admitted Stephen Buschbom, head of applied research and analysis at data firm Trepp. "These projects look more like infrastructure and complex technology ventures than traditional real estate."

Obsolescence Cycle Compressed: From Decades to Years

Beyond that, there are considerations almost unheard of for CMBS buyers. The rapid iteration of AI chips can drive sharp spikes in power and cooling demands. A facility built around one generation of hardware could become obsolete within just a few years, eroding asset value and making debt refinancing significantly harder.

"For traditional real estate, obsolescence cycles can be modeled in terms of decades. But data centers are completely different," Killick noted. "The chips you installed six months ago could soon be replaced by other unknown chips. This alone makes due diligence extraordinarily difficult."

Meanwhile, data centers have become a major political issue from local to national levels, facing public opposition rarely seen in commercial real estate. Market observers point out that concerns over utility costs and local infrastructure strain have sparked calls to restrict new projects in some communities, making the regulatory environment especially unpredictable.

Oversupply Concerns: Spreads Have Silently Widened

Some perennial concerns persist, particularly oversupply. Major technology companies have issued over $429 billion in bonds globally this year to fund AI buildouts. Although this financing spans multiple fixed-income markets beyond CMBS, investor fatigue with the funding wave has spilled into property bonds. Just last week, a $356 million bond backed by a 30-megawatt facility near Elk Grove Village, Illinois, priced its highest-rated tranche at spreads noticeably wider than initial guidance. This marks the third such occurrence in recent months.

According to Barclays data, risk premiums on AAA-rated data center deals have expanded since the start of the year, now averaging 1.65 percentage points above their floating-rate benchmarks—compared with 0.93 percentage points for offices, 1.05 percentage points for retail, and 1.25 percentage points for industrial properties. With a substantial pipeline of projects needing financing, Citigroup projects data center CMBS issuance will jump approximately 50% next year to between $18 billion and $20 billion.

"We expect supply to increase next year, which will bring longer-term repricing risk, especially if demand becomes more fragile," wrote Jeffrey Berenbaum, head of global market research at Citigroup, in a report this month. Still, computing power demand currently far exceeds available supply, which helps sustain investor confidence in the sector. He added: "Right now, you might have AA-rated tenants with lease terms of roughly 15 to 30 years—but if they all leave, what you're left with is the world's largest pickleball court."