Artificial intelligence (AI) is the defining technological shift of this era. Given the rapid adoption across the global economy, AI’s computational demands are skyrocketing. While most attention has been on large tech stocks, there’s another way to gain exposure to the AI revolution via the bond markets: through data center ABS (asset-backed securities) and CMBS (commercial mortgage-backed securities).
Data centers serve as the physical backbone of AI, housing the high-performance computing (HPC) clusters, GPUs, and servers that power AI workloads. Unlike traditional office or retail real estate, data centers operate as mission-critical digital infrastructure, requiring massive power capacity to manage AI model training and inference, advanced cooling systems to prevent overheating from GPU-intensive operations, and low-latency connectivity for real-time data processing and AI applications.
Data centers come in different forms, but two of the most critical to today’s digital economy are colocation and hyperscale facilities. Colocation data centers are shared environments where multiple businesses lease space, power, and cooling for their servers. These facilities offer flexibility and cost efficiency, allowing companies to outsource their IT infrastructure while maintaining control over their own hardware. Hyperscale data centers, on the other hand, are massive, purpose-built facilities owned and operated by tech giants like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud. Designed to support large-scale cloud computing and AI workloads, hyperscale data centers provide the computing power behind everything from ChatGPT to self-driving cars.
Recognizing the growth in demand for high-capacity computing and storage, institutional capital has poured in. Private equity firms and REITs are investing heavily in data centers as a stable, recession-resistant asset class. And given the surge in data center revenues, structured finance markets are stepping in to provide capital. Over the past few years, issuance of data center ABS and CMBS has grown significantly, allowing investors to gain AI exposure via securitized markets.
Data center ABS are structured financial products where cash flows from data center leases are pooled, securitized, and sold to investors, allowing operators to unlock liquidity from long-term leases while providing investors exposure to digital infrastructure. The process begins with lease pooling, where cash flows from long-term data center leases — often triple net leases with hyperscale tenants or colocation providers — are bundled together.
This revenue is then securitized, packaged into bonds, and structured into different tranches based on risk and credit rating. Once issued, these bonds are sold to institutional investors seeking stable, long-term returns, with cash flow allocations ensuring that investors receive interest and principal payments from the underlying lease revenues. Data center ABS are particularly attractive because they offer stable and predictable cash flows, as long-term leases with high-credit tenants like AWS, Google, and Microsoft serve as strong collateral. Additionally, tenant stickiness is high, as relocating IT infrastructure is complex and expensive, reducing turnover. Combined with low default risk and the growing demand for digital infrastructure, data center ABS provide a compelling way for investors to gain exposure to the sector with minimized risk.
Data center CMBS (commercial mortgage-backed securities) provide financing by bundling loans secured by data center properties into bonds sold to investors. Unlike ABS, which is backed by lease revenue, CMBS relies on real estate mortgages. The process begins with mortgage origination, where data center operators take out loans secured by their facilities. These loans are then pooled into CMBS trusts, with bonds issued to investors who receive payments based on mortgage debt repayments. Unlike traditional commercial real estate, data centers house mission-critical tenants with strong renewal rates, reducing default risk. Additionally, single-asset, single-borrower (SASB) CMBS deals — structured around a single, high-value data center asset — are becoming more common, allowing large institutional investors to gain targeted exposure to premium data center properties.
Data Center CMBS Structure
As AI adoption accelerates, the demand for high-performance computing infrastructure will only continue to rise, reinforcing the importance of data centers as a critical asset class. The structured finance market has responded with ABS and CMBS structures tailored to data center financing, offering investors a way to gain exposure to AI’s growth through securitized markets. Unlike traditional commercial real estate, data centers benefit from long-term leases, high-credit tenants, and mission-critical importance, providing stability in bond portfolios. With capital flowing into the sector and securitization evolving to meet demand, we see continued investment opportunities in AI-driven digital infrastructure, particularly for those looking for stable, long-term cash flows in a rapidly growing market. While data center financing will continue to evolve, its role in structured finance is set to expand, creating new avenues for investors to participate in the AI revolution.
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