Everyone on Wall Street seems to be racing into data centers right now. Blackstone Inc. (BX), KKR & Co. (KKR), and Bain Capital are throwing billions at the infrastructure behind the AI revolution. The logic sounds airtight: artificial intelligence needs computing power, computing power needs buildings, buildings need investors.
But Fernando De Leon isn't buying it.
De Leon runs Leon Capital Group, which he built from a $100,000 startup into a $10 billion commercial real estate operation. He cut his teeth as a Goldman Sachs analyst and famously called the 2008 subprime mortgage crisis before it imploded. Now he's seeing similar warning signs in the data center frenzy, according to CNBC.
The Valuation Problem Nobody Wants to Talk About
Here's what's bothering De Leon: Developers are slapping $10 billion price tags on data center projects, but the comps don't support it. There haven't been any exits above $4 billion or $5 billion in this space. The math doesn't add up, and when the math doesn't add up in real estate, that's usually when things get interesting.
"I look at a data center that's $10 billion, right? First of all, there haven't been any exits above, you know, $4 billion or $5 billion, you haven't seen comps, so that worries me," De Leon told CNBC.
If Data Centers Are So Great, Why Won't Tech Companies Own Them?
This is the question that really gets to the heart of De Leon's skepticism. The world's largest tech companies — the ones who supposedly need these buildings to survive — are refusing to buy them. Instead, they're asking developers to build and finance everything while they just lease the space.
"Why doesn't the largest company in the world want to own its own asset?" De Leon asked. "The AI business is everything for them today, for the large hyperscalers, and so they're saying 'No, you build it, you finance it.'"
That's a red flag the size of a football field. When the companies who understand the technology best won't take ownership risk, maybe that risk is higher than everyone thinks.
Swiss Cheese Leases
De Leon has a colorful way of describing the 15- to 20-year leases that developers are relying on to justify their massive investments. He calls them "Swiss cheese" leases — they look solid from a distance, but they're actually full of holes.
The problem is technological obsolescence. AI hardware evolves rapidly, and if the equipment inside a data center becomes outdated in a few years, the building's value could crater. Those long-term leases probably have escape hatches that let tech giants walk away when their infrastructure becomes inefficient. Developers might think they have guaranteed income for two decades, but they could be in for a nasty surprise.
Still Bullish on Real Estate Overall
Despite his data center concerns, De Leon remains optimistic about commercial real estate broadly. He's predicting a massive wave of capital flowing into the sector as institutional investors increase their allocations.
Wealth management firms, family offices, and sovereign wealth funds are moving their real estate allocations from roughly 3% to 6%. That shift could bring an additional $4 trillion chasing a limited supply of properties, De Leon said.
"When that happens, you see an oversupply of capital, you'll see price appreciation for fundamentally sound real estate assets," he told CNBC. "And so I think the story of the next 10 years will be that the real estate capital markets will grow tenfold."
The key phrase there is "fundamentally sound." De Leon has made his fortune by avoiding euphoric bubbles and focusing on assets with real underlying value. Right now, he's betting that data centers don't fit that description — no matter how much everyone else wants them to.