CRE Analyst Jan 18, 2025 8:00:00 AM

CREFC Miami 2025: Optimism, Risk, and the Data Center Boom

Thoughts from CREFC Miami 2025: the good, the bad, and the ugly

---- The Good ----

Lenders and debt capital providers are in high spirits. Typically, attendees leave conferences like this feeling "cautiously optimistic" about the coming year. However, the tone at this year's CREFC was distinctly more upbeat—bordering on purely "optimistic."

---- The Bad ----

Spreads compressed significantly in 2024, and the doomsday hyperbole surrounding fundamentals and property values has largely subsided. Naturally, debt investors are feeling positive after a strong 2024 performance, but interest rates remain the ultimate driver of lending activity, and predicting interest rates is inherently perilous.

E.g., during last year’s CREFC Miami conference, an audience poll predicted a flat yield curve and a 10-year Treasury yield between 3.5% and 4.0% at YE2024.

Additionally, some expressed concerns this year about whether spreads are adequately compensating for risk, especially given the recent trend of aggressive underwriting. Despite this, the prevailing sentiment seemed confident that spreads would continue to grind lower.

---- The Ugly ----

AI’s explosive growth has driven an unprecedented surge in demand for data centers. This asset class is expanding perhaps faster than any other in the history of commercial real estate. Discussions at CREFC touched on how data center real estate is increasingly featured as collateral in CMBS offerings.

We're in the early stages of this data center boom, but real estate investors—both debt and equity—have responded by becoming much more open-minded to this once-foreign asset class.

[When did you first hear the term 'hyperscale'? If you're a real estate investor, it was likely within the last 18 months.]

Here’s where it could get ugly. The demand for data and power seems insatiable, and investor appetite for products that serve these needs is following suit.

A debate is emerging over whether data centers should be classified as infrastructure or real estate. Either way, capital is flowing into this space, and in a market where cap rates and interest rates are not consistently falling, this trend could create a zero-sum dynamic.

Eastdil estimates that data centers will need $1 trillion over the next 4-5 years.

Where will the capital come from?

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