How Will Private Equity Be Able to Exit Its Data Center Investments?

• Data in the center: The data center boom has been fueled by private equity firms but those companies will have to reconcile the long timeline needed to pay off the investments to their investors.

• Settlers’ dilemma: Another company has settled in D.C. lawsuit against RealPage and its clients.

• Apocalypse later: The rise in home foreclosures has not yet created a problem when it comes to zombie properties.

• Multifamily security: Doorbell cameras are fine for homes but only AI-powered commercial systems can manage the complexity of multifamily security.

Investment

How Will Private Equity Be Able to Exit Its Data Center Investments?

Data centers have been the hottest commodity in real estate. Fuel was poured on that fire when ChatGPT became commercially available and nearly every large tech company announced plans to ramp up their AI development. Data and computing centers are unique in a number of ways. They are large industrial properties that need to have access to large amount of energy to power servers and water to cool them. They also have to be designed and maintained by highly skilled engineers. All of this adds up to mean that they are an incredibly expensive, and therefore risky, piece of real estate.

The high cost of data centers has created an opportunity for some of the largest, deepest-pocketed investment groups in the world. Private equity groups like Blackstone, BlackRock, KKR, and Blue Owl have together invested hundreds of billions of dollars buying and developing data centers. The massive investment flowing into data centers, alongside technological advancements that could reduce the need for computing infrastructure, has raised concerns that the sector may be overbuilt.

Another concern has to do with the misalignment of ROI expectations. Data centers take a good amount of time to develop and will likely not be quick to sell due to the limited market with enough cash to make these large purchases. Private equity investors often have an expectation that they will start to see some payback within 5 to 7 years. Some companies like Blackstone have funds that are able to hold assets for longer terms but in general, investors are not willing to wait over a decade to get their initial investment back.

Some big tech companies like Microsoft, Meta, and Tesla are already starting to develop their own data centers instead of leasing them. Other arrangements are also being made like Startgate, a $500 billion joint venture between SoftBank, OpenAI, Oracle, and MGX. These types of owner/operator developments might make more sense for the long timelines that are needed for these tech infrastructure programs.

Overheard

Multifamily Security

Another Property Company Settles in the RealPage Lawsuits

Yesterday the Washington D.C. based property company W.C. Smith settled with the attorney general for its role in using RealPage's rent optimization software. The settlement was for just over $1 million. The company admitted no wrongdoing but said in a statement that the settlement was done to end the "considerable and unnecessary legal expenses" and allow the company to focus on its ongoing business.

The only other company to settle so far has been Cortland, another D.C. based developer. There was no monetary settlement in the Cortland's case, but the company did agree to stop using non-public data, cease the use of third-party pricing software, and cooperate with the ongoing DOJ investigation.

Despite Uptick in Home Foreclosures, Zombie Properties Are Not a Problem

In the second quarter of 2025, U.S. foreclosure activity experienced a modest uptick, with 222,358 properties entering the foreclosure process, marking a 4.8% increase from the previous quarter. Despite this rise, the housing market remains resilient, as evidenced by the stable vacancy rate of 1.3% for the 13th consecutive quarter. Notably, only 3.3% of homes in foreclosure were classified as "zombie properties," where homeowners have vacated before the foreclosure process concludes. This figure is consistent with the first quarter of 2025 and slightly higher than the 2.9% reported in the same quarter last year, indicating that repossessed homes are being reoccupied or sold relatively swiftly.

The low prevalence of zombie foreclosures suggests that the market is efficiently absorbing distressed properties, mitigating potential negative impacts on neighborhoods and property values. While foreclosure filings have increased—April 2025 saw a 14% rise compared to April 2024—the quick turnover of these properties is a positive sign for the housing market's health. The current scenario contrasts sharply with the 2008 housing crisis, where a glut of abandoned homes contributed to widespread neighborhood decline.

Mortgage delinquency rates further underscore the market's stability, remaining at a historically low 2.8% as of March 2025, unchanged from the previous year. Molly Boesel, senior principal economist at Cotality, noted that while some metropolitan areas affected by natural disasters in 2024 experienced elevated delinquency rates, these instances are exceptions rather than the norm. Overall, the combination of low vacancy rates, minimal zombie foreclosures, and steady delinquency figures points to a housing market that, despite facing challenges, continues to demonstrate robustness and adaptability.

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Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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