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What Microsoft’s Canceled Data Center Leases Means for the Industrial Market

February 25, 2025

Tuesday, February 25, 2025

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  • Digital demand: Microsoft has canceled some of its leases for data storage space. What does that mean for the data center market?

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Data storage has been the standout asset class for the commercial real estate world ever since ChatGPT burst into our lives, reaching an unprecedented 100 million users in only two months. The data center market has been so hot that CBRE has started its own Data Center Solutions advisory group and acquired Direct Line Global, an infrastructure provider for data centers last year. But, despite what many thought was going to be years worth of double-digit growth in demand for data centers, Microsoft has started to slow down and even shrink some of its data center footprint.

The report comes from TD Cowen, a securities analyst group, which found that Microsoft has canceled leases for North American data centers totaling the equivalent of two full facilities. Microsoft has also allowed several letters of intent (LOIs) for other centers to lapse and has walked away from at least five properties it had under contract.

The analysts' findings have made waves in the tech and real estate sectors. Microsoft has been the largest consumer of data center space over the past year and a half and has remained bullish on future demand. The largest data center REIT, Digital Realty, fell nearly four percent on the news, while data center infrastructure companies saw even steeper declines—Schneider Electric dropped almost seven percent on the day.

Despite the capital markets' reaction, it remains unclear whether this signals a softening data center market or simply an adjustment in Microsoft's strategy. One possible reason for Microsoft's actions could be its new partnership with OpenAI and Oracle, tied to President Trump’s “Stargate” initiative.

Another potential factor is the increasing difficulty some data centers face in securing the necessary power for operations, particularly as more space is converted from storage to computing. CBRE’s recent data center report supports this concern, noting that in markets like Silicon Valley, “Several developers who purchased property to build a data center have been informed that they won’t receive utility power for over a decade.”

TD Cowen’s analysts remain unconvinced that power shortages were the primary reason. Their report states, “Microsoft is using facility/power delays as a justification for the termination […] this is the same tactic that Meta used to cancel multiple data center leases in the U.S. after we learned in our checks that Meta had then canceled a $4 billion capex program related to the metaverse.”

Whatever Microsoft's true motive for allegedly canceling these leases, if confirmed, it would mark a turning point in the data center market. Just a few months ago, it seemed inevitable that supply would struggle to keep up with skyrocketing demand. Now, at least in some parts of the U.S., one of the biggest players in AI may be taking a few chips off the table.

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