For all the ups and downs (mostly downs) AI equities have subjected investors to this year, there are some constants. For instance, some of the largest economies are pledging massive AI-related expenditures over the next several years. As a result, ETFs such as the ALPS Active REIT ETF (REIT ) could merit attention as backdoor AI plays. This is because data center real estate investment trusts (REITs) will benefit from some of the aforementioned largess.
Data center REITs have been among the stars of the real estate sector in recent years. However, the group excludes many of the legacy funds in the category. That highlights one benefit of REIT’s active management.
Arguably, that’s a big point in REIT’s favor because analysts are forecasting significant growth ahead for data center landlords.
“We see the sector poised for growth over the next 12 to 24 months, driven by hyperscale expansion and continued off-premises cloud migration. The favorable demand supply outlook is likely to continue, given most of the available space is pre-leased until 2027, especially at large data centers,” Vikram Malhotra of Mizuho told Nareit.
REIT: Right Place, Right Time
REIT possesses some of the defensive traits investors are accustomed to with the real estate sector, as highlighted by the ETF’s outperformance of the S&P 500 on a YTD basis. However, involvement with REIT doesn’t require investors sacrifice growth opportunities.
“The data center REITs are uniquely positioned to capture enterprise data center demand, given the existing customer base of more than 5,000 for Digital Realty (DLR) and more than 10,000 for Equinix, Inc. (EQIX). Their demand funnel is about much more than just a handful of the large hyperscalers,” Jonathan Petersen of Jefferies said to Nareit.
Equinix is the ETF’s largest holding at a weight of almost 9%. Meanwhile, Digital Realty commands 3.75% of the REIT portfolio. In the Nareit interview, Nick Del Deo at MoffettNathanson spoke bullishly on American Tower (AMT), which is also a REIT holding.
“Larger players with software-driven networking fabrics, most notably Equinix, Digital Realty, and CoreSite, which is part of American Tower, may also develop new tools to help customers manage the complexity of AI deployments and the necessary movement of data,” said the analyst.
Data center demand is geographically diverse. That diversification is easier to tap into and benefit from with a fund like REIT rather than selecting individual equities. This could bolster the case for REIT.
The analysts also pointed to potential tariff resistance and the possibility of industry consolidation. These could be near- to medium-term tailwinds for data center REITs.
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