Microsoft’s Canceled Data Center Leases: Impact on the Industrial Market and Financial Landscape

Data storage has emerged as a top-performing asset class in the commercial real estate industry, especially with the rapid growth of ChatGPT, which has amassed an impressive user base of 100 million within just two months. This surge in demand has led CBRE to establish its own Data Center Solutions advisory group and acquire Direct Line Global, an infrastructure provider for data centers, in a strategic move last year. However, despite expectations of sustained double-digit growth in the data center market, Microsoft has recently shown signs of slowing down and downsizing its data center footprint.

A securities analyst group called TD Cowen has reported that Microsoft has terminated leases for North American data centers equivalent to two full facilities. Additionally, Microsoft has allowed several letters of intent (LOIs) for other centers to expire and has backed out of contracts for at least five properties.

These findings have caused ripples in both the tech and real estate sectors. Microsoft has been the largest consumer of data center space in the past 18 months and has maintained an optimistic outlook on future demand. The news of Microsoft’s actions led to a nearly four percent drop in the stock of Digital Realty, the largest data center REIT, while data center infrastructure companies experienced even steeper declines, with Schneider Electric falling almost seven percent on the same day.

Despite the market’s reaction, it remains uncertain whether this indicates a softening data center market or simply a strategic adjustment by Microsoft. One possible explanation for Microsoft’s actions could be its recent partnership with OpenAI and Oracle, which is linked to President Trump’s “Stargate” initiative.

Another potential factor is the growing challenge faced by some data centers in obtaining sufficient power for operations, especially as more space is allocated to computing rather than storage. CBRE’s recent data center report supports this concern, highlighting 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.”

However, TD Cowen’s analysts remain skeptical that power shortages were the primary reason behind Microsoft’s decision. 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.”

Regardless of the true motive behind Microsoft’s alleged lease cancellations, if confirmed, it would signify a turning point in the data center market. Just a few months ago, it seemed inevitable that supply would struggle to keep up with the soaring demand. Now, at least in certain parts of the U.S., one of the major players in AI may be reducing its involvement in the data center industry.