The Impact of Microsoft’s Terminated Data Center Leases on the Industrial Market: A Comprehensive Analysis

Data storage has emerged as a prominent asset class in the commercial real estate industry, especially with the rapid rise of ChatGPT, which has amassed an impressive user base of 100 million in just two months. This surge in demand has led to the establishment of CBRE’s Data Center Solutions advisory group and the acquisition of Direct Line Global, a data center infrastructure provider, by CBRE 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 report from TD Cowen, a securities analyst group, reveals that Microsoft has terminated leases for North American data centers equivalent to two full facilities. Additionally, the company 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 the tech and real estate sectors. Microsoft has been the largest consumer of data center space in the past year and a half and has remained optimistic about future demand. The news of Microsoft’s actions resulted in 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 witnessing a seven percent decrease in its stock price.

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

Another factor that may have contributed to Microsoft’s decision is the increasing challenge faced by data centers in securing sufficient power for their 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, developers who purchased property for data center construction have been informed that they will not receive utility power for over a decade.

However, TD Cowen’s analysts remain skeptical that power shortages were the primary reason behind Microsoft’s actions. 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 skyrocketing demand. Now, in certain parts of the U.S., one of the leading players in AI may be reducing its involvement in the market.