The data center boom is here, and it's time to explore the trends shaping this structured market. The race to secure data center assets is on, and the stakes are high.
In the world of commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS), data center issuance has skyrocketed. With a year-to-date transaction volume of $20.9 billion in 2025, it's clear that the demand for data storage, computing power, and AI implementation is driving this growth. But here's where it gets interesting: the market is benefiting from increased price discovery between CMBS and ABS.
Our Chart of the Week compares the relative value of single-A-rated CMBS and ABS data centers. Currently, CMBS offers a higher spread compared to ABS in new issue transactions, providing an attractive opportunity for investors. Despite structural differences between the two markets, the underlying collateral backing loans is flexible and adaptable. This was demonstrated last month when a new ABS trust and a two-year-old CMBS loan, both with the same sponsorship and located on the same data center campus in Phoenix, AZ, showed the potential benefits of this flexibility.
The collateral, with long-term leases to investment-grade tenants, differed primarily in their rate type. The ABS trust featured a fixed-rate, while the CMBS loan had a floating-rate. This rate difference could result in a significant cost variation, with a potential $5 million difference when converting from a floating-rate CMBS to a fixed-rate ABS financing. As sponsors explore diverse funding sources, we may witness more transfers of collateral between CMBS and ABS trusts.
The data center issuance trend is supported by strong market demand. However, as pricing spreads narrow across ABS and CMBS markets, we must consider potential challenges. McKinsey projects a staggering $7 trillion in capital expenditures for data centers by 2030, and while securitized markets have kept up so far, the asset class may face market fatigue and tiering between sponsors and collateral types in the future. New entrants to securitized markets should be cautious of headline risks and market sentiment shifts, which could impact financing costs.
In summary, the data center asset class is an exciting and relatively new structured product. While the fundamentals are healthy in the short term, investors should monitor developments closely. The asset class is maturing, and some volatility is expected in the short to medium term. The relative value across CMBS and ABS markets is compelling, offering investors opportunities to express their convictions. But here's the controversial part: do you think the data center boom is sustainable, or is it a bubble waiting to burst? Share your thoughts in the comments; I'd love to hear your insights and opinions on this evolving market.
