By Mike Forman
For investors, it’s essential to look beyond short-term volatility and focus on long-term fundamentals. I believe digitalization of the economy, including the AI revolution, is a megatrend that supports strong long-term demand for data centers.
The share of GDP attributed to the information technology sector has more than tripled over the last 25 years but remains at just 8%. [ 1 ] As technology usage grows, the increased computing and storage requirements fuel demand for data centers. Said differently, the cloud does not live in the clouds! We’ve seen a long trend of robust growth in data center demand as cloud computing and content creation have boomed, and, more recently, as AI has begun to take off.
AI adoption is still in its infancy. Early adopters of AI, such as software engineers, showcase its potential — over 25% of all new code at Google is now generated by AI [ 3 ] and engineers using AI are 26% more productive. [ 4 ] Yet more broadly, AI has barely begun to be integrated into our lives, the technology we interact with, and the economy. Today, just 1-5% of work hours are assisted by AI. [ 5 ] This is changing rapidly, particularly as AI models become more capable and reliable. For example, this year, we are beginning to see the first examples of AI “agents,” which upgrade capabilities from do-it-yourself tools (e.g., generating vacation itineraries) to white-glove services (e.g., actually booking your trip).
The potential for AI is enormous. I expect it will become embedded into everything — enterprise processes, scientific discovery, medical advances, manufacturing, and robotics. Each of these use cases will require significant increases in computing power compared to today.
For example, the cost to access equivalent-intelligence AI models has declined by 99% over the past two years. [ 6 ] These efficiency gains have introduced volatility in public markets, but they also highlight the rapid pace of technological advancement.
Counterintuitively, efficiency gains have been the propellant of digitalization. Compute has been getting exponentially more efficient in terms of both cost and energy — computations per dollar of IT investment and per watt have been doubling every two to three years for many decades. [ 7 ] On top of this, innovation in software has doubled the number of tasks which can be completed per unit of compute every year. [ 8 ] Despite these gains, IT spend and compute power usage have not gone down, but rather have increased dramatically, as these efficiency gains create new capabilities and unlock new use cases.
We are seeing a similar trend within the AI space. As capabilities improve and costs come down, usage is exploding — usage of leading AI platforms is up 4x year-over-year, and OpenAI now has over 600 million monthly active users. [ 10 ] Revenues are also growing rapidly, with 2025F revenues for AI model providers up 16x since 2023 and 3x year-over-year to $14 billion.
This phenomenon, known as Jevon’s Paradox, explains why efficiency gains often lead to greater resource consumption. It’s a dynamic we’ve seen throughout history, from lightbulbs to transportation. Digitalization is the megatrend of our lifetime.
However, with data centers, we are investing in the “picks and shovels” of the digital economy, and are well positioned if we believe that long-term demand for compute is going up.
Capital markets volatility may lead to periods of slower growth, and we have seen this happen before. Our current leasing pipeline is as large as it’s ever been, but we continue to be disciplined in our approach and structure our investments to minimize downside in the event demand slows. For example, we typically only build or lend to data centers after securing pre-leases with investment-grade counterparties on long-duration contracts. This means we are protected against short-term shifts in demand and can play the long game.
Vacancy rates across the U.S. are below 2%, [ 12 ] tighter than any other sector we invest in. This does not appear to be changing anytime soon — there is almost no speculative construction in the industry given the capital intensity of each project. As we are seeing real time in our businesses, it’s becoming harder every day to build new data centers.
Power is a major bottleneck to delivering new capacity. After 25 years of flat electricity demand, the US is experiencing a surge in demand from data centers, electric vehicles, electrified heating systems, and re-shoring of manufacturing. [ 14 ] The power grid has not been able to keep up, and wait times for new grid connections have increased to 7-10 years in key data center markets. [ 15 ] Blackstone is investing heavily in new generation and transmission infrastructure, but upgrading and modernizing the grid takes decades—not months or years. We have been able to procure power at scale by leveraging our 20+ years of experience investing in energy markets and the highly capable teams at our portfolio companies, but most new entrants to the space lack this expertise.
Beyond power, developers continue to experience supply chain constraints, labor shortages, and increased regulatory and permitting challenges. Amidst this backdrop, operational execution is crucial, and we are wary of the many “fly-by-night” operators who seem to have emerged overnight. When investors ask us what we worry about the most, operational execution is at the top of the list. We are focused on investing behind best-in-class platforms, including our portfolio companies QTS, AirTrunk and Lumina, and our joint venture partner Digital Realty. Many of these platforms have proven track records spanning multiple decades.
Capital has also become a more important differentiator, as these campuses often require billions of dollars to build. Blackstone’s financial resources combined with high-quality operators is a winning formula.
We have built the largest and fastest growing data center business in the world in partnership with incredibly talented teams at our portfolio companies. For years now, we have been planting the seeds for future growth and are positioning ourselves for continued leadership over the long-term.
Beyond our equity investments, we have also built a leading digital infrastructure lending platform, and are focused on investing at scale across the entire capital stack. Our conviction and access to capital enable us to unlock unique opportunities and provide differentiated solutions across the digital infrastructure ecosystem.
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