There's one bright spot in commercial real estate amid an 'inevitable' wave of distress, CEO says

• Commercial real estate has struggled post-pandemic, with office values tanking as remote work persists.
• But there's been huge growth in data centers, says Aetos Capital Real Estate CEO Scott Kelley.

Commercial real estate has struggled post-pandemic, amid tight financial conditions and falling prices.

But there's one corner of the industry that's soaring above other property sectors: data centers.

"There continues to be an almost unquenchable demand for data center capacity," Scott Kelley, CEO of Aetos Capital Real Estate, said in a Thursday interview with Bloomberg.

Data centers — the infrastructure at the heart of the AI boom — have seen outsize growth, with the size of market doubling in four years, according to data from JLL released Tuesday.

Vacancy at colocation data centers has fallen to a record low of 3%, and data center construction has increased by sevenfold in the last two years, the report says.

The rapid growth of data centers across the US comes as the commercial real estate market, more broadly, has struggled since the pandemic.

Office vacancies are high, and offices in central business districts have seen their values sink 52% from their peak, MSCI Inc. data shows.

Retail, meanwhile, is stabilizing, hitting a five-year low point for vacancy at around 4%, but is still hard-hit by high interest rates, like the rest of the industry.

"If you want to go by category, offices got issues, retail has got issues, increasingly apartments do, to some extent, but data centers have just been on fire," Kelley said.

The commercial real estate market has over $900 billion in debt set to mature this year, according to Bloomberg. Once that debt hits maturity, it will have to be refinanced at higher rates and possibly lower property values.

Kelley said people have been anticipating this commercial real estate crash, but it hasn't come as quickly as expected.

"People have been — us included — anticipating this distressed wave of real estate, which has not come as quickly as folks thought. But it's also inevitable, just because the refinancing rates are totally disconnected from the underwriting of a bunch of these properties," Kelley said.

He says regulators don't want to cause a banking crisis during an election year, so they're waiting until after the election to tighten the screws on local and regional banks that "extend and pretend" troubled commercial property loans.

Even with such high demand for data centers, he sees even bigger opportunities coming for real estate as a result of AI.

He says his company is working "to really synthesize the information in a way to help you make not just good commercial judgments but informed commercial judgments," Kelley said.

"We're focused on places we can add value," he said.