It’s hard to find a hotter topic right now than data centers. If you look at recent public polling data, pretty much no one—left, right or center—wants one anywhere near where they live. The backlash against the facilities also is going global, seen in growing public pushback on building the very large industrial sites with significant power generation needs.
A quick scan of the headlines on any given day will include at least one story about a public hearing about data center siting that descended into chaos or a potential moratorium on new builds. It seems the only people that want data centers are tech companies and the asset managers that believe in the potential of including those companies in portfolios. Many institutional investors have been ready backers of these projects, as well as upgrades to the energy generation and transmission infrastructure needed to power them.
For investors, the salient question is whether or not the pushback comes with any real power to increase risk or limit projects.
According to the National Conference on State Legislatures, 16 states are considering bans on new data center builds. The bans under consideration are typically for a limited period of time—New York paused new development for one year, for example—while the state legislature does further study of data centers’ potential impact.
Another group of states have introduced measures to restrict data center building, but those bills failed to pass or were vetoed by governors. City and county level bans are also keeping data centers out of multiple localities, even when no statewide ban is in place.
So far, however, these efforts have not made a meaningful impact on new builds. As CIO recently reported, hyperscalers have hundreds of billions of dollars in capital expenditure planned for this year and next. There are still a plurality of states that are willing to allow projects to move forward. Despite that, the market is starting to ask more questions, and some companies are already making moves to insulate themselves from projects that might see fresh restrictions.
On September 24, Bloomberg reported that Oracle sent Blue Owl a force majeure notice about the Project Jupiter data center in New Mexico. Oracle is meant to be an anchor tenant on the sprawling project, but increased scrutiny, followed by the denial of a key permit, have raised questions about whether the data center will come online as planned. Oracle issued the notice hoping to defer payments if the data center is delayed or the project falls through. However, it is unclear if the project’s problems will be enough to put off Oracle’s financial obligations to Blue Owl.
Where the Money Is
While the headlines focus on the data centers’ physical footprints, what goes into one and where the cost is reported on balance sheets is a bit more complicated. The potential impact, therefore, of bans or other regulatory restrictions might also be less clear to the market and to investors.
“What we’re seeing right now is a lot of off-balance-sheet financing,” says Doug Colandrea, a senior director and rating committee chair at Kroll Bond Rating Agency. “We have seen a significant expansion in all balance sheet obligations, and they’re coming in differently than they have in the past in terms of flavors, sizes and what buckets they’re going in.”
Colandrea says the biggest piece right now is for financing GPUs—the chips that support AI.
“There is also a premium on land and a premium on storage,” Colandrea says. “Companies are scrambling to get both of these things so that they have the capacity to meet their compute demands. The breadth and the depth of the financing is something we haven’t seen before. When you’re talking about numbers this significant, there is only so much you can do on balance sheet, which is what is driving the growth of off-balance-sheet financing.”
KBRA recently published a longer article on how it is evaluating the growing mix of on- and off-balance-sheet financing, but the main challenge is that not every company has the same exposures. A typical off-balance-sheet credit might focus on leases not yet commenced—such as Oracle’s Project Jupiter.
Colandrea says when those projects come online, they move onto the balance sheet and are treated as debt. But in the interim, their impacts across the board are less clear.
“Companies are going to tap a variety of capital pools to finance these things. The question is whether the expected revenues come online fast enough for companies to meet their [debt service] obligations,” Colandrea says.
The market itself seems to want an answer to that question. Colandrea says that between the year’s first and second quarters, tech companies started offering greater disclosure about their financing mix in response to pressure and to growing questions about project pipelines.
Lesya Paisley, portfolio manager and managing director at MacKay Shields, does want those answers. She says she’s factoring in the potential impact of off balance sheet financing when she looks at the opportunity set. “We’re very concerned about how fast this financing has grown,” she says. “There’s a tendency to not treat it the same as off balance sheet financing in other industries, but we would ask ‘what makes it different?’”
She adds that most of the hyperscalers have vast balance sheets and are investement grade issuers, but the revenues still have to materialize to cover the costs of this buildout.
Other questions may also arise. New academic research shows that in counties where data centers are being built, local government borrowing costs rise. The interest costs localities are paying when they sell bonds for their water systems increases by 26 basis points in water-scarce counties compared to water-abundant counties. The effects are concentrated in the tax-exempt municipal revenue bond market, but yields on school bonds also increase in communities that are major data center hubs and where housing price growth is also lower as a result of data centers not driving significant long-term job growth, leading to a weaker future local property tax base.
Opportunities Expand
So far, increased scrutiny is not putting much of a damper on investment. In a recent analyst note, BlackRock estimated that “annual U.S. financing demand could exceed $7.5 trillion by 2030, driven mainly by the capital needs of the AI buildout.” Analysts expect ongoing bond issuance and new investment growth.
“The broader AI and data-center bond universe accounts for about 14% of U.S. investment-grade issuance this year, up from 5% in 2025 and 1% over the previous decade. We think this financing wave has room to run,” BlackRock analysts wrote. “Markets have been rattled by talk of slowing frontier-model development, but we would not equate that with a slower physical AI buildout. For now, demand remains robust: most AI compute is used for inference—running existing models—rather than training new ones. With adoption still in its early stages, inference should keep driving demand for compute even if frontier-model progress slows.”
Johnny Gould, head of infrastructure research in the real assets consulting group at investment consultant Callan, says institutions are keeping an eye on the pushback, but recognize that data center development is a long-term investment trend that will evolve further.
“There is a sense that there might be headline risk here and constituent risk among public pensions, for example, given the community responses we’ve seen in a number of places. We’re seeing more caution from institutional investors because they don’t want to be party to negative impacts on communities,” Gould says. “There is also potential for liquidity risk or project risk if there are legislative or regulatory responses.”
Gould says institutional investors he works with are focusing on finding broadly diversified infrastructure funds with strong investment-grade opportunities in data centers as a way of mitigating some of those risks. When focused on data-center-specific investments, investors are asking more questions about contract terms and getting more granular about project requirements in general, Gould says.
“They want to see things like regulated utility costs, so higher prices aren’t being passed on to consumers, for example,” he says.
Gould says the reality that digital infrastructure investment will have winners and losers is driving some of the thinking within institutions that are watching to see how some of the competing trends develop before going all-in on a big allocation to data center development.
“I think there’s ultimately going to be some kind of inflection point,” Gould says. “We’re certainly in a race at this time and companies that want to be market leaders are trying to win that race so they can have a dominant position. But it’s sort of anyone’s guess on how that plays out. That’s why we’re advocating for caution and a diversified approach.”
Tags: data centers, financial risk