Betting Big on AI! Blackstone, the "Real Estate Tycoon," and its $25 billion "Data Center" Empire

"Real estate tycoon" Blackstone is betting on data centers, aiming to become the "landlord" of tech giants.

Last year, due to the explosive demand for AI, large tech companies such as Meta and Microsoft have seen a continuous increase in their demand for data centers, resulting in a shortage of modern data centers. These companies need a large amount of computing resources from data centers to train and run their AI models.

The surge in demand for data centers has also led to a rise in monthly rents for data center operators.

Earlier in 2021, Blackstone spent $10 billion to acquire data center operator QTS, which can provide the space and power needed to meet the growing AI demand. Today, QTS is valued at approximately $25 billion, doubling its valuation.

Blackstone has stated that QTS may be one of the best investments the company has ever made.

A Win-Win for Blackstone and QTS

QTS is a real estate investment trust based in Kansas, USA. It operates over 7 million square feet of data center space in 28 regions in North America and Europe. Its clients include large software companies, social media companies, and government agencies that need data centers for secure storage and processing.

In 2020, when Blackstone was considering acquiring QTS, the AI boom and the growth in demand for data centers were not yet consensus, and investors were not entirely convinced that investing in large data centers was a wise choice.

Despite the doubts, Blackstone ultimately decided to acquire QTS. In 2021, Blackstone acquired the data center operator QTS for $10 billion and privatized it at a valuation of over 20 times its profit. This is another major move by Blackstone to strengthen its acquisition of data center projects.

After Blackstone's acquisition of QTS, its real estate investment trust fund, BREIT, valued at $61 billion, also followed suit and invested in data centers.

From the current perspective, this investment has brought benefits to Blackstone. Currently, QTS is valued at approximately $25 billion, doubling its valuation.

Furthermore, in the current situation of continued sluggishness in commercial real estate due to high interest rates, BREIT has sold some traditional real estate assets, such as luxury hotels. At the same time, BREIT has increased its investment in data centers, which now account for 8% of the fund's total assets. QTS is helping to boost the performance of BREIT and alleviate redemption pressure.

For QTS, the takeover by Blackstone has been a turning point. With Blackstone's support, QTS has accelerated land acquisitions and power procurement, and the planning timeline has been expedited. The company's employee count has increased by half over the past 1.5 years, reaching 1,000 people.

AI Boom Sparks Intense Demand for Data Centers

The current power demand in the United States is tight, and there are many factors contributing to the surge in power demand, one of which cannot be ignored - the explosive demand for AI.

The surge in demand for generative AI has driven a significant increase in the demand for power and data centers. AI operations require robust backend support, especially data centers. Moreover, AI relies on high-performance computing in data centers, which consumes a significant amount of electricity.

According to data from Newmark Group, AI computations on server architectures could consume four times the current electricity consumption for cloud processing. According to Boston Consulting Group, it is estimated that by the end of the 2020s (around 2030), the power consumption of data centers in the United States will triple from 2022, reaching 390TWh, which is equivalent to approximately 7.5% of the projected national power demand.

To operate these massive data centers, the key is power and land. Blackstone has made significant investments in these two areas. QTS's projects are expected to use up to 6GW of power, equivalent to the electricity consumption of about 5 million households. The construction of these data centers not only requires substantial capital investment but may also put pressure on the local power grid.

In terms of land, Blackstone is embarking on construction projects across the United States, building giant data centers, with the intention of making QTS a "landlord" for tech giants. From large plots of land along the Phoenix highway to a complex project covering 400 acres, Blackstone's plans seem to be everywhere.

Jon Gray, President of Blackstone, currently believes, "With forward-looking considerations, we have identified the data center shortage caused by AI and believe that companies with land and capital will be in a favorable position."

According to media reports, the monthly rent for data center operators has been rising, from $70 to $80 per kilowatt three years ago to over $100. Brokers say that in some top markets, it can even reach $150 per kilowatt.

Blackstone's Expansion Sparks Controversy

However, such development is not without controversy. In Manassas, Virginia, QTS's planned 900-acre large-scale development project has sparked strong opposition from local residents and environmentalists. They are concerned that these data centers will damage local historical sites, consume too much energy and resources, increase the burden on the power grid, and cause new transmission line issues.

Despite facing challenges and controversies, Blackstone and QTS are considering bolder moves. According to insiders, QTS is eager to make acquisitions to further expand into Europe. In December last year, Blackstone partnered with Digital Realty Trust Inc. to develop a $7 billion data center campus in Frankfurt, Paris, and Northern Virginia. In this wave of AI, it's not just Blackstone, other private equity firms are also accelerating their entry. From Brookfield to KKR, they have completed $43 billion worth of US data center transactions between 2021 and 2023, which is more than five times the previous three years. The entry of Blackstone and other private equity firms has not only changed the layout of data centers, but also accelerated the development of the AI industry.