Colocation Deals Surge: Data Center Valuations & Capital Inflows

By Majid Radaei, RadCRE · · Market Updates

Colocation facility valuations remain robust, driven by AI demand, with major transactions like KKR's $15 billion acquisition of CyrusOne fueling institutional capital into the sector.

Institutional Capital Floods Colocation Sector Amid AI Boom

The colocation data center market continues to be a hotspot for institutional capital, driven by the insatiable demand for processing power, particularly from artificial intelligence (AI) and machine learning (ML) workloads. Valuations for prime colocation assets remain elevated, reflecting strong fundamentals and predictable cash flows. Recent months have seen a flurry of activity, from major acquisitions to new development financing, as investors chase the sector's robust growth.

According to recent reports from CBRE and JLL, global data center investment reached record levels in 2025. One of the most significant transactions underscoring this trend was KKR and Global Infrastructure Partners’ acquisition of CyrusOne for approximately $15 billion in 2022, a deal that set a benchmark for future institutional interest. More recently, in early 2026, Blackstone announced a $7 billion hyperscale data center development joint venture with Digital Realty, highlighting continued confidence in even ground-up opportunities within the sector. These transactions, often executed at aggressive cap rates ranging from 4.0% to 5.5% for stabilized core assets, reflect the competitive landscape.

The demand drivers are clear: cloud adoption, increasing enterprise digitalization, and the exploding computational needs of AI. Hyperscale tenants, in particular, are driving much of the new supply and absorption. This has led to extremely low vacancy rates – often below 5% in key North American markets like Northern Virginia, Dallas, and Silicon Valley – which further supports valuation premiums.

Financing Data Center Acquisitions and Development

Securing financing for data center assets, while attractive to lenders due to strong tenant covenants and long-term leases, involves specific considerations. Traditional CMBS loans are available for stabilized assets, with spreads currently ranging from T + 175-275 basis points for high-quality properties. For new development or value-add plays, construction loans and bridge financing are prevalent. Construction financing, dependent on pre-leasing commitments, often carries higher rates, typically SOFR + 300-500 bps, given the specialized nature and construction risk.

Mezzanine and preferred equity solutions are also common in the capital stack for larger, more complex deals, often commanding returns in the 12-18% range. Lenders are increasingly sophisticated in underwriting data center specific risks, including power availability, fiber connectivity, and tenant credit quality. The sheer scale of many of these projects also often necessitates syndicated loans or partnerships with debt funds and institutional capital providers.

RadCRE Perspective

Majid Radaei, Founder of RAD Commercial Realty, observes, "The colocation sector is not just hot; it's fundamental infrastructure for the AI revolution. Valuations are indeed rich, but not without basis. We're advising clients to look beyond just the standard core markets. While Northern Virginia remains a titan, secondary markets with robust power grids and fiber infrastructure are emerging as compelling value plays.

From a financing perspective, lenders are keen, but they're also discerning. Straightforward CMBS for a fully leased, stabilized facility with investment-grade tenants is easily placed at favorable spreads around T + 175-225 bps. However, the real art is in structuring development and expansion capital. For ground-up projects or significant capacity expansions, we’re seeing a fascinating blend of senior construction debt — priced at SOFR + 350-450 bps, often with significant recourse requirements due to current market uncertainty — complemented by preferred equity or joint venture equity at the 14-18% IRR level. This blend of capital is crucial in today's environment, especially with SOFR stubbornly holding around 4.31%.

The key for sponsors is demonstrating a clear path to tenant commitment and a deep understanding of power procurement and cooling technologies. We recently structured a bridge-to-CMBS facility for a client expanding an 8MW data center in Arizona, where the bridge lender required a defined pre-leasing target and an interest reserve for the construction phase. This bespoke approach to capital structuring is where RadCRE delivers significant value for our clients navigating the complexities of this high-growth asset class."

Key Market Dynamics and Outlook

The robust demand is expected to continue, particularly from hyperscalers and AI-driven enterprises. This will likely sustain high development pipelines and competitive valuations. However, challenges such as rising power costs, supply chain issues for critical equipment, and increasingly stringent environmental regulations are becoming more prominent factors in underwriting. Investors are focusing on energy efficiency and renewable power sources as key differentiators for long-term sustainability and tenant attraction.

The colocation sector, therefore, presents both significant opportunities and nuanced risks. Deep market expertise and sophisticated financial structuring are essential for capitalizing on its ongoing expansion.

Tags: colocation facility valuations, data center investment, CRE capital markets, institutional real estate, bridge lending, CMBS spreads, RadCRE, real estate financing, AI infrastructure

Sources: CBRE Research, JLL, Commercial Observer, CoStar News, Bloomberg, Real Capital Analytics