Billionaire CRE Developer Warns of Data Center Finance Risks

The burgeoning demand for artificial intelligence has ignited a gold rush in data center development, but for seasoned commercial real estate (CRE) billionaire Fernando De Leon, this frenetic activity bears unsettling resemblances to past market excesses. De Leon, CEO of Leon Capital Group, recently spoke with CNBC Senior Real Estate Correspondent Diana Olick on the Property Play podcast, sharing a stark warning regarding the financial stability of the data center sector and offering broader insights into navigating the complex cycles of commercial real estate. His commentary underscored the critical importance of understanding capital flows and market incentives, especially for founders, VCs, and tech insiders operating in high-growth, capital-intensive arenas. De Leon, a self-made billionaire with a unique background in evolutionary biology, reflected on his firm’s origins, which were forged in the crucible of the 2008 Great Financial Crisis. He recounted how Leon Capital Group proactively divested from residential lot development in 2007, sensing “fundamentally unsound” practices in the market. This prescient move allowed his firm to accumulate liquidity and then thrive by “fixing” stalled and problematic real estate projects for banks and life insurance companies in the crisis’s aftermath. This experience instilled a deep understanding of market cycles and the importance of prudent, counter-cyclical investment. His current apprehension centers on the data center market, where he observes a concerning dynamic. De Leon highlighted that even the largest technology companies, the hyper-scalers, with multi-trillion-dollar market caps, are increasingly choosing not to own their own data center assets. “I look at a data center that’s $10 billion… the largest companies on the planet… saying, ‘I don’t want to own this asset. I don’t want to have this on my balance sheet,'” De Leon stated. This decision to offload ownership to financial companies raises a crucial question: why would these tech giants, whose core business relies heavily on this infrastructure, prefer to lease rather than own? The answer, De Leon suggests, lies in the rapid pace of technological change driven by AI. He pointed out that the “digital infrastructure is extraordinarily expensive and is defying Moore’s Law and optimizing at a very, very fast clip.” This means the hardware and internal technology within data centers can become functionally obsolete within months or a few years, long before a 15 or 20-year lease term expires. The financial companies holding these long-term leases bear the risk of this obsolescence, often backed by the savings of pension funds. “It’s not their money. It is the money of teachers and cops and firefighters and teachers in Texas… These people, it’s their savings,” De Leon emphasized, highlighting the potential for widespread impact if these long-term liabilities prove unsustainable. This scenario, where external capital is chasing assets that core users are reluctant to own outright, signals a potential market distortion. De Leon applies a principle famously articulated by Charlie Munger: “Show me the incentive and I’ll show you the outcome.” He believes that understanding incentives is key to predicting market behavior and identifying “tourists” – investors who enter a market due to euphoria or an oversupply of capital, rather than fundamental understanding. He noted similar patterns in the run-up to the 2008 crisis, where excessive capital and irresponsible lending created an illusion of boundless growth. Today, he sees an “oversupply of capital” driven by wealth management firms, RIAs, pensions, and sovereign wealth funds flowing into real estate, creating a chase for finite assets and potentially inflating prices beyond sustainable levels. This deep understanding of market dynamics and human behavior, honed by his background in evolutionary biology and behavioral economics, guides De Leon’s firm. He co-founded Crexi, a real estate platform leveraging AI to democratize access to commercial real estate data. By synthesizing vast amounts of information on lease and sales comparables, Crexi makes pricing and market analysis more efficient and transparent. This technological advancement empowers a broader range of investors, from individual private investors to large institutions, to make more informed decisions. Beyond data centers, De Leon’s investment strategy focuses on demographic tailwinds and micro-markets. His firm is heavily invested in healthcare, not just properties but also the operating businesses, including veterinary care, dental, and MedSpas. He identified these sectors by observing demographic trends and cost differentials; for instance, an orthopedic procedure costing $10,000 in a hospital might be $3,500 in an outpatient ambulatory center. This logical cost-saving shift fuels demand for specific healthcare real estate. Similarly, he sees immense opportunity in the growing Latino demographic in states like Texas and Florida, which drives household formation, GDP growth, and consumer spending. By focusing on these fundamental, long-term drivers in specific micro-markets, De Leon aims to build businesses with inherent resilience against broader market cyclicality. For De Leon, the future of commercial real estate will be defined by the disciplined allocation of capital, informed by deep market intelligence and an awareness of underlying economic and demographic shifts. He anticipates that the commercial real estate capital markets will grow tenfold in the coming decade as more wealth is transferred and allocated. However, this growth will favor those who prioritize fundamental value and long-term sustainability over speculative plays, especially in sectors where rapid technological change could quickly erode asset value.