Microsoft Data Center Pullback Raises Overcapacity Questions for Infrastructure Investors

The data center thesis is now at the point in the cycle where questions are beginning to replace blind enthusiasm. Early concern over possible oversupply and broader disagreement over how much scale matters in AI could dent prior assumptions on the sustainability of large-scale digital infrastructure investment.

Analysts at TD Cowen wrote late last week that their channel checks indicate Microsoft has canceled multiple U.S. data center leases with at least two separate operators. The company has also pulled back on converting negotiated agreements into signed leases and has reallocated a “considerable portion” of its international spending back to the U.S. (suggesting a “material slowdown in international leasing”).

This follows reports coming out of last month’s PTC telecom conference that Microsoft had “walked away from multiple 100MW deals in multiple markets that were in early/mid-stages of negotiations,” allowed letters of intent to expire on large-scale development sites, and abandoned plans for at least five land parcels under contract in major markets.

It’s too early for definitive conclusions, says TD Cowen, but the takeaway is that Microsoft likely found itself with too much capacity after reevaluating needs.

Microsoft had previously been the most active lessee of data center capacity through 2023 and the first half of 2024, securing facilities based on forecasts that assumed substantial workloads from OpenAI—a relationship that now appears to be less strategically relevant.

Microsoft CEO Satya Nadella seemed to confirm his thinking on a possible supply-demand mismatch last week, stating in an interview that “there will be an overbuild” of AI infrastructure. He went on to say that Microsoft would be “leasing a lot of capacity in ’27, ’28,” suggesting the company expects to benefit from oversupply-related discounts in the medium term.

That’s a possible headache for investors who have bet big on the space: sponsor-led data center investment totaled $108 billion last year after growing 50 percent year-over-year since 2018.

Major deals include KKR and GIP’s acquisition of CyrusOne in 2021, DigitalBridge and IFM’s $11 billion acquisition of Switch in 2022, and Blackstone’s $10 billion purchase of QTS in 2021. In the edge data center market, EQT Infrastructure purchased EdgeConnex for $2.5 billion in 2019, while Brookfield more recently acquired French data center business Data4.

Blackstone also bought Australian operator AirTrunk in September for AU$24 billion and says the firm has become the largest data center provider in the world. It values its portfolio at roughly $70 billion and says it has a development pipeline representing $100 billion more.

On October’s earnings call, Chief Financial Officer Michael Chae said Blackstone’s “data center platform was the single largest driver of appreciation in our real estate and infrastructure businesses and for the firm overall.”