Bloomberg
Off a highway in Phoenix, cranes tower over a stretch of land larger than 60 football fields. The first of five hulking bunkers are under construction.
Thirty miles away, engineers are plotting another complex on 400 acres, some three times the footprint of the Mall of America, all but erasing the land’s farming roots. If all goes as planned, both sites will be home to thousands of computers churning mountains of data, powered by the energy needed for hundreds of thousands of homes.
This is Blackstone Inc’s bet on the AI revolution.
After its US$10 billion takeover of data centre operator QTS in 2021, the world’s largest private equity firm is fueling rapid growth at one of the top landlords for tech giants. It’s bankrolling the development of massive structures that will handle crucial computing needs, while also reshaping communities across America.
It’s part of the classic Blackstone playbook for real estate, the largest piece of its US$1 trillion empire. The firm identifies where there’s a rising need for properties but too few to meet demand. It then directs billions of investor dollars to build giant landlords poised to capture big rents and market share, a move it has deployed in everything from warehouses to suburban homes.
In this case, the shortage centres on the buildings needed to sustain the digital workings of modern life — and since the deal, demand has exploded. With the artificial intelligence boom taking hold, the Metas and Microsofts of the world are increasingly relying on landlords for the space, and critically, electricity to run machines that train software to predict patterns from a deluge of text, images and videos. Blackstone now says QTS could be one of the best investments in its history.
The company has parlayed its land reserves to profit on a short supply of space and power in key markets. QTS has US$15 billion of properties in development, up from US$1 billion at the time of its acquisition. It’s become North America’s largest provider of leased data centre capacity based on megawatts under contract, after ranking No. 4 just three years ago, according to research firm datacentreHawk.
But the vast amount of resources required makes expanding further more complicated.
Power is already strained in key parts of the country. QTS estimates that its projects, once complete, will tap into some 6 gigawatts of electricity, equal to the needs of roughly 5 million homes. Some campuses will need new power lines, threatening higher costs to others on the grid. And the economic impact of the centres isn’t distributed equally, pitting neighbour against neighbour over who benefits from vast industrial parks filled with computers, rather than properties such as hotels and shopping centres that draw a steady flow of visitors and jobs.
“People are willing to make larger investments on data centres,” said Brian Pryor, Houlihan Lokey’s North American data centre lead banker. But “there can be public backlash if you suck up power and resources without clear and direct benefits to the local community.”
Already, QTS has faced challenges winning approvals. The biggest recently played out in Manassas, Virginia, where residents and conservationists fought a proposed multibillion-dollar, 900-acre development with tracts next to a state forest and a Civil War battlefield. Hundreds of people showed up to speak at a county vote on approving land for a 2,100-acre data-centre corridor, with supporters and opponents lobbying for 27 straight hours.
It’s a preview of the fights that lie ahead as the AI industry gives rise to more data centres all over the country, accelerated by the often disruptive force of private equity.
“I understand that people don’t want data centres,” Ann Wheeler, then-chair of the board making the Manassas decision, said moments before the vote. But “it’s not like they’re gonna go away.”
In a statement, Blackstone said it “couldn’t be prouder and more excited” about its investment in QTS. The firm said QTS data centres bring hundreds of millions of dollars in annual tax revenue and jobs to communities, and that the company is positioned to secure reliable power in an industry facing constraints. QTS said separately that Blackstone has helped it to further its mission at a faster pace, and that it carefully plans projects with stewardship of resources in mind.
This story is based on conversations with QTS and Blackstone executives, residents and grassroots organisers, field visits as well as land and zoning records.
Blackstone’s Bet
Blackstone President Jon Gray, the firm’s former real estate chief and now heir apparent as CEO, has corralled the company into the thematic bets where demand is running up against constraints. He now sees AI making a data centre shortage all the more acute — and said those with land and capital will be at an advantage.
“QTS is a lens into a very important part of the economy that has a lot of momentum,” Gray said in an interview. “AI will be a powerful force to make lives better.”
So-called generative AI, where algorithms crunch troves of data and use it to spit out new content, has led to an intensifying need for new technology and infrastructure. Server racks for AI computing can consume four times the power currently used in cloud processes, according to Newmark Group. That calls for data centres that can support surges in workloads, and more advanced cooling systems to handle the heat emitted.
Private equity firms are racing to fund this picks-and-shovels gold rush. Investors from Brookfield Infrastructure Partners to KKR & Co. have done US$43 billion worth of US data centre deals between 2021 and 2023, more than five times the prior three years, according to Dealogic. Tech giants also are building their own complexes.
Back when Blackstone was exploring a QTS purchase in 2020, the AI opportunity wasn’t as apparent. Dealmakers faced pointed questions from executives including Gray. They’d been on the hunt for a data centre deal in the past two years, but not everyone was convinced windowless monstrosities should be the firm’s next big bet.
Some questioned if the firm was late catching up to rivals. Rents hadn’t increased for years as tech firms drove a hard bargain.
A trio of dealmakers stood firm. Greg Blank, Mike Forman and Tyler Henritse, from the infrastructure and real estate groups, made the pitch. Big Tech would need infrastructure to support a surge in computing processes as more of the economy migrated online — an idea Blackstone had been bullish on for years. Cloud giants would go from running their own data centres to leasing more. Because data centres were hard to build, landlords would be able to command prices they wanted. The ability to capitalise on a power crunch also was compelling to some of the people evaluating the deal.
Blackstone said that power constraint wasn’t a key part of its original thesis. A “US$10 billion transaction in a new space gets heavily scrutinised at the firm,” Forman said. The company ultimately was drawn to factors including QTS’s large land bank and leadership team.
Blackstone went on to take QTS Realty Trust Inc. private in a deal that valued the company at more than 20 times earnings. Marquee funds invested in lockstep, including Blackstone Real Estate Income Trust, the firm’s US$61 billion fund for individuals.
QTS is now helping to lift BREIT at a time when commercial real estate is depressed by high interest rates and the trust has been forced to limit redemptions. As BREIT sold stakes in properties such as luxury hotels, it plunked down more cash into data centres, which are now 8% of the fund. Blackstone executives told investors in August to put money in BREIT if they want to invest in the “AI revolution.”
QTS, like its peers, has locked in rising rents in major markets. Its valuation has more than doubled since the acquisition to some US$25 billion by the end of 2023, as Blackstone committed more money to its future projects. BREIT redemptions are easing, and the firm said on its Jan. 25 earnings call that it will stop limiting withdrawals in the first quarter if that trend continues.
Big Money Arrives
For Kansas-based QTS, the Blackstone takeover marked a turning point. CEO Chad Williams had founded the company in 2005 and stitched it one deal at a time into a public enterprise. An heir to a car-salvage business, he’s known to sometimes pray in team meetings and has walls dedicated to the armed forces and America across his properties. Nearly a quarter of the company is made up of current and former military service members.
With Blackstone’s arrival, Williams started telling staff that QTS would be the biggest company of its kind. Some data centre employees in work gear whispered among themselves at the money men in suits and loafers at the hard-hat sites. Quarter-mile sprints are over, QTS managers said; prepare for a marathon.
QTS snapped up land and procured power faster and sped up planning timelines. It grew headcount by roughly half, to more than 1,000, in the past year and a half. Some staffers voiced unease among themselves that as the firm readied more mega-centres, it would tie the company’s profits too closely to cloud giants. In its statement, QTS said its data centres are designed for a range of uses.
Then came last year’s AI mania. Hyperscalers are now paying data centre operators monthly rates of more than US$100 per kilowatt, from US$70 to US$80 per kilowatt three years ago, in some areas. In top-tier markets, it’s as high as around US$150 per kilowatt, brokers say. (As data centres provide access to power, rents are often measured by watts instead of square feet.)
At QTS, executives have told colleagues that if they make the case for more cash from Blackstone, they will all but get it. Blackstone said it sees data centres as a way to deploy capital at attractive development yields.
The limiting factor to their ambition is power.
Limited Resources
Even if data centres are estimated to take just a small fraction of the nation’s total electricity consumption, they’ve been stressing some markets more than others. Dominion Energy Inc. paused connections to new data centres at one point in 2022 for a critical tech corridor in Northern Virginia and sped up the build-out of transmission lines. Some Blackstone executives have warned the firm and QTS could attract attention for causing more strain to the grid.
“There is a lot of data centre growth happening and that growth is not evenly distributed across the US,” said Arman Shehabi, a scientist at California’s Lawrence Berkeley National Laboratory, who is studying data centre power needs for the government. “It’s consolidating in certain locations, and this could create a power crunch in those areas.”
One of QTS’s big growth areas is in Arizona, where its 85 acre-campus near the centre of Phoenix is seen as a crown jewel. It’s fully leased before it’s even complete, with Microsoft Corp. as one of its tenants. Elsewhere, QTS said it has contracted all the power it needs to meet multiple years of demand on a 400-acre plot just northwest of downtown that would cement the desert valley’s rise as a data centre destination.
Data centres’ water needs have made them a hot-button issue in arid cities such as Phoenix. In the part of Arizona QTS is eyeing, a data centre can’t rely on water because years of farming have depleted groundwater in the area, causing huge cracks in surrounding land to emerge.
Joseph Cook, who has studied the area as a research geologist with the Arizona Geological Survey, said a data centre that sucks up substantial water could lead to new fissures. “The data centre might not be affected, but it could be destructive to roads and homes,” he said. Nearby Luke Air Force Base, home of the 56th fighter wing, looms large to the local economy and national security.
QTS said the cooling system it has developed will cut water usage at the site by hundreds of millions of gallons each year. More broadly, staffers have also discussed developing data centres with micro-nuclear reactors to wean them off local grids.
Blackstone has been working to help QTS find sites outside the most power-constrained markets. It’s also facilitated conversations between QTS and energy providers the firm backs.
Battle in Virginia
In Northern Virginia, a longtime tech hub that connects to intercontinental fibre-optic cables, both QTS and Brookfield Infrastructure-backed Compass Datacentres are planning projects clustered in a 2,100-acre stretch in Manassas. Locals and preservationists have said the plans would destroy history and tourism because of its proximity to a Civil War battlefront — and also strain power grids and spawn new transmission lines.
But homeowners in the area had few other options besides selling, said Mary Ann Ghadban, a resident and real estate broker. She led the charge in mobilising several farms and households to ask the county to turn the area into a data centre corridor. With high-voltage power lines already snaking through people’s yards, their homes stood to fall in value as the area rapidly changed, she said.
“If we didn’t come up with a plan, we would lose everything,” said Ghadban, who is in contract to sell her 55-acre farm to QTS. Wearing a T-shirt that read, “We are NO Longer Rural,” she was one of the attendees at the December meeting where county officials voted on the QTS project’s fate.
While police cars circled to corral the crowd, grassroots groups waved a banner that read “DIGITAL GATEWAY ‘TO HELL.’” Landowners in contract with developers and unions who stood to gain construction gigs eyed them warily.
As 130 people took the microphone at the meeting, several touted tax revenue to support schools and police, and the park trails accompanying the development. Others warned of the consequences on the environment, and stress on the grid. QTS’s project would require roughly 1 gigawatt of power, the equivalent of 100 million LED lightbulbs.
County staff said the developers’ plans lacked detail on where power lines would run. The massive projects are expected to call for new transmission infrastructure, but that complex undertaking will require the transmission provider and local electric utility to coordinate first.
After starting at 10 a.m., the meeting went into the night and next day. Just before the vote, the developers pledged to have data centre users draw 10% of energy from clean or renewable sources. Antonio Calabrese, the DLA Piper land-use attorney representing QTS, rushed out of the room and returned moments later with a concession: The developer would reduce the density of development bordering the battlefield.
At around 1 p.m. the day after the meeting began, the plan passed with a 4-3 vote, with one official abstaining.
That’s not the end of the fight. Residents and a conservationist group sued the county board and entities tied to the developers this month, saying a lack of public notice of the hearing and changes QTS and Compass made on the fly violated zoning laws.
A Compass spokeswoman said the company was aware of the legal challenge but “we remain focused on implementing the county’s vision for the Digital Gateway.” Calabrese said QTS looks forward to being a partner to the community and that the company made minor refinements at the county’s request.
Blackstone and QTS, meanwhile, are considering bolder bets. Williams isn’t ruling out buying a rival. QTS is eager for an acquisition to plant more flags in Europe, people close to the matter say.
In December, Blackstone paired up with Digital Realty Trust Inc. to develop US$7 billion in data-centre campuses in Frankfurt, Paris and Northern Virginia. Power is largely secured.
