Oaktree Co-CEO Panossian Sees Signs of Exuberance in Data Center Boom
It’s no secret that the artificial intelligence revolution is profoundly reshaping industries, but as capital pours into the infrastructure underpinning this transformation, there's a growing unease among some seasoned investors. Armen Panossian, co-Chief Executive Officer at Oaktree Capital Management LP, recently voiced a sentiment that many are starting to whisper: the furious pace of investment in AI-linked assets, particularly data centers, is beginning to show distinct signs of "exuberance."
Panossian, whose firm is known for its deep expertise in credit and distressed assets, isn’t one to mince words. He suggests that the sheer volume of money chasing these opportunities is creating a "risk of excesses." What does that mean, exactly? Think of it as a gold rush where the prospectors are so focused on striking it rich that they might overlook the quality of the claim, or the sheer number of other prospectors digging next to them.
The demand for computational power is, undeniably, immense. AI models require gargantuan amounts of energy and specialized hardware, leading to an unprecedented build-out of data centers. These aren't just your average server farms; they are cutting-edge facilities, often requiring massive land plots, intricate cooling systems, and reliable, high-capacity power grids. Developers and institutional investors, eager to ride the AI wave, have been flooding this space with capital, pushing valuations higher and accelerating development timelines.
However, as Panossian points out, this rapid deployment of capital can lead to situations where sound underwriting principles might take a back seat to the fear of missing out. We’ve seen this pattern before, haven't we? From the dot-com bubble of the late 90s to certain segments of the clean energy boom, periods of intense technological innovation often coincide with speculative fervor. The underlying technology might be revolutionary, but the financial dynamics around it can become divorced from fundamental value.
For investors, the concern isn't about whether AI will continue to grow – most agree it's a fundamental shift. Rather, it’s about the price at which one gains exposure to this growth. If too much capital chases too few truly high-quality opportunities, or if projects are rushed without proper due diligence on power availability, site suitability, or long-term tenant demand, the returns might not materialize as expected. Or, worse, an oversupply could emerge in certain geographies or segments, leading to depressed rents and unoccupied space further down the line.
Oaktree’s perspective is particularly insightful given its contrarian nature. They often thrive by finding value in overlooked or distressed assets, stepping in when others are retreating. So, when someone from Oaktree talks about exuberance, it’s a strong signal for investors to pause and assess. It suggests that while the narrative of AI’s unstoppable march is compelling, the financial market’s response might be getting ahead of itself, creating a scenario where disciplined capital allocation becomes paramount.
What's more interesting is how quickly this sector has scaled. Just a few years ago, data centers were a niche real estate play. Now, they're at the forefront of global infrastructure investment, attracting billions of dollars from pension funds, private equity giants, and sovereign wealth funds. This rapid influx of diverse capital, while testament to the sector's perceived potential, also amplifies the risk Panossian highlights. It's a reminder that even in the most promising technological revolutions, financial prudence remains the ultimate safeguard against future regrets.
