For the last couple of years, building and buying data centers has looked as sure a bet as there can ever be in real estate, such was the boost that AI had given to already strong demand.

But what if AI doesn’t need as much data center space as expected? 

News out of China over the past week might give those in the sector pause because it questions the assumptions being made on the spending that will go into AI hardware — including the data center industry’s “grow at all costs” ethos.

Late last week, the Chinese AI platform DeepSeek released updated software. DeepSeek’s R1 large language model tool and chatbot aren’t quite as good as the best versions of ChatGPT made by OpenAI, tech industry experts are saying, but it’s not far off and is better than most of OpenAI’s rivals.

And crucially, it was developed and operates using a fraction of the computing power that U.S. tech firms are using, at a fraction of the cost. That means less need for data centers.

Tech stocks related to AI took an absolute hammering early this morning. 

And the big listed data center firms like Equinix and Digital Realty saw their shares hit nearly as hard as the chipmakers — down 8% and 11%, respectively, versus an 11% drop for Nvidia in early trading.

Data center demand isn’t predicated solely on AI demand: It’s a story about the digitization of society as a whole. Streaming and online shopping will continue to voraciously suck up computing power. 

But there was already concern that AI was causing a data center bubble, and consultancy Gartner warned in November that overhype could push the industry into a “Trough of Disappointment.”

And what DeepSeek has done and the impact it might have is a salutary reminder: Cutting-edge technology moves so fast. Real estate moves slowly.

— Mike Phillips, Jay Rickey, Kayla Carmicheal, Mark F. Bonner and Catie Dixon

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CRE News Quiz

True or False: Last week, Sterling Bay bought Groupon’s former HQ on the Chicago River. (Answer at bottom.)

On Our Radar

• Donald Trump pledges federal aid for California wildfire recovery. The president visited Los Angeles Friday to survey wildfire damage, pledging to “open the coffers” for federal relief while urging California to cut regulatory barriers to rebuilding. In contrast to congressional Republicans who suggested tying aid to political concessions, Trump promised expedited federal permits and suggested allowing victims to build beyond zoning limits. The fires have caused over $250B in damages, destroying 4.5M SF of commercial property.

• U.S. new-home sales rise for a second year amid builder incentives. New-home sales accelerated 3.6% in December to an annualized 698,000, exceeding forecasts. For 2024, sales reached 683,000, up 2.5% from 2023. Median prices climbed 2.1% to $427K, despite broader cooling trends. Builders’ incentives, including mortgage rate buydowns, have kept demand strong, particularly in the South and Western mountain states. Supply hit a 17-year high at 494,000 units, while resale inventory remains 17% below prepandemic levels. Analysts expect competition from resales to increase in Texas and Florida, potentially easing prices.

• The global real estate market could hit $7.84T by 2033. Currently valued by Straits Research at $4.06T, the planet’s real estate is projected to grow at a 7.6% compound annual growth rate. Growth will be driven by rising residential construction and increased government infrastructure investment. North America is estimated to grow 2%, while Europe’s is forecast to have a CAGR of 2.5%, fueled by urbanization and construction spending. The land segment will dominate the market, and sales transactions are expected to outpace rentals. 

• Two days until interest rate D-Day. CME FedWatch today shows a 97.3% chance of the Fed holding steady this week. There is a 2.7% chance of a 25-basis-point drop, based on interest rate trader activity. The FOMC meeting starts tomorrow, and the next interest rate decision will come on Wednesday afternoon. 

Today’s Deep Dive: After The Apocalypse: Why The Pandemic And E-Commerce Didn’t Kill Off Physical Stores

When Triple Five Senior Vice President of Development Kurt Hagen sat down at a local municipality meeting in early 2021, he was ready to burn down the $5B house.

A year of stop-start pandemic lockdowns and restrictions had turned the opening of the long-delayed American Dream mall into a nightmare. Pretty much the moment Triple Five had thrown open the 3M SF complex's expensively manufactured doors, it had to slam them shut again.

“It would have been much better if American Dream had burned down or a hurricane had hit it, financially,” Hagen told his audience, a group of Bloomington, Minnesota, City Council and Port Authority officials, with whom he was discussing the fate of another of the group's big properties, Mall of America. “Because we would have been covered by insurance. But this pandemic that we didn’t see coming has not been covered, and it is the worst scenario imaginable.”

The pandemic was seen by many as the nail in the coffin for retail, which had been on the decline for a decade as e-commerce kept stealing an ever greater slice of the retail sales pie. 

But five years later, physical retail isn’t just surviving — it’s one of the strongest asset classes.

Read the full story here.

This Morning’s News

HOUSING — Insurers Dropping HOAs (Yahoo Finance): Similar to the single-family home market, insurers are either increasing premiums or deciding not to cover HOAs at all due to extreme weather events and aging buildings. Read more here.

COWORKING — WeWork’s Luke Robinson On Its 2025 Growth Plans (Bisnow): WeWork spent 2024 restructuring, including the closure of over 100 locations and a new majority owner. In June, the coworking company emerged from Chapter 11 with a smaller footprint and cash infusion from Yardi. What is going on with WeWork in 2025? Bisnow asked its regional president for North America about what its growth will look like. Read more here.

OFFICE — AT&T Secures $850M In 13M SF Sale-Leaseback (Bisnow): The company sold dozens of offices deemed underutilized as part of its efforts to reposition its footprint. Reign Capital bought the portfolio. Read more here.

MULTIFAMILY — Deal Volume Up 22% (Multifamily Dive): Stronger liquidity and investor demand drove a rebound in multifamily transactions, with expectations for further acceleration in 2025. Read more here.

SFR — 110,000-Plus Under Construction Nationwide (Point 2 Homes): The U.S. is seeing a surge in build-to-rent housing, with more than 110,000 SFR homes under development. Read more here.

DATA CENTERS — Blue Owl JV Secures $2.3B For Expansion (Commercial Search): A joint venture backed by Blue Owl has landed $2.3B in financing to support a new large-scale data center project. Read more here.

HEALTHCARE — Largest U.S. For-Profit Hospital Operator HCA Beats Q4 Forecasts (Bisnow): One of MPT’s five largest tenants is facing a different scenario than its landlord and its two largest operators. HCA brought in $18.3B in revenue, beating analyst forecasts in 2024. Read more here.

DATA CENTERS — Blackstone To Pay $1B For Natural Gas Power Plant (Bisnow): Blackstone Energy Transition Partners is acquiring Potomac Energy Center. The 774 MW plant was previously owned by Ares and sits 4 miles from the hub of NoVa’s data center market. Read more here.

HEALTHCARE — Duke, UNC To Build $2B Children's Hospital (Axios): The rival universities are teaming up for a major pediatric medical facility in the Triangle. Read more here.

CAPITAL MARKETS — China Vanke Expects $6.2B Loss As Property Crisis Deepens (NYT): One of China’s largest property developers, China Vanke said Monday its top executives would step down and warned of a $6.2B loss in 2024. It's the latest sign that China’s property downturn has not yet hit bottom. Read more here.

M&A — Newmark Expands In Europe, Completes Brand Integration (Newmark): Newmark has rebranded BH2 and Gerald Eve under the Newmark name. Newmark generated nearly $350M in revenue from outside the U.S. in the 12 months prior to September 30, 2024. Read more here.

INVESTMENT — Brookfield Invests $1.6B In Japan’s Hotel Market (Bloomberg): Brookfield Asset Management said it plans to increase its real estate investments in Japan after buying a stake in a Tokyo hotel and a plot of land for logistics development in deals valued at $1.6B. Read more here.

OPPORTUNITY ZONES — QOZ Investments Drive Jobs, Economic Growth (Argosy): Argosy's Opportunity Zone Economic Impact Analysis report shows $1.4B in total investments delivering 3,430 new housing units, 440 new hotel rooms, 316K SF of industrial space and 50K SF of new retail space. Read more here.

RETAIL — Amazon Faces Union Battles In Grocery Expansion (NYT): Amazon's labor disputes have spread to Whole Foods and its grocery business. Read more here.

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So You’ve Come For An Answer 

False! Sterling Bay was the seller. 3Edgewood paid $88.7M for the 600 W. Chicago Ave. property, a source with the company confirmed to Bisnow. That marked a steep decline from the $510M Sterling Bay paid for the property in 2018. 3Edgewood was created by former Phoenix Suns owner Robert Sarver in 2023 to invest in real estate and now owns 8.5M SF.

Do you think you have a harder CRE news question? Email us. Take your best shot and we may feature you and your question in this space.

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The First Draft is produced by Director of Newsletters Jay Rickey, Managing Editor Catie Dixon, Editor-in-Chief Mark F. Bonner and Deputy Newsletter Editor Kayla Carmicheal, with an assist from AI. We’d love your feedback! Email us at firstdraft@bisnow.com.