Data Center Euphoria Starts to Ebb After DeepSeek

(Bloomberg) — The market turmoil sparked by DeepSeek’s chatbot this past week has left some rethinking the credit frenzy around artificial intelligence.

Corporate giants told money managers this week that the Chinese startup’s cheaper models will only spur more demand for the technology and the sprawling infrastructure it requires. While big investors such as Blackstone Inc. President Jon Gray say that “digital infrastructure remains essential,” behind the scenes landlords and credit providers say the situation is more nuanced, and some are starting to fret.

A senior executive at one of the major data center landlords expects the firm’s borrowing costs to increase because lenders will seek to protect themselves against the risk of the properties becoming obsolete from a DeepSeek-style disruptor. Another asset manager, which both acquires and provides credit for the real estate, said their lending ambitions are now less certain after the market panic. The danger, the person said, is that AI mimics the green investing boom, when a rapid influx of money into clean energy created an oversupply of assets. Both executives asked not to be identified as they weren’t authorized to speak publicly.

“The market is still exploring the impact of the new AI models, but it could be a healthy correction,” said Timo Buijs, senior director of project and infrastructure finance at ABN AMRO Bank NV. “Even if it has an impact on demand for data centers for AI, there is still growth expected,” he added, noting it may be “just slightly lower growth.”

The explosion of interest in artificial intelligence since ChatGPT’s 2022 debut has set off a global building spree for data centers that house the servers and chips powering the tech. Private equity, real estate firms and sovereign wealth investors have pledged enormous amounts for the facilities, making them central components of economic growth across the globe. Apollo Global Management Inc., for example, sees a more than $2 trillion opportunity in data centers and associated infrastructure over the coming five years.

Despite DeepSeek’s emergence, Meta Platforms Inc. Chief Executive Officer Mark Zuckerberg predicted a “really big year” in AI for his firm. Khazna, a data center developer that’s part of Emirati tech conglomerate G42, told Bloomberg that DeepSeek’s emergence “further underscores the growing demand” for the facilities.

Wider credit markets have also been comparatively sanguine about this week’s turmoil, suggesting they see the issues as less of an existential risk than stock investors. “A big difference between equity and credit valuations was highlighted, with many names losing significant market value (Broadcom and Nvidia the largest), yet bond-spread widening was limited to a narrow range of 10 bps or less,” Robert Schiffman, Bloomberg Intelligence Senior Credit Analyst, wrote on Tuesday.  

In the commercial mortgage-backed securities market, Barclays Plc strategists said the downside risk to securitized data centers is low compared with stocks. “The biggest risk to our view is a paradigm shift around data centers, which can significantly change investor sentiment, akin to what happened with the office sector over the past few years,” they wrote.

If DeepSeek’s claims about its spending are accurate, the startup showed that it could train an AI model at a fraction of the amount that Meta, OpenAI and other major developers spend. However, these models still need data centers and equipment to make functional chatbots that people use or AI tools companies purchase.

During this stage, even developers like DeepSeek will need to spend heavily on chips and computing resources, said Narry Singh, an executive partner with the consultancy AlixPartners. 

“I find the idea that this is going to depress massively the demand for infrastructure tenuous at best,” he said.

Click here to listen to the latest Credit Edge podcast 

–With assistance from Tasos Vossos and Ronan Martin.

More stories like this are available on bloomberg.com