Ares Sounds Alarm on Data Center Bubble as AI Investments Surge

Ares Management Corp. has issued a cautionary warning about the growing risks of overbuilding in the data center sector, driven by the surge in artificial intelligence (AI) infrastructure investments. Co-President Kipp deVeer emphasized that while the demand for data centers is accelerating, the rapid influx of capital could lead to marginal capacity that fails to meet long-term needs. "These trends tend to lead to overbuilds in certain places," deVeer stated at the Greenwich Economic Forum, underscoring the need for selective and measured development strategies to mitigate potential oversupply. The firm's concerns align with broader industry analyses, including a Moody's report highlighting the structural shifts in data center construction and the associated credit risksAnalysts Warn of Overbuild Risks as AI Data Centers …^[1].

The data center boom is fueled by AI's transformative impact, which is reshaping infrastructure requirements. AI-driven facilities are increasingly designed as "AI factories" with power capacities of 1–5 gigawatts, and rack densities have surged to over 200 kW per rack-far exceeding traditional averages. Hyperscalers like Meta and OpenAI are investing in massive projects, including Meta's 2 GW campus in Louisiana and OpenAI's Stargate joint venture. These developments reflect a strategic shift toward remote, power-rich locations, where stranded natural gas resources and repurposed coal plants are being leveraged to meet energy demandsAnalysts Warn of Overbuild Risks as AI Data Centers …^[1].

Ares' investment strategy focuses on pre-leased developments with 15-year terms and rent escalators, a model designed to reduce long-term risk. The firm has raised $2.4 billion in the first half of 2025 and aims to secure over $8 billion in equity for data center projects in London, Japan, and Brazil. This approach contrasts with the speculative nature of past tech cycles, where unleased facilities faced higher exposure to market volatility. Ares also emphasizes partnerships with investment-grade tenants, such as hyperscalers, to ensure stable returns.

Industry reports project that data centers could consume 1,600 terawatt-hours of global electricity by 2035, rivaling the energy use of major economiesAres Raises the Stakes With $8 Billion Data Center Bet^[3]. Power constraints are already reshaping site selection, with developers collaborating directly with utilities or constructing on-site power generation. For example, a former coal plant in Homer City, Pennsylvania, is being repurposed to support AI data centers, while natural gas-powered facilities are emerging in energy-abundant regionsAnalysts Warn of Overbuild Risks as AI Data Centers …^[1]. These adaptations highlight the sector's reliance on energy infrastructure, which remains a critical bottleneck as demand grows.

The risks of obsolescence are also intensifying. Rapid technological advancements, such as the shift to liquid cooling for high-density racks, require facilities to adapt designs mid-construction. JLL analysts note that rack power densities are projected to reach 50–100 kW per rack by 2027, forcing operators to prioritize flexibility and sustainability in project planningWhy data centers could hit obsolescence sooner than …^[2]. Ares' focus on phased development and pre-leasing aligns with this need for agility, as developers seek to avoid stranded assets in a rapidly evolving landscape.

While the data center market attracts significant private equity and sovereign fund investments-global M&A deals reached $73 billion in 2024-Ares highlights the importance of balancing growth with prudence. The firm's $70 billion target for alternative credit by 2028 and expansion into secondary market opportunities reflect its broader strategy to capitalize on discounted private equity and infrastructure stakes. Meanwhile, regulatory scrutiny over grid strain and environmental impact remains a wildcard, with some regions like Virginia considering legislative measures to temper data center expansion.

Despite these challenges, the sector's growth trajectory remains robust. Brazil, for instance, is emerging as a key hub, with companies like Scala and Tecto investing $1.8 billion to $1 billion in hyperscale facilities powered by renewable energy. Global demand for data center capacity is expected to triple by 2030, driven by AI, cloud migration, and digitalization. Ares' cautious optimism mirrors the industry's dual focus on innovation and risk management, as stakeholders navigate the delicate balance between capitalizing on AI-driven opportunities and avoiding the pitfalls of overbuilding.