Digital Realty's Geographic Mismatch: A Structural Headwind to AI Growth

Digital Realty's core investment thesis is now at odds with the geography of the AI buildout. The company's scale and concentration in established primary markets create a fundamental mismatch, limiting its ability to capture the new demand cycle. This isn't a temporary blip but a structural constraint.

The first sign of this tension is in the company's own bookings. Over 50% of its quarterly bookings are now tied to AI, a clear signal of where growth is concentrated. Yet, the largest deals in 2025 are favoring emerging markets outside its traditional footprint. This shift is driven by a critical factor: speed to market. AI projects prioritize rapid deployment, and emerging markets offer a decisive advantage with shorter power delivery timelines. While established markets provide stability and talent, they often face multi-year utility delays that simply don't align with the aggressive timelines hyperscalers need for their AI clusters.

The result is a development pipeline that is a poor fit for the current demand cycle. Digital Realty's vast pipeline of $9.7 billion gross is anchored in its existing portfolio of primary markets. Meanwhile, the largest 2025 deals are moving to places like Indianapolis and the Carolinas, where land is cheaper and power can be secured faster. This creates a growth constraint.

The company's ability to convert its record bookings into new revenue is hampered by its physical location in a market where the fastest-growing demand is migrating elsewhere.

The bottom line is that Digital Realty's scale is a double-edged sword. Its deep roots in established markets provide stability and high yields, but they also lock it into a geographic model that is misaligned with the urgent, power-constrained buildout of AI infrastructure. Until the company can meaningfully expand its footprint into these emerging, high-growth corridors, its ability to fully participate in the AI-driven expansion will be capped.

Financial and Valuation Impact

The demand shift is now translating into financial pressure and a skeptical market view. While management has raised its long-term earnings forecasts, the market's reaction suggests it is reassessing the growth trajectory and, more critically, the valuation premium.

Management's optimism is clear. The company has raised its EPS estimates for 2025, 2026, and 2027, reflecting confidence in its underlying asset quality and balance sheet. Yet, the market's focus is fixed on the near-term valuation driver: the 2026 core FFO multiple. This is where the structural mismatch bites. Analysts at Bank of America see the growth constrained by the company's scale and development schedule, which creates downside risk to fourth-quarter leasing forecasts and limits multiple expansion. The result is a valuation that is no longer seen as compelling, even as fundamentals remain solid.

This skepticism is amplified by a broader market view. Large listed data center operators are increasingly seen as bond proxies rather than direct beneficiaries of the AI buildout. This perception, coupled with historically negative REIT sentiment, acts as a ceiling on multiple expansion. Investors are not rewarding these companies for their high-quality assets and stable returns; instead, they are pricing them for the risk of being left behind in the AI infrastructure race.

The tension between analyst ratings and share price action underscores this reassessment. Just as Deutsche Bank and Goldman Sachs initiated coverage with Buy ratings, shares have declined 5.44% over 30 days. This divergence points to a market that is looking past the AI narrative and focusing on the execution risk. The market is telling Digital Realty that its growth story is now contingent on its ability to adapt its geographic footprint-a challenge that has not yet been solved. For now, the financial impact is a valuation discount that reflects this uncertainty.

Investment Implications and Catalysts

The structural mismatch between Digital Realty's footprint and AI demand creates a clear investment thesis: the company's high-quality assets are now priced for stability, not for the explosive growth of the AI buildout. This sets up a series of near-term tests where execution and market sentiment will collide.

The first major catalyst arrives on February 5, 2026, with the Q4 2025 earnings release. This report will be a key test of the company's ability to navigate its constraints. Management has already signaled that fourth-quarter core FFO per share will be tempered by seasonally higher repairs and maintenance expenses, along with other headwinds. While the company posted a quarterly record for core FFO, the guidance for the period will be scrutinized for any signs of the growth trajectory being pressured by the geographic mismatch. Analysts will watch for commentary on the pace of preleasing in primary markets versus emerging corridors.

A major risk to this thesis is the continued pre-leasing of capacity in emerging markets. Evidence shows 74.3% of all under-construction capacity in primary markets is already committed, driven by hyperscalers and AI providers. This intense competition for contiguous power blocks in established hubs like Northern Virginia is a double-edged sword. It validates the sector's strength but also accelerates the depletion of available space in Digital Realty's core portfolio. As more capacity is locked up in primary markets, the company's ability to fill its own pipeline of $9.7 billion gross in development could be further constrained, limiting near-term revenue conversion.

Yet, the broader data center sector provides a supportive backdrop that does not solve Digital Realty's specific problem. The industry has shown remarkable resilience, with record-low vacancy of 2.3% and average pricing increases of up to 19% for large deployments. This fundamental strength underscores that demand is real and powerful. However, for Digital Realty, this backdrop highlights the very competition it must overcome. The sector's health is a function of the global AI buildout, but the company's ability to participate is now a function of its geographic agility-a capability that has not yet been demonstrated at scale.

The bottom line is that Digital Realty's investment case hinges on a future adaptation that is not yet visible. The Q4 earnings will test current execution, while the relentless preleasing in primary markets poses a tangible near-term risk to its pipeline. The sector's resilience offers a floor, but the ceiling remains the company's structural geographic mismatch. Until Digital Realty can credibly show it is expanding into the emerging markets where the largest deals are being struck, the market is likely to continue viewing it as a high-quality asset play with limited AI upside.