Digital Realty's Leasing Momentum in a Shifting AI-Driven Data Center Landscape: Balancing Growth Constraints and Market Fundamentals

The artificial intelligence (AI) revolution has ignited a surge in demand for high-capacity data centers, positioning Digital Realty Trust (DLR) as a key player in the digital infrastructure boom. However, as the company navigates a landscape marked by both robust leasing fundamentals and significant growth constraints, investors must weigh its strategic advantages against emerging risks.

Market Fundamentals: A Strong Foundation

Digital Realty's leasing performance in 2025 underscores its dominance in the AI-driven data center sector. The company reported record lease commencements in Q2 2025, raising its full-year core Funds From Operations (FFO) guidance to $7.15–$7.25 per share. This momentum is fueled by a $919 million backlog of signed leases as of Q1 2025, providing visibility into future cash flows. Half of Fortune 500 companies now rely on Digital Realty's infrastructure, a testament to its ability to secure long-term commitments from industry leaders.

The AI sector has been a primary growth driver. For 2024–2025, 50% of lease bookings were tied to AI demand, reflecting the sector's outsized contribution to the company's pipeline.

Digital Realty has responded with aggressive expansion, including land acquisitions in strategic U.S. markets like Atlanta and Charlotte, where major data center developments are planned through 2026. A $3.0 billion hyperscale data center fund launched in 2025 further signals its commitment to scaling capacity. Financially, the company's Q1 2025 revenue grew 10.26% year-over-year, with an operating margin of 25.89%, reinforcing its operational strength.

Growth Constraints: Navigating a Complex Landscape

Despite these positives, Digital Realty faces headwinds that could temper its expansion. Interest rate sensitivity remains a critical risk. While lower rates post-2025 offer some relief, the company's capital-intensive model-requiring heavy investment in power, cooling, and land- remains vulnerable to financial conditions. A declining gross margin trend, with Q3 2025 at 54.97% (down from 56.03% in Q2 2025), highlights the pressure from rising capital expenditures.

Infrastructure bottlenecks also pose challenges. Power availability has become a limiting factor, as seen in Santa Clara, California, where completed data centers remain unpowered due to local utility constraints. Such issues underscore the importance of infrastructure readiness in AI expansion. Meanwhile, competition from peers like Equinix intensifies, as does regulatory uncertainty around AI and semiconductor development according to market analysis.

Investment Implications: A Calculated Outlook

Digital Realty's global scale- over 300 data centers in 50+ cities-positions it to meet the expanding needs of AI-driven industries. Strategic partnerships, such as its collaboration with NVIDIA to demonstrate liquid cooling and power efficiency, further enhance its competitive edge. However, investors must monitor the interplay between demand and constraints.

The company's raised 2025 revenue guidance ($6.025B–$6.075B) reflects confidence in its growth trajectory, but the five-year average decline in gross margins (-3.4% annually) suggests a need for operational discipline. While AI demand is unlikely to wane, the ability to execute on expansion plans will depend on resolving power and supply chain bottlenecks.

Conclusion

Digital Realty's leasing momentum in the AI era is underpinned by strong fundamentals, including a robust backlog, strategic investments, and a diversified client base. Yet, the path to sustained growth requires navigating interest rate fluctuations, infrastructure limitations, and regulatory risks. For investors, the key lies in assessing whether the company's scale and innovation can outpace these challenges-a question that will define its role in the next phase of the AI revolution.