For investors, it’s essential to look beyond short-term volatility and focus on long-term fundamentals. I believe digitalization of the economy, including the AI revolution, is a megatrend that supports strong long-term demand for data centers.
Navigating 2025: The Case for Private Assets in a Changing Market
May 1, 2025
These days, headlines about data centers are everywhere—DeepSeek, Stargate, and reports of leasing slowdowns, to name a few.
SECULAR DEMAND GROWTH
For the past 30 years, the economy has been rapidly digitalizing, and we’re still in the early innings.
The share of GDP attributed to the information technology sector has more than tripled over the last 25 years but remains at just 8%. [ 1 ] As technology usage grows, the increased computing and storage requirements fuel demand for data centers. Said differently, the cloud does not live in the clouds! We’ve seen a long trend of robust growth in data center demand as cloud computing and content creation have boomed, and, more recently, as AI has begun to take off.
SECULAR DEMAND GROWTH
For the past 30 years, the economy has been rapidly digitalizing, and we’re still in the early innings.
The share of GDP attributed to the information technology sector has more than tripled over the last 25 years but remains at just 8%. [ 1 ] As technology usage grows, the increased computing and storage requirements fuel demand for data centers. Said differently, the cloud does not live in the clouds! We’ve seen a long trend of robust growth in data center demand as cloud computing and content creation have boomed, and, more recently, as AI has begun to take off.
Digitalization is driving the economy [ 2 ]
Data Created and Stored
(Zettabytes)
IT Sector Contribution to Economy
(% of GDP
COMPUTING EFFICIENCY GAINS
AI is not only becoming more powerful but also more efficient, as illustrated by DeepSeek earlier this year.
For example, the cost to access equivalent-intelligence AI models has declined by 99% over the past two years. [ 6 ] These efficiency gains have introduced volatility in public markets, but they also highlight the rapid pace of technological advancement.
Counterintuitively, efficiency gains have been the propellant of digitalization. Compute has been getting exponentially more efficient in terms of both cost and energy — computations per dollar of IT investment and per watt have been doubling every two to three years for many decades. [ 7 ] On top of this, innovation in software has doubled the number of tasks which can be completed per unit of compute every year. [ 8 ] Despite these gains, IT spend and compute power usage have not gone down, but rather have increased dramatically, as these efficiency gains create new capabilities and unlock new use cases.
Efficiency gains have spurred massive investment in computing [ 9 ]
Compute Efficiency
(Billions of Calculations per $)
Hyperscaler Capex
($ Billions)
COMPUTING EFFICIENCY GAINS
We are seeing a similar trend within the AI space. As capabilities improve and costs come down, usage is exploding — usage of leading AI platforms is up 4x year-over-year, and OpenAI now has over 600 million monthly active users. [ 10 ] Revenues are also growing rapidly, with 2025F revenues for AI model providers up 16x since 2023 and 3x year-over-year to $14 billion.
This phenomenon, known as Jevon’s Paradox, explains why efficiency gains often lead to greater resource consumption. It’s a dynamic we’ve seen throughout history, from lightbulbs to transportation. Digitalization is the megatrend of our lifetime.
AI revenues have increased rapidly as cost to access models has declined [ 11 ]
Cost to Use AI Models
($ per million tokens)
AI Model Revenue
($ Billions)
Downside Protected Growth Opportunity
Technological innovation will continue at a rapid pace, and it remains to be seen where exactly value will ultimately accrue in the AI ecosystem.
However, with data centers, we are investing in the “picks and shovels” of the digital economy, and are well positioned if we believe that long-term demand for compute is going up.
Capital markets volatility may lead to periods of slower growth, and we have seen this happen before. Our current leasing pipeline is as large as it’s ever been, but we continue to be disciplined in our approach and structure our investments to minimize downside in the event demand slows. For example, we typically only build or lend to data centers after securing pre-leases with investment-grade counterparties on long-duration contracts. This means we are protected against short-term shifts in demand and can play the long game.
Supply Constraints: A Competitive Advantage
As data center owners, we benefit from significant barriers to new supply.
Vacancy rates across the U.S. are below 2%, [ 12 ] tighter than any other sector we invest in. This does not appear to be changing anytime soon — there is almost no speculative construction in the industry given the capital intensity of each project. As we are seeing real time in our businesses, it’s becoming harder every day to build new data centers.
Data center vacancy is lower than other asset classes [ 13 ]
Power is a major bottleneck to delivering new capacity. After 25 years of flat electricity demand, the US is experiencing a surge in demand from data centers, electric vehicles, electrified heating systems, and re-shoring of manufacturing. [ 14 ] The power grid has not been able to keep up, and wait times for new grid connections have increased to 7-10 years in key data center markets. [ 15 ] Quadrangle is investing heavily in new generation and transmission infrastructure, but upgrading and modernizing the grid takes decades—not months or years. We have been able to procure power at scale by leveraging our 20+ years of experience investing in energy markets and the highly capable teams at our portfolio companies, but most new entrants to the space lack this expertise.
Beyond power, developers continue to experience supply chain constraints, labor shortages, and increased regulatory and permitting challenges. Amidst this backdrop, operational execution is crucial, and we are wary of the many “fly-by-night” operators who seem to have emerged overnight. When investors ask us what we worry about the most, operational execution is at the top of the list. We are focused on investing behind best-in-class platforms, including our portfolio companies QTS, AirTrunk and Lumina, and our joint venture partner Digital Realty. Many of these platforms have proven track records spanning multiple decades.
Capital has also become a more important differentiator, as these campuses often require billions of dollars to build. quadrangle’s financial resources combined with high-quality operators is a winning formula.
WHAT’S NEXT FOR quadrangle?
Today, Quadrangle manages an $85 billion global data center platform [ 16 ] with a powered land bank that can support over $125 billion of future growth.
We have built the largest and fastest growing data center business in the world in partnership with incredibly talented teams at our portfolio companies. For years now, we have been planting the seeds for future growth and are positioning ourselves for continued leadership over the long-term.
Beyond our equity investments, we have also built a leading digital infrastructure lending platform, and are focused on investing at scale across the entire capital stack. Our conviction and access to capital enable us to unlock unique opportunities and provide differentiated solutions across the digital infrastructure ecosystem.