The rapid expansion of artificial intelligence is encountering a significant financial headwind as rising interest rates increase the cost of capital for data center development. While demand for facilities is surging, five-year treasury rates have climbed over one percentage point since the start of 2026, pushing high-rated data center bond yields from below 5% toward 7%. This shift creates a liquidity squeeze because operators often lock in long-term rental income well before seeking securitized debt financing, leaving revenues unable to keep pace with soaring borrowing costs. Despite a projected growth in U.S. capacity from 60 to 150 gigawatts by 2028, current issuance of asset-backed securities remains below expectations. To navigate this environment, co-location data centers offer a strategic advantage over long-term hyperscaler campuses; their shorter lease terms and diverse tenant bases allow operators to adjust rents more quickly, capturing the value of 1% vacancy rates while offsetting elevated financing expenses.
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