Artificial intelligence is a transformative technology that we believe will be a net positive for real estate, though it has the potential to create both winners and losers across the investing landscape.
Over the past few decades, we have witnessed several transformative technology cycles: the proliferation of personal computing, the growth of the internet, the rise of social media, and the mobile revolution. AI appears to be the next technology with this transformative potential.
While AI has been progressing for decades, OpenAI’s release of ChatGPT in late 2022 brought language-capable AI into the mainstream, catalysing a rapid acceleration in investment, with the potential for mass adoption of technology.
We believe generative AI is likely to have wide-ranging applications across the economy, and this technology has the potential to transform sectors across markets, including real estate.
Though still early, we believe AI has strong potential to be a net positive for more than half the investable universe for Reits, improving operational efficiency for sectors such as healthcare and hotels, while leading to increased demand for data centres and towers.
On the other hand, traditional office, which represents 3.1 per cent of the investable universe for Reits, could see lower demand due to job displacement from AI.
AI revenue is expected to grow significantly over the next several years. Leading research firms estimate annual AI growth between 18 per cent and nearly 30 per cent.
Bank of America estimates the growth will culminate in a total addressable AI market of $900bn (£715bn) by 2026.
Cloud service providers at the leading edge of AI have pointed to a growing revenue opportunity and corresponding acceleration in capital expenditures to capitalise on AI.
A large supplier of AI hardware and software reported it has seen a surge in AI-related demand, resulting in second quarter 2023 data centre revenues up 141 per cent from the first quarter.
Most of that growth is being led by accelerated computing requirements from cloud service providers, social media platforms and corporate enterprises across the automotive, financial services, health care and telecom industries.
One of the top 10 cloud providers has identified next generation AI as a potential $10bn business line, and has signalled higher data centre investments to support AI adoption and continued cloud migration.
To meet increasing AI revenue opportunities, Morgan Stanley expects capital expenditure growth among the largest cloud providers to accelerate from 7 per cent in 2023 to 15 per cent in 2024.
The business cases driving data centre demand are a combination of existing cloud workloads and novel AI applications.
While AI use cases driving data centre demand are intriguing, further understanding is needed for how consumers and enterprises are going to leverage AI.
However, it is already clear that AI is changing how many companies operate, which in turn is increasing their need for computing power, cloud-based data and ultimately data centre capacity.
A few notable AI examples:
