Digital Realty Posts Record AI Leasing as Data Center Demand Surges
Digital Realty Trust reported $707 million in new leases during the first quarter-its second-best bookings quarter on record and roughly 70% above any prior comparable period. The company's management attributed the surge to broad demand across customer segments, signaling that the data center expansion tied to AI adoption is sustained rather than cyclical.
The quarter's standout deal was a 200 MW hyperscale lease in Charlotte focused on AI inference work. It marks the largest megawatt transaction in the company's history and validates Digital Realty's strategy of building scale campuses near network hubs outside the most expensive legacy markets.
Smaller Deals and Connectivity Drive Sustained Growth
Beyond mega-deals, the company signed zero-to-one MW contracts and interconnection bookings totaling $98 million, up 40% from the first quarter of 2025. AI-oriented demand accounted for about 21% of this segment. Digital Realty added 116 new customer logos, indicating the growth extends well beyond a handful of hyperscale tenants.
Interconnection bookings climbed 24% to $186 million, reflecting the value of high-connectivity ecosystems within the portfolio.
Backlog and Pipeline Support Multi-Year Growth
Total backlog reached a record $1.8 billion at Digital Realty's share, with scheduled commencements of $44 million this year, $247 million in 2027, and $242 million from 2028 onward. This visibility reduces forecast uncertainty for future revenue.
The development pipeline expanded to $16.5 billion in value, up 60% year over year, with 1.2 GW under construction. About 61% of that capacity is already preleased at an expected yield of approximately 11.4%, meaning the company is deploying capital against committed demand.
Financial Guidance Raised on Strong Performance
Core funds from operations came in at $2.04 per share for the quarter, up 15% year over year. Management raised 2026 core FFO per share guidance by $0.10 to $8.10, implying roughly 9% growth versus 2025.
Revenue and adjusted EBITDA both grew at double-digit rates. Same-capital cash NOI rose 7.9% year over year in nominal terms, though constant-currency growth was 2.5% due to higher operating expenses.
Balance Sheet Strengthened, Leverage Down
Debt to adjusted EBITDA fell to 4.7 times, a multi-year low. The AFFO payout ratio eased to about 64%, freeing up retained cash flow for expansion. Digital Realty closed a $3.25 billion U.S. hyperscale fund and now has over $8 billion in joint-venture and incremental private capital capacity.
The company invested $910 million in development capex net of partners while maintaining ample liquidity to pursue additional projects.
Construction Costs and Execution Risks Mount
Building costs in the Americas have risen to roughly $14 million per MW from $12.5 million, driven by higher land prices, construction inflation, and supply chain tightness. More advanced designs capable of liquid cooling for AI workloads are also raising costs.
Average lease commencement lags have stretched to around 19 months, largely because of very large, complex deals. While this delays revenue recognition, management said the scale, pricing, and precommitment justify the timing lag.
The company flagged industry-wide labor shortages-particularly electricians-and long equipment lead times as constraints. Digital Realty said its scale and relationships help mitigate these issues, but some projects will require creative phasing to stay on track.
Permitting and Community Resistance Emerging
Local opposition to data center projects is becoming more common, with permitting and community pushback affecting approvals in several markets. Digital Realty is investing more in stakeholder engagement and community benefits to smooth the process, treating social license as a critical factor in delivering large campuses.
Energy price volatility and supply chain uncertainty also remain risks. About 90% of utility expenses are passed through to customers, and a substantial portion of power is hedged, but indirect effects on customer behavior could still influence demand.
Near-Term Pace Expected to Slow
Management guided to a step-down in quarterly performance after Q1, with a lighter second quarter and a rebound expected in the back half of the year. Full-year guidance was raised, but the average pace of core FFO growth over remaining quarters will be slower as expense comparisons normalize and timing factors play through.
Operating expenses rose faster than trend in the quarter, compressing constant-currency growth despite stronger nominal gains. Management attributed part of the increase to normalization after unusually low repairs and labor costs a year ago.
Global Expansion Continues
Digital Realty acquired Telepoint in Sofia, secured land in Portugal and Milan, and entered Cyberjaya in Malaysia. Management described these moves as critical for serving latency-sensitive and interconnection-heavy workloads as AI and cloud adoption deepen across regions.
The company projects same-capital cash NOI growth of 4% to 5% on a constant-currency basis and net development capex of $3.5 billion to $4.0 billion, supported by the $1.8 billion backlog and planned dispositions and joint-venture capital later this year.
For strategy and finance executives, the earnings call underscores how AI demand is reshaping capital allocation in infrastructure. Digital Realty's record leasing and strengthened balance sheet show the secular shift is real, but rising construction costs, labor constraints, and permitting delays signal that execution will determine which operators capture the full opportunity.
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