Why this real-estate-related corner of the stock market may benefit from AI

“What we’re seeing is the real infancy of demand drivers stemming from artificial intelligence,” Durkay said by phone. “There is a difference between the server requirements for workloads in artificial intelligence versus the workloads for traditional applications.”

Data centers house servers, with the GPU, or graphics processing unit, needed for AI requiring more power than traditional applications such as cloud computing, according to Durkay. She said that historically, “the vast majority of servers have been CPUs,” or central processing units.

“The GPU is going to be significantly more sophisticated, a lot more intense,” she said. “A GPU allows for parallel processing and computing so that thousands of jobs can run simultaneously.”

Within the U.S. real-estate securities market, Digital Realty Trust Inc.
DLR,
+0.91%
and Equinix Inc.
EQIX,
-0.24%
are among “the biggest players” in data centers, according to Durkay. Companies like DigitalBridge Group Inc.
DBRG,
-0.39%
and Iron Mountain Inc.
IRM,
+0.18%
may also provide some exposure to the data-center theme, she said, although they’re not “pure plays.” 

“It has yet to be determined where the major hubs of artificial-intelligence data centers will be,” said Durkay. The largest data-center markets in the U.S. are now in Santa Clara, Calif., and northern Virginia, as the “early backbone of the internet” was built in those areas, she said, citing their “cable and fiber connectivity” as well as the availability of power.

While that connectivity remains important today, “the challenge is going to be that power availability” to meet AI-related demands, according to Durkay.

Other areas for data centers include northern New Jersey, Atlanta, Dallas and Chicago, she said.

AI buzz

“AI is a big buzzword,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab, by phone. “Everybody wants to know where the opportunities are” for investing. He’s expecting that in the next three decades, “AI will change our lives as much as the internet itself has in the last 30 years.”

Generative AI has rapidly become a popular investment theme after the release of the ChatGPT app late last year.

So far stock-market investors have “really concentrated their support” for the AI theme at the “megacap tech level,” according to Jay Jacobs, BlackRock’s U.S. head of thematics and active equity ETFs. “We’ve seen the giants in the space from hardware and software really rallying this year,” he said by phone, pointing to the “market’s excitement around their growth prospects.”

Among megacap tech stocks, chip maker Nvidia Corp.
NVDA,
-1.74%
has skyrocketed 222% this year through Wednesday, while Microsoft Corp.
MSFT,
-0.26%
jumped around 48% over the same period. 

What the market may have “missed” is the “second-order effects of AI,” Jacobs said. In other words, the “downstream beneficiaries” of increasing AI adoption, including the “regular nuts and bolts of digital infrastructure,” he said, pointing to data centers as an example.

For exposure to AI, BlackRock suggests investors might consider funds such as the iShares Semiconductor ETF
SOXX,
+1.20%,
iShares Expanded Tech Sector ETF
IGM,
+0.32%,
iShares U.S. Tech Breakthrough Multisector ETF
TECB,
+0.43%
and iShares Robotics and Artificial Intelligence Multisector ETF
IRBO,
+0.62%,
according to Jacobs. 

The iShares U.S. Tech Breakthrough Multisector ETF has a small weight in the category associated with data center REITs, or real-estate investment trusts, according to a spokesperson for BlackRock. The fund’s holdings as of July 18 included Digital Realty Trust and Equinix, according to holdings data on BlackRock’s website. 

“We haven’t been living in this new AI world for very long,” said Jacobs. “It’s still early.”