By Ian Salisbury

Investors have been fleeing the AI trade -- not withstanding a dramatic upsurge today -- with one exception: data center real estate investment trusts.

It had been a tough few days for tech stocks, with investors selling both AI hyperscalers (which seem overvalued) and software stocks (whose business models seem threatened.) One AI play continued to rally -- real estate investment trusts that lease data center facilities to compute hungry customers.

The sector's two biggest names have both rallied in 2026. Digital Realty Trust, which reported better-than-expected fourth-quarter earnings Thursday, is up 9.8% in 2026. Rival Equinix, which reports Feb. 11, is up 9.3%.

Analysts expect Equinix's adjusted funds from operations -- the REIT industry's equivalent to operating profits -- to grow 6% in the coming year, but accelerate to 9% by 2028. For Digital Realty, expectations are slightly higher, with analysts looking for 10% annual growth over the next three years.

There are several reasons REITs have escaped the tech carnage. One is that, while AI models like ChatGPT, Claude and Gemini may be locked in a fight to the death, Data REITs are poised to benefit no matter which options wins. Both Digital Realty and Equinix control real estate in sought-after locales like Northern Virginia, Illinois and Northern California, with prime access to electricity, fiber optic capacity and key customers.

What's more, even if AI demand turns out to be something of a bust, their blue-chip facilities should still see surging demand from other growth areas like corporate cloud computing.

"Sticking to these Tier 1 markets is a big part of the strategy for Digital Realty and Equinix," says BMO Capital Market analyst Ari Klein. "There's durable demand in those important markets, and that's unlikely to change."

Klein rates both stocks as outperform. His target price for Digital Realty is $195, representing an upside of about 15% from today's price of $170. For Equinix it's $925, representing an upside of about 11% from today's price of $837.

Data center REITs may also be benefiting from the fact that their share prices simply haven't run up as dramatically as other AI bets. Like most real estate stocks, Equinix and Digital Realty were hit hard when the Fed sharply hiked interest rates in 2022. Despite the recent rally, neither stock has outperformed the S&P 500 over the past five years -- a dismal stretch for real estate across the board.

But that means their shares don't necessarily look overvalued today -- unlike other AI stocks. Today, Digital Realty trades at about 21 times forward earnings, and Equinix 20 times. That's pricey for a REIT. The sector trades at an average of about 17 times, but below the S&P 500's average of 22 -- and far below the lofty valuation of the Magnificent Seven club of tech stocks, which is nearly 30.

At the same time, after a difficult few years, REITs may finally be benefiting from a more favorable interest-rate situation. REITs, just like individual homeowners, cheer lower rates for decreasing borrowing costs and pushing up real estate values. After holding rates steady for much of 2025, the Fed resumed cutting short-term rates late last year. Wall Street expects at least two more cuts by the end of 2026.

Investors also largely applauded the news late last week that Trump will nominate Kevin Warsh to succeed Jerome Powell as Fed chair. Warsh has a serious policy reputation -- not a guarantee in the Trump era -- and has recently advocated for lower short-term rates.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 06, 2026 15:13 ET (20:13 GMT)

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