Jim Chanos’ next Big Short: data centers

Hedge fund titan raising several hundred million for fund to short REITs

Jim Chanos, president and founder of Chanos & Company LP (Getty Images, iStock)
Jim Chanos, president and founder of Chanos & Company LP (Getty Images, iStock/Photo Illustration by Steven Dilakian for The Real Deal)

Data centers may be quaking in their 0s and 1s after a major hedge fund manager revealed his big bet against legacy properties in the sector.

Short seller Jim Chanos is raising hundreds of millions of dollars for a fund that will take short positions in U.S.-listed REITs, the Financial Times reported. Chanos, president and founder of Chanos & Company LP known for predicting the collapse of Enron more than 20 years ago, is using the fund to bet against data centers, which are essentially server warehouses that help power the internet.

“The story is that although the cloud is growing, the cloud is their enemy, not their business,” Chanos told the outlet. “Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centers.”

Much like the rest of industrial real estate, data centers have been riding a high in recent years as cloud computing has expanded across the globe. The highwater mark may have come in August, when Blackstone bought data center provider QTS Realty Trust for $10 billion, taking more than 7 million square feet of data center space in North America and Europe.

But Chanos thinks the party is over for legacy data centers. The hedge fund manager noted the three biggest cloud providers, Amazon Web Services, Google Cloud and Microsoft Azure, are also the biggest tenants of data centers and may be increasingly interested in building their own data centers to particular specifications.

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“When your biggest competitors are three of the most vicious competitors in the world, then you have a problem,” Chanos said.

Industrial real estate’s big rise during the pandemic was already causing some problems for data center providers. In Chicago, for instance, developers have been running out of space to meet the demand for data centers.

Industrial real estate has faced its own headwinds in recent weeks as Amazon has scaled back its activity in the sector. Rising inflation and interest rates coupled with a downturn in leasing by e-commerce companies and limited opportunities to buy are jolting the sector.

[FT] — Holden Walter-Warner