Global investors have treated data centers as a rare sure thing in commercial real estate: growing demand, long leases and infrastructure-like cash flow. Now, a new report from First Street and Goldman Sachs warns that a big part of that story is mispriced. Climate risk, it argues, is already squeezing margins and adding volatility in some of the world's most important data center hubs — and underwriting hasn't caught up.
Climate Risk Moves To Center Stage
The report lands at a time when data centers are both politically contentious at the local level and central to global capital flows, with global installed capacity projected to double to 228 megawatts by 2030. Using physics-based models, First Street finds that climate exposure has become "a core driver of operating performance, valuation, and credit quality for data centers as an asset class," even though "climate risk remains underpriced."
For investors and lenders, the message is blunt: climate can no longer sit in a risk appendix. First Street and Goldman Sachs say it needs to move into the heart of underwriting, pricing and capital allocation, not remain a secondary consideration.
Risk Is Concentrated In Key Hubs
One of the more unsettling takeaways for capital allocators is how much capacity sits in places with elevated climate exposure. The report notes that "a meaningful share" of global data center capacity is located in regions with higher exposure to both chronic climate stress and acute natural hazards, and that "the industry is concentrating some of its largest and fastest-growing hubs in some of the riskiest locations."
Four U.S. regions land in the top 10 most exposed data center markets globally: the Carolinas (5), Virginia (6), Atlanta (8), and New York/New Jersey (9). Internationally, the list is led by Johor, Malaysia (1), Singapore (2), Batam, Indonesia (3), Marseille (4), Bangkok (7) and Beijing (10). For investors, that ranking is a reminder that power pricing and connectivity alone no longer tell the full story.
Chronic Versus Acute Risk
The report splits climate risk into two buckets that manifest differently in the P&L. About 54% of global data center capacity operates under chronic stress conditions such as extreme heat or water scarcity — the sort of issues that creep into the numbers through higher energy and water costs and reduced efficiency over time.
At the same time, 79% of capacity is exposed to acute hazards, including flood, wind or wildfire, which tend to show up as sudden hits from downtime, repair capex and insurance shocks. Taken together, chronic and acute risks make cash flows bumpier and less predictable — a direct challenge to the "safe, stable infrastructure" narrative that has helped pull institutional capital into the sector.
When The Models Meet Reality
To ground the analysis, First Street and Goldman Sachs point to recent real-world events that function as climate stress tests for the asset class. In Texas, severe flooding in 2025 led to extended downtime at data centers, forcing operators to rely on diesel generation while access to affected sites for maintenance and recovery was limited.
On the chronic side, the report cites the United Kingdom in 2022, when temperatures above 40 degrees centigrade pushed cooling systems past their design limits. That heat wave triggered outages and service degradation for enterprise customers and, according to the report, "exposed a gap between modeled and actual cooling performance," raising questions about the engineering assumptions built into underwriting and insurance models.
How Interconnected Systems Fail
The report underscores that data centers rely on a tightly linked set of systems — from the building envelope to electrical infrastructure and cooling. Because of that interdependence, a failure in one area can tip into a system-level outage rather than an isolated component issue.
Even redundancy has limits. Backup systems are only useful if they can operate when needed, and extreme events can strain multiple systems simultaneously. For investors, that means assumptions about uptime, revenue continuity and service levels deserve a harder look, especially in high-risk regions.
Mispriced Markets And NOI Stability
Despite the wide range of exposures, the report finds that "markets with different levels of risk are being underwritten as equivalent." That, it argues, creates a misalignment between underlying climate risk and the stability of net operating income, insurance availability, debt capacity, refinancing terms and exit values.
"Markets with similar power costs and connectivity diverge materially once climate exposure is incorporated," the report notes, making site selection "even more important." It highlights Northern Europe, the San Francisco Bay Area, Quebec and Bogota as among the least exposed locations, pointing to the potential for a future repricing between higher- and lower-risk markets as climate becomes a more explicit underwriting input.
Underwriting Climate Into The Base Case
The authors are clear that chronic and acute risks should be reflected in base-case assumptions rather than treated as low-probability downside scenarios. That means building higher baseline energy and water costs, reduced operating efficiency, and likely insurance repricing into standard pro formas, not just stress tests.
It also means accepting that outages and repair capex are more likely than historical data alone might suggest, especially in exposed regions. "For investors and lenders, the implication is straightforward: climate risk must move from a secondary consideration to a core underwriting input," the report concludes. For those willing to do that work now, there may be an opportunity to build more resilient portfolios — and to price risk more accurately than the broader market.
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