Why Equinix and Digital Realty Benefit From Data Center Zoning Battles

Key Points

• Voters approved data center restrictions in 40 of 41 local ballot measures, yet Equinix and Digital Realty Trust gained after the election.
• Rising construction costs, permitting delays, and utility queues are creating a scarcity moat that boosts the value of existing, energized data center capacity.
• Digital Realty Trust and Equinix reported record third-quarter bookings and pricing power, though they show different valuations and growth timelines for investors to consider.

During the recent election cycle, voters favored limits on data center development in 40 of 41 local ballot measures across 10 states. Concerns over power grid strain and land use dominated the conversation, but established data center landlords initially outperformed other AI infrastructure stocks.

While some AI infrastructure stocks sold off in response to regulatory headwinds, a closer look at the underlying mechanics reveals a different story. The demand for artificial intelligence infrastructure and cloud computing remains intact. When local regulations restrict new construction, the existing, fully energized supply can become substantially more valuable.

Investors evaluating the digital infrastructure space should consider how rising construction costs and permitting delays actually create a protective moat around established operators. As supply bottlenecks form, the pricing power can shift back to the landlords holding permitted properties.

Red Tape, Green Lights: How Zoning Fights Reward Incumbents

The November elections highlighted a growing resistance to digital infrastructure development. Voters favored restrictions on data center projects in almost all local ballot measures across 10 states, while newly elected leaders in key hubs like Texas, Georgia, and Ohio signaled support for stricter grid oversight. The market reaction was uneven, with some AI infrastructure stocks declining sharply while Equinix and Digital Realty gained immediately after the election.

The market seems to have priced in the risk of delayed pipelines and development bottlenecks. Unpermitted greenfield projects slated for 2028 and beyond face genuine regulatory hurdles and extended utility queues. This supply restriction raises the economic value of capacity that is already permitted, built, and connected to the electrical grid.

When local governments artificially constrain new supply, incumbents with energized server halls gain leverage at the negotiating table. Companies that already navigated zoning laws and secured utility power now operate assets with high scarcity value, insulating them from future competitive builds.

From Rural Hubs to City Streets: The Urban AI Inference Pivot

Understanding the infrastructure dynamic requires looking at the primary customers. Major cloud providers continue to allocate capital toward network expansion. Combined capital expenditures across the top three hyperscalers are expected to approach $600 billion in 2026, supported by a collective backlog nearing $1.8 trillion.

This demand translates directly into leasing momentum for Equinix NASDAQ: EQIX and Digital Realty Trust NYSE: DLR. Both companies reported record third-quarter bookings, indicating that enterprise demand is outpacing localized development friction.

A noticeable shift in workload requirements helps insulate these specific operators. While rural artificial intelligence training megacampuses attract the most regulatory scrutiny, enterprise customers increasingly require low-latency urban inference hubs to process data closer to the end user.

Equinix operates retail facilities that typically span about 30 to 60 megawatts. This footprint sits comfortably below the 100-megawatt threshold that often triggers heavy state-level regulatory review. Equinix recently accelerated cabinet deliveries by about 40% to meet urban demand, while interconnection fabric revenue grew about 24%.

Digital Realty Trust is scaling its infrastructure to support high-density computing, operating live liquid cooling across more than 25 locations and generating roughly 80% year-over-year growth in combined smaller-capacity and interconnection bookings.

Costly Construction: How Expensive Shells Lift Existing Value

Building a modern data center requires more capital today than it did just a few years ago. Severe equipment inflation impacts every layer of the development process. Industry pricing for essential components like switchgear has climbed about 60%, while transformers and cooling systems cost roughly 30% more. In higher-cost markets, developing an AI-ready facility can exceed $20 million per megawatt.

As replacement costs rise, established operators can charge a premium for their existing space. Long-term leases in this sector feature built-in annual rent escalators, typically ranging from 2% to 4%, providing a compounding baseline of revenue growth.

More importantly, these landlords use contract structures that pass utility costs directly to tenants. Digital Realty Trust collected around $470 million in tenant reimbursements during the third quarter, helping offset volatile power costs.

Supply scarcity visibly drives mark-to-market pricing power. Digital Realty Trust posted cash renewal spreads near 11.8%, with large leases exceeding one megawatt commanding rate increases above 26%. Equinix is experiencing a similar dynamic, achieving pricing gains of roughly 12% on new contracts.

Valuation Divergence: Where the Digital Real Estate Deals Hide

Despite operating in the same sector, recent market volatility highlights two distinct valuation profiles, offering different entry angles for portfolio allocation.

Digital Realty Trust presents a potential value opportunity following the recent dip. Digital Realty Trust shares trade around 21.8 times expected 2026 core funds from operations (FFO) and sit about 13% below their 52-week high. The company recently acquired a 9.9% stake in Australian operator NEXTDC through a joint venture with Goodman Group. Neither company currently plans to make a takeover offer, reducing immediate concerns about financing a larger acquisition.

Digital Realty Trust also secured over $1.4 billion in private fund commitments and received a credit upgrade to Baa1 from Moody's. While the company secured a record $855 million in third-quarter bookings at 100% ownership, investors should account for the 17-month weighted-average lag between lease signing and rent commencement. Current sales success will primarily drive cash flow expansion in 2027 and 2028, not in the immediate quarters ahead.

Equinix gained following the election even as other AI infrastructure stocks declined, reflecting its position as a high-margin interconnection compounder. Equinix stock trades near 24.3 times expected 2026 adjusted funds from operations (AFFO). While the company runs negative free cash flow due to expected total capital expenditures of $5 billion to $6 billion in 2026, its operating cash generation remains strong.

Both companies face ongoing macroeconomic headwinds. With benchmark 10-year Treasury yields near 5%, the cost of debt remains elevated. Refinancing older debt creates slight margin friction. Equinix recently issued green bonds at a hedged rate of 4.82%, a noticeable step up from the borrowing costs on much of its existing debt. Managing this cost of capital will dictate how efficiently both enterprises can fund their expansion pipelines.

Wired for Wealth: 2 Ways to Play the Data Center Moat

The physical reality of digital infrastructure is changing. Tougher permitting rules, extended utility grid queues, and escalating electrical equipment costs are building a wall around new greenfield supply. This environment turns existing, power-connected footprints into valuable, cash-flowing assets.

Backed by record bookings and contractual utility pass-throughs, Digital Realty Trust offers a potentially discounted entry point for investors willing to wait for the development backlog to convert into recognized revenue. Equinix provides a premium approach, utilizing its smaller urban footprint to compound high-margin AI inference demand while potentially reducing exposure to the largest development projects facing regulatory scrutiny. Investors seeking exposure to the physical layer of the digital economy might find the current pricing landscape an opportunity to evaluate these foundational technology providers.