Oracle is taking a massive gamble — $248 billion in data center leases, a commitment that is up more than 2,200% from two years ago — as the software giant races with other major firms to secure more space during the artificial intelligence boom.
The Austin, Texas-based firm disclosed in a regulatory filing this month that it had the lease commitments for space inside data centers as of the end of November. That’s a position some analysts who follow the company and the data center sector deem too risky if there is a downturn in the industry that leaves the tech giant with excess space.
The leases are expected to start between the third quarter of fiscal 2026 and fiscal 2028 and last 15 to 19 years, the filing said. The dollar figure for the leases has increased 148% since the end of August and soared 2,239.62% since November 2023.
Oracle’s disclosure in the past week shows the world’s largest technology companies are spending exponentially more money on data centers in a trend that doesn’t appear to be slowing anytime soon. That’s reinforcing concerns from some analysts about a potential AI bubble.
Most tech giants are also spending gargantuan amounts to own or lease space inside data centers, but Oracle stands out for its rapid pace of growth, according to analysts at S&P Global. Moreover, Oracle’s business model for its cloud-computing division seems as if it could lead to losses in the event of an industry downturn.
In data centers that Oracle doesn’t own, the firm leases space inside the facilities to house its computer servers, semiconductors and other equipment. Oracle then sells cloud-computing services, using those servers and equipment, to clients like Phenix Real Time Solutions, which makes video-streaming software, and telecommunications company TIM Brasil.
“We have invested in the rapid expansion of the Oracle Cloud by increasing existing data center capacity and adding data centers in new geographic locations to meet current and expected customer demand,” Oracle said in its latest annual report. “We expect this trend will continue.”
Timing mismatch
But the two contractual arrangements involve a mismatch in timing, which poses a risk, Kelly Morgan, research director for data center infrastructure at S&P Global Market Intelligence, told CoStar News. Oracle’s rent-payment commitments to data center landlords typically span 15 years to 19 years. But the contracts that Oracle’s customers sign are shorter, usually for about five years.
The concern is “that firms planning to rent out chip capacity [at data centers] will have short-term contracts from tenants and long-term contracts on the data center,” Morgan said.
Oracle did not respond to email requests for comment. But the company acknowledged the situation in its annual report filed in June.
“If we overestimate customer demand or our data center capacity needs, we could be locked into multiyear commitments for excess data center space, resulting in lower profitability and cash flows,” Oracle said in the June 18 regulatory filing. “Our third-party data center vendors generally require us to pay significant contract termination fees to early exit such obligations.”
Other technology companies that use vast amounts of space inside data centers have a diversified business model that protects them from that risk, said Andrew Chang, director of corporate ratings at S&P Global. A large percentage of the data center space that Microsoft uses is for its own business needs. The same is true for Google.
What’s more, Microsoft and Google each has a stable of well-established customers for data center space that have a track record of paying. Oracle, on the other hand, is seeking AI-based startup companies, which can be shaky.
Future demand
Future demand is also a question, Chang said. If demand for data center space declines significantly by 2030, Oracle might be stuck owing rent to its data center landlord while it lacks customers to pay for Oracle’s services. Alternatively, Oracle might find replacement tenants, but ones that pay less in rent.
“Oracle maybe can get somebody else as a tenant, but maybe one that’s not as desirable,” Chang told CoStar News.
That’s one reason that S&P gives Oracle’s credit profile a “BBB” rating, considered adequate for paying bills, compared with the better “AAA” ratings for Microsoft, “AA+” for Google parent company Alphabet and “AA” for Amazon, Chang said.
Oracle executives explained during the company’s recent earnings conference call that it doesn’t start paying rent for data center space until the facility has opened.
“We don't actually incur any expenses for these large data centers until they’re actually operational,” CEO Clay Magouyrk said during the Dec. 10 call.
“Oracle does not pay for these leases until the completed data centers and accompanying utilities are delivered to us,” Douglas Kehring, principal financial officer, reiterated during the call.
Oracle did not disclose the identities or locations of the data centers where it has committed to paying rent. Neither did Oracle specify its landlords for data center space.
Digital Realty Trust, a Dallas-based real estate investment trust, identified Oracle as its second-largest customer, according to its latest annual report. Oracle generated about $266.6 million in yearly revenue for Digital Realty Trust, or about 6.4% of all company revenue.
Oracle declined CoStar's request for a comment on this issue.
Oracle has partnered with OpenAI and others on the Stargate data center project in Abilene, Texas. Oracle also leases space at a Hillsboro, Oregon, data center owned by Landmark Dividend, and a data center in Temple, Texas, owned by Oppidan, according to CoStar data. Oracle also owns data centers in Austin and West Jordan, Utah.