Munis won't play big role in AI buildout, says BlackRock

Bloomberg News

Municipal bonds have a small but targeted role in the country's massive and debt-driven artificial intelligence infrastructure buildout, according to asset management giant BlackRock.

The huge price tag of many projects and the long-dated structure of munis compared to the short-term nature of AI technology limit the usefulness of direct tax-exempt bond financings for the private tech facilities, the firm said.

Municipal bonds' private use test marks another constraint, BlackRock notes, as public power utilities are restricted to three-year contracts with non-government customers. Public power utilities are lobbying for regulatory and legislative changes to allow them to float more tax-exempt bonds related to the boom.

"In our view, municipal bonds can address selected infrastructure needs, but most of the capital required for AI-related development will come from outside the tax-exempt market," BlackRock said in a Sept. 29 report.

The firm estimated that AI-related munis are likely to total only around $11 billion in 2026, less than 2% of the expected $580 –$600 billion of overall muni volume.

AI-related municipal issuance this year has been concentrated in public power, water and wastewater, and related infrastructure, BlackRock said.

"The AI data center buildout is reshaping U.S. infrastructure, but its impact on the municipal market is likely to be targeted," authors James Schwartz and Patrick Haskell said. "For investors, the central question is not whether AI-related demand is growing, but whether an issuer is adequately compensated for the infrastructure it builds and the risks it assumes."

Hyperscalers and developers are turning to the asset backed securities, commercial mortgage-backed securities, project finance, private credit, taxable corporate debt and equity markets to finance what Brookings said is on track to become the country's largest infrastructure investment cycle relative to the size of the economy.

In June, Google parent Alphabet issued muni bonds in a $1.2 billion prepaid energy deal that investors met with enthusiasm. Similar sales may become more common but they're "complex, tax-sensitive and limited in scale," BlackRock said.

"The [investor] response reinforces that municipal bonds can finance select power-procurement transactions, but the largest AI data center financings will continue to rely on non-municipal capital markets," the firm said.

Investors should expect more taxable muni and hybrid structures but "treat them as selective opportunities rather than a new core sector," BlackRock said.

The data center boom shows no signs of slowing.

Brookings estimates that AI investment in data center buildings, power systems, networking infrastructure, and specialized chips and other equipment will total $10.3 trillion from 2025 to 2032, or an average of 3.63% of U.S. gross domestic product per year.

That would make it larger than "major U.S. canal, railroad, electrification, highway, and telecommunications investment booms," Brookings said.

Construction spending is up more than 73% over the past 12 months, according to Associated Builders and Contractors.

"Frankly, it's becoming difficult to contextualize the size and speed of this boom," said ABC chief economist Anirban Basu in a statement. "The increases have been particularly large over the past four months, with data center spending increasing at an incredible 149% annualized pace since March."