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Data center REITs generated solid profits for passive income investors in the real estate sector in 2024. However, new developments in the tech sector could stop their bull run in 2025. CNBC Senior Markets Correspondent Dominic Chu recently appeared on the network's"Squawk on the Street" to discuss challenges facing the data center sector and how they could affect investors. His first point of focus was recent moves by Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT).

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Apple recently announced a $500 million investment to build its data centers across the US. Constructing those new data centers carries significant front-end costs, but it will also drastically reduce the amount of data center space Apple needs to rent for the long term. This also means data center REITs that had previously been making money by renting space to Apple will have a $500 million hole to fill in terms of new vacancies.

Chu noted that Apple is not the only company taking major steps to reduce expenditures on data center leases. He discussed Microsoft's recent cancellation of enough data center leases that it will no longer need to carry a note from TD Cowen to pay for them. Chu quoted Microsoft as saying it has "not changed its data center policies." The policy may not have changed, but the company is definitely leasing less space than before. 

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"Those data center REITs have been a big part of the growth story in real estate," Chu said, adding, "The thesis, as the tech grows, the industry needs more facilities to make the magic happen for AI." If big tech companies like Apple and Microsoft look internally for cost-cutting measures to reduce data center expenses, the "thesis" changes and data center REITs could feel the pain.

Chu profiled some major data center REIT stocks and how they've already been retreating from 2024 highs or experiencing drastically slowed growth. One data center REIT stock Chu mentioned is Equinix (NASDAQ: EQIX), which Chu said was "about 7.5% away from its November high." He added, "The stock is now flat this month."

Chu also pointed out that Iron Mountain (NYSE: IRM) is "30% down from its October 25 high," and "that stock is down 9.5% just this month." On the other side of the equation, Digital Realty Trust (NYSE: DLR) was up by 16.5% since November. The up-and-down trend is visible in the ETF sector as well, where Chu notes mixed performance among the three big ETFs in the data center sector. 

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Chu said the Global X Data Center and Infrastructure (NASDAQ: DTCR) ETF was up 15 % in February, while the Pacer Data and Infrastructure Real Estate ETF (NYSE Arca: SRVR) was up 7% in February. However, Chu said the upward tide had not lifted the entire sector. According to Chu, the iShares US Digital Infrastructure (NYSE Arca: IDGT) was "pretty much flat," after having retreated by 6% from its December levels.  

Chu thinks these market trends indicate a different cycle is on the horizon for the data center sector. That cycle may be characterized by flat performance or pullbacks from 2024 levels. He told the hosts "It (the data center sector) has been not a typically volatile sector of the market, but real estate investment trusts, especially data centers, are now bucking that trend."

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This article Is The Data Center REIT Honeymoon Period Over? originally appeared on Benzinga.com