Beyond DeepSeek: AI disruption and the implications for real estate

Artificial Intelligence and Real Estate Series | Part II

February 27, 2025

Daniel Tomaselli

Manager, Global Research

Armel Traore Dit Nignan

Head of Real Estate Data & Analytics

In the first installment of our Artificial Intelligence & Real Estate Series, published last December, we introduced a framework to analyze the impact of the rising adoption of AI technologies on the commercial real estate environment. We also warned that as the AI revolution remains in its infancy, investors should brace for unanticipated breakthrough advancements that are difficult to predict and precisely time. Indeed, over the past month, a pivotal leap took place, intensifying the competition for AI industry leadership and market dominance.

The shifting economics of AI development and deployment

On the 20th of January, a little-known Chinese AI start-up, DeepSeek, released a free and open-source generative AI chatbot able to rival the US industry giants. The release went unnoticed until a few days later when more details about its large language model (LLM) became widespread.

LLMs are general-purpose models trained to understand human language and perform tasks such as generating text or answering questions. These serve as the basis for various AI applications, including, but not limited to chatbots, search engines, and document summarization. Developing a state-of-the-art LLM system typically requires significant capital expenditures and ongoing operational costs. As a result, this field is dominated by a handful of tech giants—such as Alphabet, Amazon, Meta, and Microsoft—investing billions in data center infrastructure, training proprietary AI models, and reinforcing their industry leadership.

Against this backdrop, the rise of DeepSeek may be viewed as a black swan event, or at the very least a watershed moment in the current AI landscape. Indeed, compared to the previous LLMs, DeepSeek claimed to build its application at a small fraction of the cost (measured in millions of dollars rather than billions) compared to other leading LLMs, using far less computation power and fewer chips. Although questions still arise on the validity of these claims, the achievement has cast doubts on several economic and technical assumptions taken for granted when developing AI models: massive scale, billions of dollars in capital expenditures, substantial power requirements, and costly NVIDIA graphics processing units (GPUs). As a result, these requirements may no longer be essential, lowering entry barriers for new competitors and signaling a profound shift in the economics driving future AI advancements.

DeepSeek innovation could represent a significant milestone of the current AI paradigm. However, it should not be seen in isolation but as part of a broader and expanding ecosystem of businesses competing to push the technology frontier further and gain market shares. Indeed, in the weeks following DeepSeek’s announcement, several companies, including OpenAI, ByteDance, Alibaba, Minstral, and Moonshot, released new versions of their own AI models with either more complex reasoning capabilities, enhanced performance, improved functionalities, or lower customer fees. This suggests the AI race is just in its infancy, and its rapid evolution will likely continue at a breakneck speed.

Exhibit 1: The AI Large Language Models (LLM) Landscape is Rapidly Expanding
Selected new model releases over the last five years.

Timeline from 2020 to 2025 showing the release AI models increasing

Source: Medium, January 2025.

The impact on the real estate sector varies by property type

In December 2024, we introduced a framework to analyze the impact of AI technologies on the commercial real estate environment. We believe the recent case of DeepSeek, alongside the broader industry trends of lower barriers to entry and wider competition, does not change but instead accelerates the path toward our earlier, sector-specific conclusions. We expect AI to continue to have a significant and positive impact on data centers, life sciences, healthcare, and logistics; a marginally positive effect on hotels, student housing, and residential; and a neutral to a negative impact on offices, high-street retail, and shopping centers.

Data centers: While the sector could experience some near-term demand moderation following the DeepSeek announcement, long-term prospects remain strong. Increased technological advancements will likely generate more data and, in turn, demand for space. In the U.S., major tech companies currently face years-long backlogs in model testing due to near-zero vacancy rates. Demand has outpaced supply, with rental growth approaching 30% annually in some markets. If DeepSeek’s model delivers on its promises, it could alleviate some immediate pressure by improving access to much-needed space while also fueling AI demand in the medium to long term—a net positive for the sector.
Industrial: The sector could benefit from further supply chain modernization. While automation has already reshaped logistics, advancements in AI-driven operations could enhance efficiency and create new investment opportunities in next-generation distribution centers.
Residential: Stronger productivity growth, typically associated with wage growth, could improve housing affordability and living standards. If AI-driven efficiencies translate into higher earnings, this could support demand for residential real estate.
Retail: Stronger economic growth, driven by AI-enabled efficiencies, can strengthen business and household balance sheets. Additionally, AI applications in inventory management and operational optimization may help retailers reduce costs and improve profitability. However, these benefits could be offset by increased e-commerce penetration enabled by AI tools.
Office: This sector may face the most significant challenges if AI accelerates the elimination of redundant positions. While AI has the potential to drive growth in emerging industries and improve corporate balance sheets, we feel that structural dislocations may act as a governor on a more robust demand recovery in an already challenged sector.

Conclusion

As history has shown with other transformative technologies, greater accessibility fosters widespread innovation and economic gains. AI is already delivering tangible productivity improvements, and its impact will undoubtedly expand. While the implications for commercial real estate vary by asset class, we expect the continued advancements of this technology to produce a positive effect overall. Ultimately, we recommend incorporating AI considerations into the investment decision process alongside other critical factors we have addressed in our Inside Real Estate - 2025 Annual Real Estate Outlook, such as macroeconomics, geopolitics, ESG, and demographics. We expect the approaching recovery in real estate to be primarily driven by income and rental growth. Thus, selecting property types with strong underlying fundamentals and favorable secular tailwinds is paramount.

The rapid advancements in AI, exemplified by DeepSeek’s emergence, are likely to reshape the real estate industry’s competitive landscape, lower barriers to entry, and eventually accelerate AI adoption across sectors. For more of our thoughts on how AI is disrupting the real estate market, read our full perspective.

Real estate

Disclosure

Risk considerations
Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate. International investing involves greater risks such as currency fluctuations, political/social instability, and differing accounting standards. Data Center properties are only attractive to a unique type of tenant. A limited tenant base increases the risk of vacancy. Additionally, a property designed to be a data center may be difficult to relet to another type of tenant or convert to another use. Thus, if operating a data center were to become unprofitable, the liquidation value of properties may be substantially less than would be the case if the properties were readily adaptable to other uses.

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Principal Global Investors (Ireland) Limited is the issuer of the Funds. Investments may only be made on an application form attached to a current prospectus and following receipt by the investor of the KIID in respect of the Fund in which they intend to invest. The latest version of the prospectus of the Funds is dated 14 December 2012.

For Real estate investors in the European Economic Area (“EEA”), this website and the information on it is only directed at persons who are professional investors for the purposes of the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”), professional clients or eligible counterparties for the purposes of the Markets in Financial Instruments Directive (Directive 2014/65/EU) (“MiFID II”) or as otherwise defined under applicable local law and regulation and at whom this website and the information on it may lawfully be directed in any relevant jurisdiction (“Eligible Persons”). In relation to each member state of the EEA (“Member State”) which has implemented AIFMD (and for which transitional arrangements are not/ no longer available), this website may only be accessed and interests in Funds may only be offered or placed in a Member State to the extent that: (i) the relevant Fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD (as implemented into the local law/regulation of the relevant Member State); or (ii) this website and its information may otherwise be lawfully distributed and the interests in Funds may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). In relation to each Member State of the EEA which, at the date of accessing this website, has not implemented AIFMD, this information may only be distributed and interests in Funds may only be offered or placed to the extent that this information may be lawfully distributed and the interests in Funds may lawfully be offered or placed in that Member State (including at the initiative of the investor).

Persons who are not Eligible Persons, including but not limited to those individuals or other persons who fall within the FCA’s definition of ‘retail clients’, should not use or rely upon this website or the information contained therein and may not engage the services of Principal Real Estate or any of its affiliates, or invest in any Fund. Potential investors are advised that all or most of the protections provided by the UK regulatory system will not apply and that the UK Financial Services Compensation Scheme may not be available in relation to an investment in a Fund or separate account.

The contents of this website have not been verified or approved by any competent regulatory or supervisory authority. No liability, whether in negligence or otherwise, arising directly or indirectly from the use of the information or any part of it on this website is accepted and no representation, warranty or undertaking, whether express or implied, is or will be made at any time by Principal Real Estate or its affiliates or any of their respective advisers, directors, officers, employees, representatives or other agents (“Principal Agents”) for any information or any of the opinions contained herein or for any errors, omissions or misstatements.

None of Principal Real Estate or its affiliates or any Principal Agents makes or has been authorised to make any representation or warranties, whether express or implied, in relation to Principal Real Estate or regarding the truth, accuracy or completeness of any of the information contained on this website at any time. No representation or warranty is given by Principal Real Estate, its affiliates or the Principal Agents as to the achievement or reasonableness of, and no reliance should be placed on any projections, targets, estimates or forecasts contained in the information on this website. Furthermore, nothing contained on this website is or should be relied on as a promise or representation as to the future. No reliance may be placed by any person for any purpose whatsoever on the information or opinions contained on this website or on its completeness, accuracy or fairness at any time.

Principal Global Investors (Europe) Limited is not authorised by the FCA to directly deal with retail investors; any distribution of the Fund to retail investors in Europe is facilitated by fund distributors with which Principal Global Investors (Europe) Limited has entered distribution arrangements, pursuant to advice provided to investors by those distributors, based on the documents Principal Global Investors (Europe) Limited provides. Retail investors should not be provided with access to this website.

The name of the Swiss representative is ACOLIN Fund Services AG, Stadelhoferstrasse 18, CH-8001 Zürich. The name of the Swiss paying agent is Banque Cantonale de Genève, 17, quai de l’Ile, 1204 Geneva. Investors can obtain the prospectus, trust deed, the simplified prospectuses and the annual and semi-annual reports free of charge from the representative in Switzerland.
The value of units and the income from them may fall as well as rise.

Investments in the Funds are neither insured nor guaranteed by the US Government or the Federal Deposit Insurance Corporation and are not deposits or obligations of, or guaranteed by, Principal Global Investors.

No Solicitation
Nothing contained in this website shall constitute an offer or solicitation, in relation to units in the Funds or generally, in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

In particular, shares issued by the Company, and units in the Funds, have not been and will not be registered under the United States Securities Act of 1933 as amended or the securities laws of any state or political subdivision of the United States and may not, except in a transaction which does not violate US securities laws, be directly offered or sold in the United States or to any US Person. The Company will not be registered under the United States Investment Company Act of 1940 as amended.

This website is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

No Investment Advice
The information in this website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision.

You should also inform yourself as to (a) the possible tax consequences, (b) the legal requirements and (c) any foreign exchange restrictions or exchange control requirements which you might encounter under the laws of the countries of your citizenship, residence or domicile and which might be relevant to any investment, including the subscription, holding, transfer or disposal of units in the Funds

Delegation of Investment Management to Affiliates

Products upon which composite results contained in this material, if any, are based may not themselves be available in the United Kingdom and certain other jurisdictions; however, the underlying investment management capability can be made available to institutional investors subject to all applicable local regulations and restrictions. In connection with its management of client portfolios, PGIE may delegate management authority to affiliates that are not authorised and regulated by the Financial Conduct Authority. In any such case, the client may not benefit from all protections afforded by rules and regulations enacted under the Financial Services and Markets Act 2000.

Disclaimer
The information on this website is given by Principal Global Investors in good faith and has been derived from sources believed to be reliable and accurate as at their date. However, Principal Global Investors makes no representation or warranty of any kind for the accuracy or completeness of the information and it is under no obligation to update or correct any errors in the information after the date of publication. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

Subject to applicable law, Principal Global Investors and its affiliates and their respective directors, employees and associates do not accept any responsibility arising in any way (including by reason of negligence) for errors in, or omissions from, the information and do not accept any liability for any loss or damage, however caused, as a result of any person relying on any information on the website or being unable to access the website.

The Internet is not a totally reliable and secure medium of communication. Principal Global Investors accepts no liability for the security or confidentiality of information transmitted in this way and any such transmission of information shall be at your own risk.

The entire content of this website is subject to copyright with all rights reserved. You may not copy, reproduce, distribute or modify the content of this website without the prior written permission of Principal Global Investors.

No instructions for investment purposes will be accepted directly from this website or by e-mail.

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You may view, download for caching purposes only, and print content from the website for your own personal use, subject to the restrictions set out below and elsewhere in these Terms of Use.

No Guarantee of Timeliness
This website may contain videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions. The information and materials contained on this website, and the terms, conditions, and descriptions that appear, are subject to change. All content on this website is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.

No Warranties
The information on this website has been developed internally and/or obtained from sources believed to be reliable; however Principal Global Investors and its affiliates do not independently verify or guarantee its accuracy or validity. The information and services provided on this website are provided ""AS IS"" and without warranties of any kind, either expressed or implied. To the fullest extent permissible pursuant to applicable law, Principal Global Investors disclaims all warranties, including, but not limited to, any warranty of non-infringement of third-party rights and any implied warranties of merchantability and fitness for a particular purpose. Principal Global Investors does not warrant, either expressly or impliedly, the accuracy or completeness of the information, text, graphics, links or other items contained on this website and does not warrant that the functions contained in this website will be uninterrupted or error-free, that defects will be corrected, or that the website will be free of viruses or other harmful components. Principal Global Investors expressly disclaims all liability for errors and omissions in the materials on this website and for the use or interpretation by others of information contained on the website. Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions on this website.

If you have questions, please email us.

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This website contains general information only on investment matters and nothing in this website is intended to constitute or form part of any offer or inducement to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Information in this website is not directed at you if we are prohibited by any law of any jurisdiction from making the information on this site available to you and is not intended for any use that would be contrary to local law or regulation. Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be available in all jurisdictions. Accordingly, persons are required to inform themselves of and observe any such restrictions.

The information in this website is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE or elsewhere in the Middle East.

The information in the following website should not be construed as investment advice or a recommendation for the purchase or sale of any security. The value of investments and the income from them may fall as well as rise. Principal Investor Management (DIFC) Limited and the other member firms of Principal (collectively, the “Firms”) do not guarantee any investment results and there can be no assurance that the strategies employed will improve investment performance, and make no guarantee that a client’s investment objectives will be achieved and no warranties or representations, expressed or implied, are made by the Firms concerning the benefits of these strategies discussed herein. The information in this website has been developed internally and/or obtained from sources that the Firms believe to be reliable; however, the Firms do not guarantee the accuracy, adequacy or completeness of such information and are not responsible for any errors or omissions. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

This website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information it contains does not take account of any investor’s investment objectives, particular needs or financial situation. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision. You should consider whether an investment fits your investment objectives, particular needs and financial situation before making any investment decision.

Nothing in this website should be construed as investment, tax, legal or other advice.

The content of this website has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority.

Access to this website is only permitted for “Professional Clients” as defined in the Conduct of Business of the Dubai Financial Services Authority’s Rulebook. If you are not a “Professional Client”, you may not access this website and you should select the “Decline” link below.

By selecting the “Accept” button below, and entering this website, you agree to these terms and confirm and represent that you are a “Professional Client”.