Investing.com -- The sell-off in REIT stocks amid concerns over Chinese ChatGPT rival DeepSeek may be an overreaction, Mizuho (NYSE: MFG ) analysts said, urging investors to buy “any weakness.”

DeepSeek, a China-based AI startup, recently released an open-source AI model, DeepSeek-R1, which has sparked concerns about the potential impact on data center demands and the future of large-scale AI investments.

These worries spilled into the equity markets, with REIT and other AI-related stocks seeing a major sell-off. For instance, shares in Digital Realty Trust Inc (NYSE: DLR ) fell more than 3% in premarket trading Monday, while Equinix Inc (NASDAQ: EQIX ) lost 1.7%.

“There may be a knee-jerk negative reaction (more so on DLR) to the news given fears of a likely rethink of big AI capex spend,” Mizuho analysts led by Vikram Malhotra said in a note.

“We would be buyers of any weakness, a lot of claims need to be verified, and we note a) most REIT development pipelines highly pre-leased, and b) we see robust double-digit pricing power in FY25 - key to multiple sustainability,” they added.

DeepSeek's announcement on January 20 that it had developed DeepSeek-R1 in just two months with less than $6 million has raised questions about the necessity of the massive spending by hyperscalers on AI technology. For context, OpenAI reportedly spends over $5 billion annually.

DeepSeek's approach, which utilized 10,000 NVIDIA (NASDAQ: NVDA ) chips, compares with the much larger purchases made by hyperscalers.

In turn, investors are questioning the implications for data centers, including the need for extensive spending on new large language models (LLMs), the distance to targeted simple language models (SLMs) and use cases that drive monetization, the risk of pipeline obsolescence, and the impact on near-term pricing power for REITs.

According to Mizuho, investors raised concerns about the demand and supply trajectory for data centers over the next three to five years, despite solid two-year projections based on channel checks that indicate most private REITs have well-leased development pipelines.

Furthermore, there is uncertainty regarding the power equation, as it's unclear how to distribute ample generation capacity to where it's needed.

“The biggest push-back was questioning the gains AI is making — newer iterations of ChatGPT not that incremental and a few clients saying “analytics has been there” forever, so monetization relative to spend is far away,” analysts added.

Their initial view is that it's difficult to predict whether DeepSeek's method will lead to significant advancements in LLMs or how US competitors will adjust their budgets in response.

If DeepSeek's claims hold, it could prompt a reevaluation of large AI capital expenditures, negatively affecting data center REITs with wholesale development centers and stocks with high growth premiums.

However, Mizuho also points out that most REIT development pipelines are significantly pre-leased, with about 60-75% for REITs and 50% for the overall US development pipeline.

“REITs have locked in contracts with Hyperscalers, good credit and termination rights,” the firm said.

With low single-digit vacancy rates, analysts project double-digit pricing power in fiscal 2025 year, crucial for sustaining multiples.