Wednesday, August 18, 2010

Data Center Markets Can't Be Measured Like Office Markets

As real estate firms develop data center practices, one of the trends I'm noticing is that they like to break down vacancies and space by metro markets, as if data centers were office buildings. Most of the people developing these studies have a background in commercial real estate, not data centers or technology, so this perspective is not surprising. But it's still wrong.

The reason you can't look at data centers like office buildings is because the key considerations for data center locations are access to power and bandwidth, while the key considerations for office buildings are access to highways or transit. And there is transportation infrastructure in every city, but there are huge variances in power and bandwidth among cities, especially those places with major peering exchanges.

Power and bandwidth access create their own demand to a much greater extent than roads and rails do. The Google, Microsoft, Yahoo data centers in the Pacific Northwest are there for the access to hydro and wind power. No one said The Dalles, Oregon was an "underserved" market before Google moved in, but this is the approach commercial real estate firms take - to treat everything like a simple supply/demand equation, and failing to adjust for the fact that the primary tenants of data centers are computers, not people.

Bandwidth access is another huge factor that gets overlooked with the underserved/at capacity mentality these old school commercial real estate people bring with them. Northern Virginia is a data center hub because of MAE East, and that exchange's peering legacy. As a result, you have to be here if you're a co-lo provider and want to provide access to multiple IP transit, peering, and fiber providers. But you don't need to be here if you're offering managed services. These important distinctions get lost when everything is treated like some sort of real estate blur.

Additionally, bandwidth creates another issue - a market's rarely "underserved", because many data centers are distant to the corporate owners paying to use them. To suggest, as Grubb and Ellis does, that Minneapolis is "underserved" makes as much sense as saying agribusiness companies are underserved in the office market. They're both nonsensical statements. Moreover, many large companies want geographic redundancy with their data centers, even if most of their employees are in one location. Data gets backed up and replicated to multiple places, but companies don't usually keep an extra accounting group in Miami just in case there's a snowstorm in Minnesota and their workers can't get into the office.

The absurd approaches commercial real estate firms use to assess data centers are just outdated methods they've carried over from the office market. Few people in industry take these numbers seriously, and investors shouldn't either.

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