Tuesday, October 12, 2010

Digital Realty Sees "Favorable Pricing in Key Markets"

By David Gross

Last week's Equinix (EQIX) panic selling has renewed fears among many investors that wholesale data center space and co-location cabinet pricing are about to drop.   However, Digital Realty (DLR) put out a statement to the contrary yesterday, with CEO Michael Foust commenting that "we continued to see very favorable pricing in all of our key markets", with regards to 3rd quarter leasing activity.

The strong pricing environment was evident in the company's disclosure on lease rates, where it mentioned that new leases signed for its Turn-Key space had an average initial lease rate of $198 per square foot, nearly 40% higher than leases signed in previous quarters but commenced in the first three quarters of this year, which had an average rate of $143 per foot.   Existing Turn-Key customers include Facebook and Morgan Stanley.   Virtually all new leases signed in the quarter were for Turn-Key space.

Its Powered Base Building service, whose customers include co-location providers like Equinix (EQIX),  Savvis (SVVS), and AT&T (T), did not sign any new tenants in the 3rd quarter, but for the year average pricing on newly signed leases has been $54 per foot, well ahead of the $32 per foot for leases placed in service over the same time period.    Moreover, most DLR leases contain escalation clauses for future rent increases.

While Equinix only leases four of its buildings from DLR, including the DC3 facility in its massive, 625,000 square foot Ashburn, VA cluster, the rate increases for Powered Base Building suggest investors should be worried less about whether Equinix can raise prices, but whether rent increases would make it unattractive to lease additional space if it wanted to hold onto its capital.

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