by David Gross
CoreSite declared a dividend of 13 cents this week, giving the company an annualized yield just under 4% based on today's closing price of $13.60. The stock has risen nearly ten percent since yesterday morning when the dividend was announced. Nonetheless, it remains below the $16 level at which it IPO'd a couple months ago.
Overall, the last few weeks have been rough for data center REITs. In addition to CoreSite struggling to get back to its IPO price, Digital Realty is down over 4% over the last month, and DuPont Fabros is down over 7%. DLR's yield is up to 4.33% as a result of its weak performance during autumn. It began the season over $61, and is down to $48.94 as we head into winter.
Showing posts with label Data Center REITs. Show all posts
Showing posts with label Data Center REITs. Show all posts
Tuesday, December 21, 2010
Wednesday, December 1, 2010
Jefferies Initiates Coverage of Digital Realty with a $67 Price Target
By David Gross
Wall Street loves vague, MBA-speak, and Jefferies continued that tradition yesterday initiating coverage on DLR with a price target of $67, or about 30% higher than the stock's current level in the low 50s.
In its research note, Jefferies stated that "DLR's dominant market position in the wholesale data center space gives it a major competitive advantage vs peers in regards to taking full advantage of strong fundamentals in the datacenter real estate market, which is poised to continue to experience positive demand/supply fundamentals for the next five years."
So here's the edge they have - they've figured out that DLR has high market share. Amazing insight. Moreover, they've determined that demand/supply conditions will be strong for the next five years. No wait they didn't say that, they said it would be "positive". Either way, I doubt that they have driven out this way in Northern Virginia, where there are cranes all over the place preparing for a new wave of data center clients.
Wall Street loves vague, MBA-speak, and Jefferies continued that tradition yesterday initiating coverage on DLR with a price target of $67, or about 30% higher than the stock's current level in the low 50s.
In its research note, Jefferies stated that "DLR's dominant market position in the wholesale data center space gives it a major competitive advantage vs peers in regards to taking full advantage of strong fundamentals in the datacenter real estate market, which is poised to continue to experience positive demand/supply fundamentals for the next five years."
So here's the edge they have - they've figured out that DLR has high market share. Amazing insight. Moreover, they've determined that demand/supply conditions will be strong for the next five years. No wait they didn't say that, they said it would be "positive". Either way, I doubt that they have driven out this way in Northern Virginia, where there are cranes all over the place preparing for a new wave of data center clients.
Monday, November 15, 2010
Akamai Leasing Another 16,000 Square Feet from CoreSite
By David Gross
While the Netflix-Akamai/Level 3 story is getting more air time now than "Panama" did in 1984, other events are still happening in the data center industry regarding CDNs, including news that Akamai has leased another 16,061 square feet from CoreSite, according to the data center provider's most recent SEC filing.
In its quarterly newsletter, CoreSite mentioned that Akamai was now peering at 40 Gbps on the provider's Any2 IP exchange, a hint that more space could have been on the way. With the additional capacity, Akamai will be leasing over 29,000 square feet from CoreSite, making the CDN supplier CoreSite's 4th largest customer by annualized rent. Facebook is still #1, and the I.R.S. is #2, with the tax collectors taking over 120,000 square feet of office space at the 55 South Market building in San Jose, where the successor to the MAE West exchange is located.
Either way, Akamai's growing presence is a major win for CoreSite against Equinix, which as I mentioned in the CoreSite earnings preview is struggling in LA against CoreSite's One Wilshire leasehold and 256,000 square foot 900 North Alameda building, which along with its New York City property, are making it a leading choice for media companies, including NBC Universal.
Even though Akamai's annualized rent will now top $3 million at CoreSite, it will still trail the I.R.S in how much revenue it produces for the REIT. And no matter how much rent the tax collectors pay to CoreSite, it's nowhere near as exciting as talking about Netflix and Level 3 as frequently as Z-100 played "Panama" in 1984.
While the Netflix-Akamai/Level 3 story is getting more air time now than "Panama" did in 1984, other events are still happening in the data center industry regarding CDNs, including news that Akamai has leased another 16,061 square feet from CoreSite, according to the data center provider's most recent SEC filing.
In its quarterly newsletter, CoreSite mentioned that Akamai was now peering at 40 Gbps on the provider's Any2 IP exchange, a hint that more space could have been on the way. With the additional capacity, Akamai will be leasing over 29,000 square feet from CoreSite, making the CDN supplier CoreSite's 4th largest customer by annualized rent. Facebook is still #1, and the I.R.S. is #2, with the tax collectors taking over 120,000 square feet of office space at the 55 South Market building in San Jose, where the successor to the MAE West exchange is located.
Either way, Akamai's growing presence is a major win for CoreSite against Equinix, which as I mentioned in the CoreSite earnings preview is struggling in LA against CoreSite's One Wilshire leasehold and 256,000 square foot 900 North Alameda building, which along with its New York City property, are making it a leading choice for media companies, including NBC Universal.
Even though Akamai's annualized rent will now top $3 million at CoreSite, it will still trail the I.R.S in how much revenue it produces for the REIT. And no matter how much rent the tax collectors pay to CoreSite, it's nowhere near as exciting as talking about Netflix and Level 3 as frequently as Z-100 played "Panama" in 1984.
Friday, November 12, 2010
CoreSite Earnings Preview
By David Gross
CoreSite has its first earnings call as a public company today, a few things to look out for:
CoreSite has its first earnings call as a public company today, a few things to look out for:
- Employee Productivity - While incorporated as a REIT, CoreSite did an un-REIT like $600k per employee in 2009, which is about what Equinix did, and about 75% lower than Digital Realty and DuPont Fabros. Part of this is because of size, and also because the company needs more ops staffing to accommodate its Any2 exchanges, including hiring for an Ops Support Center. At this point, investors cannot realistically apply REIT-like metrics such as NOI and cap rates to CoreSite like they can to DLR and DFT, because CoreSite has been structured like a REIT that's operating as an interconnection company.
- Media Clients and Los Angeles- The company's customers include NBC Universal and Akamai, and in addition to its leasehold at One Wilshire, it has over a quarter million square feet at 900 North Alameda Street, making Los Angeles its largest market, with over 40% of its space. CoreSite is giving Equinix major problems in LA, especially with Equinix building away from the downtown carrier hotels, and trying to get everyone to come out to its centers next to LAX.
- Performance of the non-Data Center Assets - About a third of the company's portfolio is office and light industrial space. Much of this comes from the over 200,000 square feet of office space in the MAE West building it owns at 55 South Market in San Jose, which is a 15 story property whose largest tenant is the I.R.S..
Friday, November 5, 2010
Digital Realty Corrects Information from Earnings Call
By David Gross
Digital Realty filed an 8-K today to correct information it gave in the Q&A during this week's earnings call. In the filing, the company stated that:
Digital Realty filed an 8-K today to correct information it gave in the Q&A during this week's earnings call. In the filing, the company stated that:
"On November 4, 2010, during the Company’s regularly scheduled earnings conference call, management incorrectly stated in response to an inquiry from an analyst that EBITDA growth in the fourth quarter of 2010 would generate $65 million of additional debt capacity under the company’s internal debt guidelines discussed earlier in the conference call. Because this incorrect figure could cause investor confusion, the Company wishes to clarify that the correct amount of additional debt capacity the Company expects from fourth quarter EBITDA growth under its internal guidelines is $260 million at the midpoint of the Company’s expected EBITDA performance range."
Thursday, November 4, 2010
DuPont Fabros Revenue Up 16%- UPDATED
By David Gross
DuPont Fabros reported quarterly revenue yesterday of $60.3 million, up 16% y/y, with FFO per share rising from 29 cents to 37 cents.
Property operating costs rose just 2% in spite of the revenue gain, allowing net income to grow from $5.5 million to $15.3 million. Additionally, the company's NOI, or Net Operating Income, margin is now 63%, close to the 65-70% range that is typical for other apartment, office, and data center REITs. A year ago, it was just 52%.
Leasing activity at its primary Ashburn, VA campus continues to be much stronger than at its expansion site in Piscataway, NJ, with ACC5 Phase 2 now 75% leased, while NJ1 is just 22% leased. Both buildings were placed into service this week. The company's Ashburn tenant roster includes brand name websites like Yahoo, Rackspace, Facebook, and Match.com, while the financial services sector which dominates Northern New Jersey is new for the firm, and is already crowding into facilities owned by Equinix and Digital Realty in Weehawken, Secaucus, and Piscataway.
The stock is down 4% today, possibly because the company reduced its annual FFO guidance midpoint slightly, from $1.35 to $1.32, due to a one-time write off of unamortized interest charges on its ACC4 loan, which it paid off early.
The earnings release came out last night, but the call is today, dial-in information is available here.
DuPont Fabros reported quarterly revenue yesterday of $60.3 million, up 16% y/y, with FFO per share rising from 29 cents to 37 cents.
Property operating costs rose just 2% in spite of the revenue gain, allowing net income to grow from $5.5 million to $15.3 million. Additionally, the company's NOI, or Net Operating Income, margin is now 63%, close to the 65-70% range that is typical for other apartment, office, and data center REITs. A year ago, it was just 52%.
 |
| DFT's ACC6 Building Under Construction Nov 2010 |
The stock is down 4% today, possibly because the company reduced its annual FFO guidance midpoint slightly, from $1.35 to $1.32, due to a one-time write off of unamortized interest charges on its ACC4 loan, which it paid off early.
The earnings release came out last night, but the call is today, dial-in information is available here.
Thursday, October 28, 2010
Dallas Data Centers
By David Gross
About to host its first World Series, the Dallas/Ft. Worth Metroplex is growing by nearly 150,000 people a year, and is now the largest metro area between Chicago and California. It also represents one of the most interesting data center markets in the U.S.. Its tenant mix reflects its deep legacy in telecommunications, with the million square foot+ Infomart building at 1950 North Stemmons representing the city's equivalent to 111 8th Avenue or 350 East Cermak, and just about every telecom provider serving a business co-locating, cross-connecting, or exchanging traffic there. Beyond telecommunications, there are two defining traits of the Dallas market: hosting companies and an outsized presence by Digital Realty.
Dallas' strength with hosting providers is tied to the GI Partners/Digital Realty dominance of the market, as well as a lucky (or smart) situation Rackspace walked into six years ago. While I have focused here on data centers where there is a well-known publicly traded company owning or leasing space, which means my list is not entirely comprehensive, Dallas is very different that other large data center markets in that DuPont Fabros, Coresite, and Equinix have a very limited presence in the DFW area. While Equinix is expanding here, it currently leases space from Digital Realty, which outside of the large Infomart carrier hotel, essentially owns the market.
Digital Realty owns over 2 million square feet of space in the DFW Metroplex, including nearly a million that it is developing in the telecom corridor in Richardson. While GI Partners no longer owns Digital Realty, it does own SoftLayer, which it merged with The Planet, and got into a lease at 4849 Alpha Road, just to the west of Digital Realty's Richardson cluster. GI Partners portfolio company Telx (which is still in registration), also leases space from Digital Realty at 2323 Bryan Street downtown, which additionally hosts an Equinix facility.
Dallas does not have the financial traders that New York and Chicago do, it does not have media and content providers that LA does, and it does not have the Facebook, Amazon, Google, or Microsoft centers Silicon Valley and Northern Virginia do. But in addition to being one of the largest mid-continent connection points for telecom providers, it is a hub for web hosters, including Rackspace.
Through Qwest, Rackspace is subleasing 144,000 square feet at 801 Industrial Boulevard near DFW airport, representing about 80% of its entire data center footprint. Rackspace sublet the space in 2004, when Qwest was pulling back from its late 90s/early 2000s expansion, and is paying just $11.25 per square foot triple net, and that's with the price escalators kicking in from the original sublease agreement. This deal runs through August 31, 2015, at which point Rackspace will likely be paying at least double, if not quite a bit more, for new space. The balance of Rackspace's facilities are in DuPont Fabros' Elk Grove Village, IL and Ashburn, VA buildings.
View Dallas Data Centers in a larger map
The Rackspace lease expiration will be interesting to watch, particularly because it is not part of the GI Partners investment family, like Digital Realty, Telx, and SoftLayer are.
Beyond Rackspace and SoftLayer, Dallas tenants include Horizon Data Centers, Perot Systems, TD Ameritrade, and the FAA, which leases a building in Fort Worth from Digital Realty, in addition to leasing another DLR property in Northern Virginia. But with a less established base in one industry than places like Northern Virginia or Silicon Valley have, Dallas is still defining itself as a data center market, and could change dramatically as it continues to grow.
About to host its first World Series, the Dallas/Ft. Worth Metroplex is growing by nearly 150,000 people a year, and is now the largest metro area between Chicago and California. It also represents one of the most interesting data center markets in the U.S.. Its tenant mix reflects its deep legacy in telecommunications, with the million square foot+ Infomart building at 1950 North Stemmons representing the city's equivalent to 111 8th Avenue or 350 East Cermak, and just about every telecom provider serving a business co-locating, cross-connecting, or exchanging traffic there. Beyond telecommunications, there are two defining traits of the Dallas market: hosting companies and an outsized presence by Digital Realty.
Dallas' strength with hosting providers is tied to the GI Partners/Digital Realty dominance of the market, as well as a lucky (or smart) situation Rackspace walked into six years ago. While I have focused here on data centers where there is a well-known publicly traded company owning or leasing space, which means my list is not entirely comprehensive, Dallas is very different that other large data center markets in that DuPont Fabros, Coresite, and Equinix have a very limited presence in the DFW area. While Equinix is expanding here, it currently leases space from Digital Realty, which outside of the large Infomart carrier hotel, essentially owns the market.
Digital Realty owns over 2 million square feet of space in the DFW Metroplex, including nearly a million that it is developing in the telecom corridor in Richardson. While GI Partners no longer owns Digital Realty, it does own SoftLayer, which it merged with The Planet, and got into a lease at 4849 Alpha Road, just to the west of Digital Realty's Richardson cluster. GI Partners portfolio company Telx (which is still in registration), also leases space from Digital Realty at 2323 Bryan Street downtown, which additionally hosts an Equinix facility.
Dallas does not have the financial traders that New York and Chicago do, it does not have media and content providers that LA does, and it does not have the Facebook, Amazon, Google, or Microsoft centers Silicon Valley and Northern Virginia do. But in addition to being one of the largest mid-continent connection points for telecom providers, it is a hub for web hosters, including Rackspace.
Through Qwest, Rackspace is subleasing 144,000 square feet at 801 Industrial Boulevard near DFW airport, representing about 80% of its entire data center footprint. Rackspace sublet the space in 2004, when Qwest was pulling back from its late 90s/early 2000s expansion, and is paying just $11.25 per square foot triple net, and that's with the price escalators kicking in from the original sublease agreement. This deal runs through August 31, 2015, at which point Rackspace will likely be paying at least double, if not quite a bit more, for new space. The balance of Rackspace's facilities are in DuPont Fabros' Elk Grove Village, IL and Ashburn, VA buildings.
View Dallas Data Centers in a larger map
The Rackspace lease expiration will be interesting to watch, particularly because it is not part of the GI Partners investment family, like Digital Realty, Telx, and SoftLayer are.
Beyond Rackspace and SoftLayer, Dallas tenants include Horizon Data Centers, Perot Systems, TD Ameritrade, and the FAA, which leases a building in Fort Worth from Digital Realty, in addition to leasing another DLR property in Northern Virginia. But with a less established base in one industry than places like Northern Virginia or Silicon Valley have, Dallas is still defining itself as a data center market, and could change dramatically as it continues to grow.
| Dallas Data Centers – Major Public Companies Owning/Leasing | ||||
| Address | Sq Ft | Owner | Tenants | |
| 1950 N Stemmons Freeway | Dallas | 1,500,000 | DCI Tech/Infomart | the Dallas version of 111 8th Ave or 350 E. Cermak |
| 8435 N Stemmons Freeway | Dallas | 21,000 | Office Building | Telx Leases a Floor for Co-lo |
| 2323 Bryan Street | Dallas | 457,000 | Digital Realty | Telx, Equinix (DA4) |
| 2440 Marsh Lane | Carrollton | 135,000 | Digital Realty | TD Ameritrade |
| 11830 Webb Chapel Road | Farmers Branch | 365,000 | Digital Realty | Perot Systems |
| 14901 FAA Boulevard | Fort Worth | 263,000 | Digital Realty | FAA |
| 904 Quality Way | Richardson | 47,000 | Digital Realty | Under Development |
| 905 Security Row | Richardson | 250,000 | Digital Realty | Under Development |
| 1232 Alma Road | Richardson | 106,000 | Digital Realty | Terremark |
| 900 Quality Way | Richardson | 112,000 | Digital Realty | Under Development |
| 1400 North Bowser Road | Richardson | 247,000 | Digital Realty | Under Development |
| 1301 International Parkway | Richardson | 20,000 | Digital Realty | Under Development |
| 4849 Alpha Road | Farmers Branch | 60,000 | Digital Realty | SoftLayer (also HQ office) |
| 400 South Akard Street | Dallas | 36,000 | Fed Reserve | Downtown Carrier Hotel |
| 4025 Midway Road | Farmers Branch | 88,000 | Digital Realty | Horizon |
| 3180 Irving Blvd | Dallas | 58,000 | Level 3 | Terremark |
| 801 Industrial Boulevard | Grapevine | 144,000 | ING Clarion | Rackspace Primary U.S. Data Center – Sublease from Qwest |
| 3,909,000 | ||||
| DataCenterStocks.com |
Monday, October 18, 2010
Northern Virginia vs. Northern New Jersey Data Centers
By David Gross
I recently wrote about how Ashburn, VA has become the hub of east coast data centers, and is carrying on Northern Virginia's, and particularly the Dulles Corridor's, legacy as a center for telecommunications providers. That said, with Equinix (EQIX), Telx, Digital Realty (DLR), and now DuPont Fabros (DFT) all operating facilities in Northern New Jersey, you could argue the east coast data center hub is really near Giants Stadium, not Dulles Airport. However, the tenant mix shows that New Jersey is unquestionably the financial hub, while Northern Virginia is the hub for everyone else.
Equinix's flagship NY4, located in Secaucus, is a 300,000+ square foot facility dominiated by financial tenants, including Tudor Investment Corporation, TheStreet.com, JP Morgan Chase, Direct Edge, Citadel Investment Group, ACTIV Financial, and Hardcastle Trading. Compare that to its DC2 facility in Ashburn, whose tenants include The Motley Fool, Accenture, The College Board and Electronic Arts. But the firm really impacted by the difference between New Jersey and Virginia is DuPont Fabros (DFT), which is based in DC and built five of its first seven properties in Northern Virginia, and is now expanding into New Jersey where the news on leasing activity has been fairly quiet.
DuPont Fabros has an impressive tenant roster in Ashburn, including Yahoo (YHOO), Facebook, and Rackspace (RAX). Northern Virginia's data center presence with major websites is strengthened further by one of the DLR facilities on Devin Shafron Drive, which serves as the east coast hub for Amazon's (AMZN) EC2 service. When you order that service, the DLR building is the "Virginia location" Amazon allows you to select on its web-based entry form.
Digital Realty has had success in New Jersey by building on its base of wholesale customers like Telx in Weehawken and Savvis (SVVS) in Piscataway, which in turn sell to financial traders. But DFT has historically relied on leading websites, not financial service providers or co-lo providers. Rackspace has its 2nd largest facility in DFT's Elk Grove Village center near O'Hare Airport, and its east coast hub at DFT's ACC4 in Ashburn. However, Rackspace does not sell to low latency financial traders, and its managed hosting service is designed to be geographically independent of its customer's physical locations, which means it has no need to expand to Northern New Jersey.
It will be interesting to see how DFT does in New Jersey, far more so than in its new building in Santa Clara, because Silicon Valley data centers look like mirrors of Northern Virginia's. And when it comes to tenant mix, market characteristics, and customer requirements, New Jersey and Northern Virginia have little in common. One is the unquestionable east coast hub for financial traffic, the other the east coast hub for web traffic.
I recently wrote about how Ashburn, VA has become the hub of east coast data centers, and is carrying on Northern Virginia's, and particularly the Dulles Corridor's, legacy as a center for telecommunications providers. That said, with Equinix (EQIX), Telx, Digital Realty (DLR), and now DuPont Fabros (DFT) all operating facilities in Northern New Jersey, you could argue the east coast data center hub is really near Giants Stadium, not Dulles Airport. However, the tenant mix shows that New Jersey is unquestionably the financial hub, while Northern Virginia is the hub for everyone else.
Equinix's flagship NY4, located in Secaucus, is a 300,000+ square foot facility dominiated by financial tenants, including Tudor Investment Corporation, TheStreet.com, JP Morgan Chase, Direct Edge, Citadel Investment Group, ACTIV Financial, and Hardcastle Trading. Compare that to its DC2 facility in Ashburn, whose tenants include The Motley Fool, Accenture, The College Board and Electronic Arts. But the firm really impacted by the difference between New Jersey and Virginia is DuPont Fabros (DFT), which is based in DC and built five of its first seven properties in Northern Virginia, and is now expanding into New Jersey where the news on leasing activity has been fairly quiet.
DuPont Fabros has an impressive tenant roster in Ashburn, including Yahoo (YHOO), Facebook, and Rackspace (RAX). Northern Virginia's data center presence with major websites is strengthened further by one of the DLR facilities on Devin Shafron Drive, which serves as the east coast hub for Amazon's (AMZN) EC2 service. When you order that service, the DLR building is the "Virginia location" Amazon allows you to select on its web-based entry form.
Digital Realty has had success in New Jersey by building on its base of wholesale customers like Telx in Weehawken and Savvis (SVVS) in Piscataway, which in turn sell to financial traders. But DFT has historically relied on leading websites, not financial service providers or co-lo providers. Rackspace has its 2nd largest facility in DFT's Elk Grove Village center near O'Hare Airport, and its east coast hub at DFT's ACC4 in Ashburn. However, Rackspace does not sell to low latency financial traders, and its managed hosting service is designed to be geographically independent of its customer's physical locations, which means it has no need to expand to Northern New Jersey.
It will be interesting to see how DFT does in New Jersey, far more so than in its new building in Santa Clara, because Silicon Valley data centers look like mirrors of Northern Virginia's. And when it comes to tenant mix, market characteristics, and customer requirements, New Jersey and Northern Virginia have little in common. One is the unquestionable east coast hub for financial traffic, the other the east coast hub for web traffic.
Data Center Construction Costs are Likely to Rise
By David Gross
I've been looking at data center capital costs, and it seems like there's only one direction they can go: up. Here's why:
1. Cap Labor Costs Increasing Faster than Inflation
Operating labor costs are not much of a factor in data centers. Microsoft's (MSFT) creating 25 permanent jobs on a $100 million capital outlay in West Des Moines, Facebook's creating 35 on a $188 million outlay in Prineville, Oregon. Most automated factories produce about one recurring job per $600,000-$800,000 of capital investment, so the one per $4 million - $6 million we see in the data center industry gives you hints as to why there's a jobless recovery. But where's that all capital going?
On their last earnings call DuPont Fabros (DFT) claimed that 50% of construction cost is labor. This is a company that did $200 million of revenue last year with just 70 full-time operating employees. And Facebook might need just 35 to run Prineville, but over 600 have worked on constructing the place, including 225 at any time, according to this article at OregonLive.com. Another glaring example of the gap between construction employment and recurring jobs is the new NSA facility in Utah, which will create up to 4,000 construction jobs, but just 200 permanent jobs at a 1.2 million square foot facility. A lively work site will likely become an eery chamber of HVAC sounds once it goes into operation.
Construction personnel per square foot varies, but a typical co-lo or do-it-yourself facility goes up with about one construction worker per about 800 feet, same as it was about ten years ago based on data I'm still going through. If this in fact turns out to be conclusive, it's an issue because cap labor costs have been rising about 5-7%, per year, which has been very noticeable in taxpayer-funded road and transit projects, in addition to the rising capital cost per Megawatt of new power plants, a good portion of which comes from rising health care and benefit costs. This means that the 50% for labor DFT cited last quarter could very well rise over the next few years.
2. Power Costs are Increasing
Like cap labor costs, power is not getting any cheaper, whether buying diesel generators for backup, or paying by the kWh from the utility, whose own costs are going up. Solar prices are an exception, and i/o Data Centers has taken advantage that by installing photovoltaics on the roof of their Phoenix facility. But the capital costs of power equipment show no signs of decreasing.
3. Server Costs Per Square Foot are Increasing
Outfitting a data center with servers is getting more expensive on a per square foot basis, even though the price/performance is improving. Rackspace (RAX), for example, has been spending about $5,300 per in-service server, including a loading factor for network equipment and firewalls. But it now has .36 servers per foot, compared to .29 servers three years ago, so its per foot capital cost for customer equipment has risen from around $1,530 to over $1,900, or about 7% per year.
4. Interest Rates are Likely to Rise
I've heard the claim that the credit crunch made it virtually impossible to finance a data center over the last two years. However, not only is this false, as Digital Realty (DLR), DuPont Fabros, Coresite (COR), i/o Data Centers, Equinix (EQIX), and others have kept expanding, this new construction has been financed at much lower interest rates than often seen when there's plenty of credit.
Equinix, for example, was borrowing at 13% during the dot com boom in 2000. March 2000 was one of the easiest times to raise money for a technology company, but during that month Colo.com had to borrow at nearly 14%. Meanwhile, in the depths of the recession in June 2009, Equinix issued $250 million of notes at 4.75%.
While construction costs are not likely to shoot up dramatically, there are very clear trends that will likely push them up over the next few years at a rate faster than inflation, and could be amplified if an economic recovery increases capital labor costs and interest rates. The time to build is now.
I've been looking at data center capital costs, and it seems like there's only one direction they can go: up. Here's why:
1. Cap Labor Costs Increasing Faster than Inflation
Operating labor costs are not much of a factor in data centers. Microsoft's (MSFT) creating 25 permanent jobs on a $100 million capital outlay in West Des Moines, Facebook's creating 35 on a $188 million outlay in Prineville, Oregon. Most automated factories produce about one recurring job per $600,000-$800,000 of capital investment, so the one per $4 million - $6 million we see in the data center industry gives you hints as to why there's a jobless recovery. But where's that all capital going?
On their last earnings call DuPont Fabros (DFT) claimed that 50% of construction cost is labor. This is a company that did $200 million of revenue last year with just 70 full-time operating employees. And Facebook might need just 35 to run Prineville, but over 600 have worked on constructing the place, including 225 at any time, according to this article at OregonLive.com. Another glaring example of the gap between construction employment and recurring jobs is the new NSA facility in Utah, which will create up to 4,000 construction jobs, but just 200 permanent jobs at a 1.2 million square foot facility. A lively work site will likely become an eery chamber of HVAC sounds once it goes into operation.
Construction personnel per square foot varies, but a typical co-lo or do-it-yourself facility goes up with about one construction worker per about 800 feet, same as it was about ten years ago based on data I'm still going through. If this in fact turns out to be conclusive, it's an issue because cap labor costs have been rising about 5-7%, per year, which has been very noticeable in taxpayer-funded road and transit projects, in addition to the rising capital cost per Megawatt of new power plants, a good portion of which comes from rising health care and benefit costs. This means that the 50% for labor DFT cited last quarter could very well rise over the next few years.
2. Power Costs are Increasing
Like cap labor costs, power is not getting any cheaper, whether buying diesel generators for backup, or paying by the kWh from the utility, whose own costs are going up. Solar prices are an exception, and i/o Data Centers has taken advantage that by installing photovoltaics on the roof of their Phoenix facility. But the capital costs of power equipment show no signs of decreasing.
3. Server Costs Per Square Foot are Increasing
Outfitting a data center with servers is getting more expensive on a per square foot basis, even though the price/performance is improving. Rackspace (RAX), for example, has been spending about $5,300 per in-service server, including a loading factor for network equipment and firewalls. But it now has .36 servers per foot, compared to .29 servers three years ago, so its per foot capital cost for customer equipment has risen from around $1,530 to over $1,900, or about 7% per year.
4. Interest Rates are Likely to Rise
I've heard the claim that the credit crunch made it virtually impossible to finance a data center over the last two years. However, not only is this false, as Digital Realty (DLR), DuPont Fabros, Coresite (COR), i/o Data Centers, Equinix (EQIX), and others have kept expanding, this new construction has been financed at much lower interest rates than often seen when there's plenty of credit.
Equinix, for example, was borrowing at 13% during the dot com boom in 2000. March 2000 was one of the easiest times to raise money for a technology company, but during that month Colo.com had to borrow at nearly 14%. Meanwhile, in the depths of the recession in June 2009, Equinix issued $250 million of notes at 4.75%.
While construction costs are not likely to shoot up dramatically, there are very clear trends that will likely push them up over the next few years at a rate faster than inflation, and could be amplified if an economic recovery increases capital labor costs and interest rates. The time to build is now.
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.
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.
Monday, October 11, 2010
DuPont Fabros Issuing $169 Million of Preferred Stock, Will Pay Off ACC4 Loan
DuPont Fabros (DFT) is issuing $169 milion of 7.875% Preferred Stock ($25 per share liquidation preference) to pay off the term loan that financed its ACC4 building in Ashburn, Virginia. After this transaction closes, the company's only remaining secured debt will be the term loan on its ACC5 expansion, which has a balance of $150 million. The covenants on the outstanding ACC5 loan are fairly similar to the ACC4 loan, and in addition to requiring DFT to maintain specific balance sheet and cash flow ratios, limit the number of new projects it can develop while the loan remains outstanding. ACC4 is fully leased, and includes well-known tenants like Facebook, Yahoo (YHOO), Rackspace (RAX), and Match.com
Most of DFT's remaining debt is the $550 million of 8.5% of unsecured notes it issued last December, which matures in 2017. Digital Realty (DLR), in contrast, has over $1 billion of mortgages outstanding, which represent about 50% of its total debt outstanding, with over 80% of its unsecured debt maturing in the 2020s.
Most of DFT's remaining debt is the $550 million of 8.5% of unsecured notes it issued last December, which matures in 2017. Digital Realty (DLR), in contrast, has over $1 billion of mortgages outstanding, which represent about 50% of its total debt outstanding, with over 80% of its unsecured debt maturing in the 2020s.
Sunday, October 10, 2010
Ashburn Data Centers
By David Gross
In Northern Virginia, many of our telecom carriers went bankrupt in the early-mid 2000s. The region spent much of the last decade shifting its emphasis from being a leading hub for ISPs and CLECs, back to its more traditional role in government contracting. However, data centers held on due to the unusually large amount of fiber optic capacity and interconnection points that already existed in the region, and centered in on one area - Ashburn - for their large expansions.
Ashburn sits in the middle of rapidly growing Loudoun County, a few miles to the north of Dulles Airport. Anyone who has visited the Equinix (EQIX), Digital Realty (DLR), or DuPont Fabros (DFT) facilities there has seen the planes, including many European flag carriers, flying right over the data center clusters on Beaumeade Circle/Filigree Court and Devin Shafron Drive.
The first major facility to go up in Ashburn was Equinix's DC1 in 1999. When it was built, many thought it was too far out, and that it might have been better off closer to the large MAE East NAP in Tyson's Corner, 15 miles east, which along with MAE West in Silicon Valley passed more Internet traffic than just about any location in the world. And with interconnection the centerpiece of the co-location business, proximity to both fiber and existing peering locations were highly important. But land costs are much lower in Ashburn, as are existing building densities, two factors which have made it conducive to large, 100,000+ square foot facilities, while the smaller data centers have tended to stay to the east in Fairfax County and downtown DC.
Today, there is just over 2 million square feet of public data center space in the Ashburn area, including the Savvis-operated/DLR-owned facilities a couple miles away on Ridgetop Circle and Nokes Boulevard, which have a Sterling address. Those facilities are adjacent to the Dulles Town Center mall, which itself was built in 1999, and are surrounded by shopping centers, and new apartment and townhouse developments. Meanwhile, the Ashburn clusters tend to be slightly more rural, sitting west of Route 28, which runs right into the Dulles Airport entrance, and used to mark the end of civilization for many DC area residents.
The primary hub for data centers in Ashburn is a collection of interconnected roads - Beaumeade Circle, Hastings Drive, Chillum Place, and Filigree Court, which are less than a mile down Loudoun County Parkway from the Washington Redskins training facility. The large former WorldCom/now Verizon Business office complex is another mile down Loudoun County Parkway. And if you continue another half mile down that road, you come to the DLR cluster at Devin Shafron Drive.
On Devin Shafron, there is a small patch of dirt and grass with a Digital Realty "for lease" sign in front, while nearby on Red Rum Drive, office REIT First Potomac Realty (FPO) recently bought the Corporate Campus at Ashburn Center, 123,000 feet of which are leased to managed hosting provider Latisys, which held a grand opening there last Thursday. Among the established properties, Equinix's DC2 has long been the place to be, with a long list of financial, media, and telecom clients including MasterCard, The Motley Fool, Level 3, Internap, Electronic Arts, BT North America, and Accenture. Around the corner from there on Hastings Drive, DC-based DFT has attracted its own set of brand name clients with Rackspace, Facebook, Yahoo, and Match.com.
This tenant mix in Ashburn reflects that this is the leading east coast data center hub, bringing together some of the largest telecom providers and most highly visited websites in the world. In the 2010s, Ashburn is carrying on Northern Virginia's 1990s legacy as the hub of ISPs and internet connectivity.
In Northern Virginia, many of our telecom carriers went bankrupt in the early-mid 2000s. The region spent much of the last decade shifting its emphasis from being a leading hub for ISPs and CLECs, back to its more traditional role in government contracting. However, data centers held on due to the unusually large amount of fiber optic capacity and interconnection points that already existed in the region, and centered in on one area - Ashburn - for their large expansions.
Ashburn sits in the middle of rapidly growing Loudoun County, a few miles to the north of Dulles Airport. Anyone who has visited the Equinix (EQIX), Digital Realty (DLR), or DuPont Fabros (DFT) facilities there has seen the planes, including many European flag carriers, flying right over the data center clusters on Beaumeade Circle/Filigree Court and Devin Shafron Drive.
The first major facility to go up in Ashburn was Equinix's DC1 in 1999. When it was built, many thought it was too far out, and that it might have been better off closer to the large MAE East NAP in Tyson's Corner, 15 miles east, which along with MAE West in Silicon Valley passed more Internet traffic than just about any location in the world. And with interconnection the centerpiece of the co-location business, proximity to both fiber and existing peering locations were highly important. But land costs are much lower in Ashburn, as are existing building densities, two factors which have made it conducive to large, 100,000+ square foot facilities, while the smaller data centers have tended to stay to the east in Fairfax County and downtown DC.
Today, there is just over 2 million square feet of public data center space in the Ashburn area, including the Savvis-operated/DLR-owned facilities a couple miles away on Ridgetop Circle and Nokes Boulevard, which have a Sterling address. Those facilities are adjacent to the Dulles Town Center mall, which itself was built in 1999, and are surrounded by shopping centers, and new apartment and townhouse developments. Meanwhile, the Ashburn clusters tend to be slightly more rural, sitting west of Route 28, which runs right into the Dulles Airport entrance, and used to mark the end of civilization for many DC area residents.
The primary hub for data centers in Ashburn is a collection of interconnected roads - Beaumeade Circle, Hastings Drive, Chillum Place, and Filigree Court, which are less than a mile down Loudoun County Parkway from the Washington Redskins training facility. The large former WorldCom/now Verizon Business office complex is another mile down Loudoun County Parkway. And if you continue another half mile down that road, you come to the DLR cluster at Devin Shafron Drive.
 |
| DLR's new data center at 43915 Devin Shafron Drive |
On Devin Shafron, there is a small patch of dirt and grass with a Digital Realty "for lease" sign in front, while nearby on Red Rum Drive, office REIT First Potomac Realty (FPO) recently bought the Corporate Campus at Ashburn Center, 123,000 feet of which are leased to managed hosting provider Latisys, which held a grand opening there last Thursday. Among the established properties, Equinix's DC2 has long been the place to be, with a long list of financial, media, and telecom clients including MasterCard, The Motley Fool, Level 3, Internap, Electronic Arts, BT North America, and Accenture. Around the corner from there on Hastings Drive, DC-based DFT has attracted its own set of brand name clients with Rackspace, Facebook, Yahoo, and Match.com.
This tenant mix in Ashburn reflects that this is the leading east coast data center hub, bringing together some of the largest telecom providers and most highly visited websites in the world. In the 2010s, Ashburn is carrying on Northern Virginia's 1990s legacy as the hub of ISPs and internet connectivity.
| Ashburn Data Centers | |||
| Rentable Sq Ft | Tenants | ||
| DFT | ACC2 44490 Chillum Place | 53,000 | Yahoo |
| ACC3 Hastings Drive | 80,000 | ||
| ACC4 44480 Hastings Drive | 172,000 | Rackspace, Yahoo, Match.com., Facebook | |
| ACC5 Phase 1 | 86,000 | ||
| ACC5 Phase 2 | 86,000 | ||
| 477,000 | |||
| DLR | 21561/21571 Beaumeade Circle | 164,453 | AT&T |
| 43881 Devin Shafron Drive | 180,000 | FAA | |
| 43791 Devin Shafron Drive | 132,086 | Morgan Stanley | |
| 43831 Devin Shafron Drive | 180,000 | Amazon.com | |
| 43915 Devin Shafron Drive | 132,000 | ||
| 21110 Ridgetop Circle, Sterling | 135,513 | Savvis | |
| 45901/45845 Nokes Boulevard, Sterling | 167,160 | Savvis | |
| 44470 Chillum Place | 95,440 | Equinix (DC3) | |
| 1,186,652 | |||
| EQIX | 44470 Chillum Place | Leased from DLR | DC3 |
| 21715 Filigree Court | 147,600 | DC2 | |
| 21701 Filigree Court | 92,000 | DC5 | |
| 21711 Filigree Court | 43,000 | DC1 | |
| 21721 Filigree Ct. | 148,000 | DC6 | |
| 21691 Filigree Court | 100,000 | DC4 | |
| 530,600 | |||
| First Potomac Realty | |||
| 21635 Red Rum Drive | 123,000 | Latisys | |
| Total | 2,317,252 |
Wednesday, September 29, 2010
Equinix Would Make a Terrible REIT
By David Gross
Citigroup put out a note last week arguing that Equinix (EQIX) should consider becoming a REIT in order to close a gap in its market value relative to Digital Realty (DLR) and DuPont Fabros (DFT). This would be a terrible idea though for the collocation provider. Co-lo and data center REITs remain very separate businesses, with different operating and financial requirements, and in many respects they're growing further apart.
The primary financial difference between providing co-lo space and building space is the number of people a provider has to pay. DLR generates over $2 million dollars in revenue per employee, Equinix just $600,000. DLR, DFT, and COR, like most REITs, need to generate NOI (net operating income) margins of about 65% to justify the high cash flow/high dividend strategy needed for that form of business. While less hands-on than managed services, which often entail a lot of software configuration, co-location is not a real estate business. It requires far more internal experts in areas like database management, network technology, and industry-specific sales support than a typical data center REIT has on staff. The additional staffing needed to do this in the co-lo business eats into operating margins, and makes it financially unsuitable for the REIT structure.
A co-lo provider needs to generate more revenue per dollar invested in fixed assets than a REIT to offset the higher staffing requirements. Equinix has been producing about 40 cents of revenue per dollar invested in PP&E compared to around 20 cents for DLR and DFT. Essentially, co-lo is more labor-intensive, less capital-intensive than the data center REIT business, which makes mixing the two very difficult.
It's easy to look at stock valuations and rush to judgments about quick fixes that could temporarily lift the price. But the trend is for co-location providers to lease space from REITs, as Telx is doing with DLR. Perhaps sometime in the future when it slows down its expansion, Equinix could consider paying some kind of dividend, but bringing its productivity and fixed asset ratios into line for a higher yielding REIT would require destroying existing operations, which would cause a lot more problems for the stock than its current valuation gap.
Citigroup put out a note last week arguing that Equinix (EQIX) should consider becoming a REIT in order to close a gap in its market value relative to Digital Realty (DLR) and DuPont Fabros (DFT). This would be a terrible idea though for the collocation provider. Co-lo and data center REITs remain very separate businesses, with different operating and financial requirements, and in many respects they're growing further apart.
The primary financial difference between providing co-lo space and building space is the number of people a provider has to pay. DLR generates over $2 million dollars in revenue per employee, Equinix just $600,000. DLR, DFT, and COR, like most REITs, need to generate NOI (net operating income) margins of about 65% to justify the high cash flow/high dividend strategy needed for that form of business. While less hands-on than managed services, which often entail a lot of software configuration, co-location is not a real estate business. It requires far more internal experts in areas like database management, network technology, and industry-specific sales support than a typical data center REIT has on staff. The additional staffing needed to do this in the co-lo business eats into operating margins, and makes it financially unsuitable for the REIT structure.
A co-lo provider needs to generate more revenue per dollar invested in fixed assets than a REIT to offset the higher staffing requirements. Equinix has been producing about 40 cents of revenue per dollar invested in PP&E compared to around 20 cents for DLR and DFT. Essentially, co-lo is more labor-intensive, less capital-intensive than the data center REIT business, which makes mixing the two very difficult.
It's easy to look at stock valuations and rush to judgments about quick fixes that could temporarily lift the price. But the trend is for co-location providers to lease space from REITs, as Telx is doing with DLR. Perhaps sometime in the future when it slows down its expansion, Equinix could consider paying some kind of dividend, but bringing its productivity and fixed asset ratios into line for a higher yielding REIT would require destroying existing operations, which would cause a lot more problems for the stock than its current valuation gap.
Saturday, September 25, 2010
Aggregate Market Cap of Data Center Service Providers Tops $30 Billion
By David Gross
In preparation for the launch of our DataCenterStocks.com Services Index, I've calculated the aggregate market cap of 13 data center services providers at $30.23 billion, with REITs, co-lo, managed hosting, and cloud providers accounting for just over half of that at $15.93 billion. Over half of the difference between the two is AKAM's $9.24 billion market value. It also includes LVLT, INAP, and SVVS whom I didn't count among the "pure" providers because they also sell transit and office-to-office bandwidth services.
In preparation for the launch of our DataCenterStocks.com Services Index, I've calculated the aggregate market cap of 13 data center services providers at $30.23 billion, with REITs, co-lo, managed hosting, and cloud providers accounting for just over half of that at $15.93 billion. Over half of the difference between the two is AKAM's $9.24 billion market value. It also includes LVLT, INAP, and SVVS whom I didn't count among the "pure" providers because they also sell transit and office-to-office bandwidth services.
| EQIX | 4.66 |
| DLR | 5.29 |
| DFT | 1.47 |
| RAX | 3.06 |
| SVVS | 1.22 |
| LVLT | 1.61 |
| AKAM | 9.24 |
| NAVI | 0.13 |
| TMRK | 0.70 |
| LLNW | 0.50 |
| ABVT | 1.34 |
| COR | 0.75 |
| INAP | 0.26 |
| 30.23 | |
| EQIX | 4.66 |
| DLR | 5.29 |
| DFT | 1.47 |
| RAX | 3.06 |
| TMRK | 0.70 |
| COR | 0.75 |
| 15.93 |
Thursday, September 23, 2010
CoreSite Nearly Turns Over Its Float In 1st Trading Session
By David Gross
CoreSite (COR) ended the day up a penny from its initial offering price, but with over 15 million shares traded, it nearly turned over its float of 16.9 million shares. The stock got off to a good start, and was up 3% to 16.48 by 1:30 this afternoon, but fell back the last two hours of trading right back to its IPO price.
CoreSite (COR) ended the day up a penny from its initial offering price, but with over 15 million shares traded, it nearly turned over its float of 16.9 million shares. The stock got off to a good start, and was up 3% to 16.48 by 1:30 this afternoon, but fell back the last two hours of trading right back to its IPO price.
CoreSite Up 2%, 3 Million Shares Traded
COR is off to a solid start in its first 45 minutes as a public company. It's up to 16.30 from an open of 16.00. Volume has settled down after 1.5 million shares traded after the opening around 9:48 this morning.
CoreSite Raises $270.4 Million, Prices at Midpoint, IPO's Today
By David Gross
CoreSite (COR) priced at $16, in the middle of its projected $15-$17 range, and begins trading today on NYSE. The offering raised a total of $270.4 million for the data center REIT, which will be the third publicly traded stock in that category, along with DLR and DFT.
We have added CoreSite to the list of stocks tracked in the ticker in the widget in the right column.
CoreSite (COR) priced at $16, in the middle of its projected $15-$17 range, and begins trading today on NYSE. The offering raised a total of $270.4 million for the data center REIT, which will be the third publicly traded stock in that category, along with DLR and DFT.
We have added CoreSite to the list of stocks tracked in the ticker in the widget in the right column.
Sunday, September 19, 2010
CoreSite to Debut This Week
by David Gross
DLR is near its 52 week high, DFT is barely 10% off of its annual peak, and it looks like they will be getting a peer this week, as CoreSite prepares to becomes the 3rd publicly traded data center REIT. Like the other REITs, CoreSite is planning to list on NYSE, and is expected to trade under the ticker "COR".
According to the S-11 CoreSite filed last week, the company is planning to offer 16.9 million shares, and raise approximately $246 million. Like most REITs and co-lo providers, the company's portfolio skews heavily to major markets, with the Boston, NY, SF, DC, and LA metro areas accounting for 98% of its annualized rent. This emphasis on a handful of top regions is one reason why data center geographical markets cannot be treated like office markets, although this is not stopping old school real estate firms from trying to force fit data centers into vacancy models better suited for commercial offices.
Co-location provider Telx, whose S-1 is beginning to show signs of age, has yet to price its shares in preparation for a public offering, though it would be surprising if it remained on the sidelines much longer, particularly with its peer Equinix (EQIX) up 20% since July.
DLR is near its 52 week high, DFT is barely 10% off of its annual peak, and it looks like they will be getting a peer this week, as CoreSite prepares to becomes the 3rd publicly traded data center REIT. Like the other REITs, CoreSite is planning to list on NYSE, and is expected to trade under the ticker "COR".
According to the S-11 CoreSite filed last week, the company is planning to offer 16.9 million shares, and raise approximately $246 million. Like most REITs and co-lo providers, the company's portfolio skews heavily to major markets, with the Boston, NY, SF, DC, and LA metro areas accounting for 98% of its annualized rent. This emphasis on a handful of top regions is one reason why data center geographical markets cannot be treated like office markets, although this is not stopping old school real estate firms from trying to force fit data centers into vacancy models better suited for commercial offices.
Co-location provider Telx, whose S-1 is beginning to show signs of age, has yet to price its shares in preparation for a public offering, though it would be surprising if it remained on the sidelines much longer, particularly with its peer Equinix (EQIX) up 20% since July.
Wednesday, August 25, 2010
Digital Realty Acquires Two Data Centers for $400 Per Square Foot
DLR announced yesterday that it had acquired two facilities fully leased to telecom carriers for $50.3 million. One of the buildings is a 69,700 square foot building in San Jose, the other a 56,000 square foot facility the company refers to as a "primary switch facility" without providing any greater detail.
The $400 per square foot purchase price is just over half of the $789 per square foot the company paid earlier this year for the 919,000 square foot Rockwood Capital portfolio of buildings. The difference likely reflects the lower lease rates paid by telecom providers to house switches and routers compared to what corporations pay for servers, storage, and enterprise networking equipment. This is also represents an economic opportunity for carriers who can conserve the capital that would have otherwise gone into building central offices.
The $400 per square foot purchase price is just over half of the $789 per square foot the company paid earlier this year for the 919,000 square foot Rockwood Capital portfolio of buildings. The difference likely reflects the lower lease rates paid by telecom providers to house switches and routers compared to what corporations pay for servers, storage, and enterprise networking equipment. This is also represents an economic opportunity for carriers who can conserve the capital that would have otherwise gone into building central offices.
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.
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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