Industry Outlook is a regular Data Center Journal Q&A series that presents expert views on market trends, technologies and other issues relevant to data centers and IT.
This week, Industry Outlook asks Jonathan Meisel, Managing Director and Data Center Solutions Market Director for JLL, about the highlights of today’s data center market. As Market Director, Jon has sole oversight of all JLL business activity in the Tristate suburban region, integrating the firm's local, national and global platforms to better serve its clients. Jon also serves as Broker of Record for JLL Brokerage, Inc. in New Jersey and represents corporations on every aspect of their commercial real estate needs both large and small, assists and represents landlords on acquisition underwriting as well as leasing and marketing of real estate assets.
Industry Outlook: Broadly speaking, what is the state of the data center industry, and why should data center professionals be more attuned to expanding their footprint this year compared with years past?
Jonathan Meisel: The data center industry is flourishing globally, and we expect that trend to continue no matter the pace of broader economic growth. Consumers’ thirst for digital content will only expand, thanks to our love for online video binge-watching and reliance on social networks. As we highlight in JLL’s 2017 Data Center Outlook, the movement of data from private corporate servers to cloud-based solutions, coupled with a growing corporate interest in Internet of Things (IoT) initiatives, is also pushing corporate demand. With data consumption skyrocketing, major cloud providers are anticipating the need to triple their infrastructure by 2020.
To say the least, data center demand is robust, but external risks could temper industry growth. Foreign-currency exchange fluctuations, the looming prospect of rising U.S. interest rates, bold M&A disruptions and regulatory-policy shifts must be heavily considered, as they will have an impact on the intricacies of expansion. Companies that successfully manage these risks will be poised for growth.
IO: Where are the top markets for data centers?
JM: This year’s big breakout markets are familiar names. U.S. real-estate transactions in hub markets remain sky high. Northern Virginia is still a star in the market, with hyperscale-cloud requirements dominating demand, followed by Dallas. Northern California remains a powerhouse as well. Land prices in Santa Clara moved above $100 per square foot in 2016, a testament to the market’s strength. Meanwhile, the Chicago area is moving up the ranks, as campus-style deployments in the suburbs lure users from legacy data centers with their greater cost efficiency.
Internationally, Dublin continues to be the fastest-growing EMEA market, with total supply likely to hit 100 MW this year. Data-protection concerns should keep demand up through the year, even as new supply comes online and pricing remains firm. The opportunities for cloud services also put Montreal and Tokyo on the map as breakout markets for 2017.
IO: When expanding, what factors should data center executives take into consideration when making location decisions?
JM: In a rapidly evolving market, executives are taking a fresh look at their location strategies, including sending more to the cloud. Environmental regulations and energy infrastructure greatly influence data center real-estate decisions. Providers strive to increase energy efficiency in their operations. Many are looking to locate in colder climates, where the reduced need for cooling can drive down electricity costs. Additionally, the continuing rise of data center microgrids, particularly in the western part of the country, promises relatively inexpensive yet reliable power that can endure even when the central grid is unavailable or congested.
Customer location plays a role, too. The pressure to provide strong services to users who live, work and play outside of hub markets is increasing demand for space at the “edge” of the network, in lower-tier yet still highly populated markets.
Operator tax breaks and the rise of data-sovereignty laws are industry game changers. Although some countries such as Sweden are offering new electricity tax breaks to attract more data center operators, others, such as Russia, are tightening data-sovereignty laws, mandating that personal data submitted by Russian citizens be stored on servers in the country. Such laws are also creating complexities in North America, raising questions about how much U.S.-delivered data will be moved to the Canadian cloud.
IO: What are some new construction/build-to-suit trends that make data centers more efficient?
JM: In the last few years, U.S. data centers have vastly improved their electricity savings. Despite expectations that energy use would catapult as quickly as the demand for real-time data, energy use has actually remained stable since 2010, according to a 2016 report by Lawrence Berkeley National Laboratory. The total server installed base is expected to grow by 40 percent from 2010 to 2020, while the industry is on pace to save energy use by up to 40 percent in 2020.
A few major trends are spurring enhanced efficiency. For example, California introduced legislation allowing advanced cooling strategies to emerge. It should make the cooling process less resource intensive. Meanwhile, “power proportionality” methods are yielding economic and environmental benefits for both data center providers and users. These methods enable data centers to scale back electricity use when they aren’t processing at full throttle. Lastly, data center microgrids are also coming into play. Considering the industry’s dependence on reliable power, it’s only natural to use relatively inexpensive microgrids that can endure congestion and provide power when the central grid is unavailable.
IO: What are some negotiation tips for leasing data center space?
JM: As organizations flock to the cloud for its promise of low capital output and high business value, we are seeing a big shift in pricing and contract terms. Bulk and wholesale pricing are no longer exclusive to large-scale projects. Projects as small as 75 kW are now getting bulk pricing. In days past, they would have received retail-type pricing.
Looking ahead, negotiations following most pending lease expirations will be far more complicated than simple renewal negotiations. Data center footprints are being reconfigured across the map, with each lease renewal representing an opportunity for data center operators to capitalize on hybrid-cloud technology and optimize their colocation footprint. As more users begin to renegotiate their leases, an uptick in server right-sizing is likely. Traditional 10-year leases are no longer the norm. Today’s average is closer to five to seven years with new opportunities for lower rents. Data center users are finding they have more leverage for flexibility and scalability at the negotiation table.