Sean Brady, co-founder of Cushman & Wakefield of New Jersey, Inc.’s Data Center Advisory Group, brought his background and the group’s expertise to a data center presentation sponsored by Jefferies & Company, Inc. The presentation focused on the 10 largest metro data center markets in the U.S.: New York (including New Jersey), San Francisco, Northern Virginia, Dallas, Los Angeles, Chicago, Atlanta, Seattle, Phoenix and Boston.
Among the key points: The market’s fundamentals remain strong, supporting supply in the pipeline; colocation fundamentals appear stronger than wholesale; and the Boston, Seattle, Phoenix, Los Angeles and Chicago markets have the most supply issues with vacancy rates over 15 percent. If New Jersey was not included in the New York Metro statistics, then it to would be among those over 15 percent.
“We project that 2012 and 2013 will be solid years for internet growth, fueling data center demand,” Brady told attendees of the New York event presented by Jefferies, a global securities and investment banking group. “There is meaningful supply in the pipeline, but there was enough demand to absorb most of the new space as of the fourth quarter of 2011.
While much of that demand will be focused on the 10 largest markets, Brady underscored data center growth by outlining the top five underserved or emerging markets set to raise their profile in 2012: Denver, San Diego, Portland, Houston, and Miami. The Portland market, by way of example, has greater tax incentives that will attract more users, on top of some of the lowest electrical rates in the country because of the availability of hydropower.
“There is pent-up demand for space that could get unleashed in all of the key markets if IT spending improves as cash-rich companies become more confident in the economy,” he said. “I see, however, a national trend of corporations either performing studies or executing data center refresh or consolidation to save money long-term. Most global corporations are trying to lower their data center operating expenses, increase redundancy, resiliency and security.
“The long-term goal is to reduce the number of servers, racks, and ‘white’ floor space,” Brady said. “This could also reduce a typical corporation’s global data centers from, say, 15, 20 or 30, down to six – two in the U.S., two in Europe, and two in Asia, which addresses all of the time zones.”
Another national trend that emerged in 2011, Brady told seminar attendees, is that third-party providers are “swimming upstream for more business and market share. Wholesalers are beginning to provide colocation services,” he said. “The colocation providers are offering a higher level of managed services and introducing Cloud if they don’t already have it. The providers that don’t have it are starting their own in-house Cloud service, and some have outsourced the service to bring it online more quickly. Going upstream and offering more services increases profit margins. By itself, Cloud service is expected to grow by 15 percent year over year for 2012 and 2013.”
In any event, “this shift in the third-party data center providers is causing an increased supply in all markets nationally,” he said. The increase in space is changing the way service is being offered, and it is changing the way users buy this service. The providers are becoming very competitive when they are bidding on the corporate user’s requirement. This has made the market more complex and complicated and it has become increasingly more important to use a qualified real estate advisor. According to Brady, the ideal team includes a data center engineer, real estate professional, and an attorney to get the best economical and contractual agreement.
In turn, that increased supply will cause a 5-10 percent decline in wholesale and colocation pricing, Brady predicts. That may already be happening: “Nationally, rents have seen downward pressure in the top markets,” he notes. For now, though, the drop might not be precipitous and rates could remain “relatively steady” through 2012. The average price in the U.S.’ top 10 markets is in $170-$185 per kW range per month, and the average size tenant demand in most of these markets is 200 kW to 350 kW per month.
The top five markets Brady expects to see the greatest demand in 2012 are Boston, Chicago, Los Angeles, Phoenix and metro Seattle. The industries that will dominate the demand are technology/media, financial services and consumer goods.
In terms of colocation vs. wholesale, “the strongest demand currently in the market is users looking for 200 to 350 kW of power, which benefits colocation operators,” Brady noted. “But most of the wholesalers have or are starting to lower their power requirements to accommodate those tenants. Many of the largest enterprise/ corporations use the wholesale model or build their own data centers, while smaller users are turning to colocation operators that cater to their space requirements and can offer managed solutions for companies that need help in running their servers.”
The research for Brady’s presentation was developed with the help of the professionals of Cushman & Wakefield’s Data Center Advisory Group, which includes the real estate industry’s most experienced advisors within this highly specialized asset class. Focusing on data centers, telecom switches, network providers, disaster recovery sites, and critical operations centers, the group includes brokers, consultants, appraisers, project and facility managers in key markets, and currently manages more than 20 million square feet of mission critical space. The group includes:
• Thirty global data center experts, advisors and brokers
• Financial Consulting Group (which provides sophisticated
financial structure, engineering and analysis)
• Business Continuity and Crisis Management Consulting Group
• Data Center Cost Segregation Group
• Project Management Group (responsible for building more than
2.5 million square feet of mission critical facilities in the past three years)
• Global Data Center Valuation and Advisory Service
• Capital Markets Group
• National Mission Critical Research Department
Among recent transactions, a Brady-led team arranged Sabey Data Centers’ $120 million principal condominium interest acquisition of 29 floors of the 32-story, 1.1 million-square-foot former Verizon Building on Lower Manhattan’s Pearl Street.
“This was an important transaction because it is Manhattan’s only special-purpose redevelopment of an existing building as a secure data center,” said Brady. “It also marks the ongoing resurgence of Lower Manhattan, while simultaneously expanding the influence of one of the country’s largest data center providers.”