Editor's Pick (1 - 4 of 8)
The Apparent Connection between CIO's Success and Business Outcomes
To the Cloud & Beyond A Death Knell for Private Data Centers?
Data Center of the Future
Mastering Partnership with a Remote Data Center
Data Centers-Through The Real Estate Lens
By Patrick Lynch, Managing Director, CBRE Data Center Solutions
Amidst a steady flow of domestic and foreign investment, the commercial real estate sector has been a stalwart performer during the most recent economic recovery in the U.S. Across the board; prices have largely returned to near-peak levels with overall rents for commercial office space having increased nearly 20 percent since 2011. So would it be surprising to learn that rental rates for wholesale and retail or colocation data center space have declined nearly 20-25 percent over the same time period? Even in an environment that produced nearly record setting absorption and leasing volume in multi-tenant facilities in 2015?
The growth and maturation of the multi-tenant data center real estate market has been as rapid and ever-changing as the technology that resides within a facility’s walls and drives the applications and business needs influencing users on a daily basis. In conjunction, a growing array of strategic opportunities have also emerged for end users who either own or lease their data centers and are looking to optimize and reduce their data center related expenses.
Climate of the Wholesale and Retail Colocation Markets
Leasing volume in third-party data centers set a new benchmark in the U.S. in 2015, with occupancy gains totaling over 200 MW in core data center markets alone (which CBRE defines as Atlanta, Chicago, Dallas, New York/New Jersey, Northern Virginia and Silicon Valley). While large requirements from cloud services and IT infrastructure providers often dominate the headlines, demand is being driven by industries of all shapes and sizes – from financial services firms, healthcare systems and even local public school districts. Emerging destination markets like Portland, Minneapolis and North Carolina have also seen an enormous upswing in new supply as they provide attractive, lower cost options for data center operators and end users.
In a sector where flexibility and cost savings often underpin requirements, demand for data center space has long been considered somewhat recession-proof and shows no sign of waning despite the emergence of ominous economic clouds in early 2016. An increasingly diverse pool of colocation options also allows users to consider and leverage cost savings affiliated with different markets and geographies, including differences in tax rates and incentives and an often wide variability in the costs of power, real estate, network and staffing.
The pace of new supply will remain robust - there are more than 150 MW currently under construction in CBRE’s core markets alone and more than 50 percent of that capacity is pre-leased. This is reflective of a recent shift in philosophy from data center providers who have adopted a “just-in-time” delivery model to adding new capacity, a model that has resulted in most U.S. markets currently being very landlord-favorable from supply and demand perspectives.
A Perfect Storm for Reducing Costs
While the high costs of data center builds always make them a risky project, this disciplined approach to adding capacity has also been a reaction aimed to help stabilize pricing trends, which have seen drastic compression at times over the past several years. Market pricing for colocation transactions did stabilize in 2015 with several markets also seeing moderate increases on the magnitude of 3-5 percent. However, macro pricing trends have been at-odds from the normal expectations of a vibrant, high growth market and there are several contributing factors at play, including the advancement of data center designs, economies of scale achievable by operators who build, own and operate data centers as their core business, and the relative immaturity of the multi-tenant data center market, which has yet to fully traverse through an expansion-contraction-recovery market cycle when compared to other established asset classes.
As such, mark-to-market renewals for organizations with leased data center assets present a significant opportunity for cost savings
As such, mark-to-market renewals for organizations with leased data center assets present a significant opportunity for cost savings. With current rates sometimes more than 25 percent lower than they were three to five years ago, the cost savings can be substantial. A recent survey (see table) of data center renewals represented by CBRE and their associated cost savings shows an average cost reduction of 29 percent across a wide spectrum of industry verticals, deal sizes and geographies.
THE RISK & REWARDS OF OWNING
Concerns about facility obsolescence have long lived in the realm of the enterprise user. The extremely high costs associated with building, owning and operating a data center make it increasingly difficult to justify the capital expenditure, with the risk of a poorly designed or planned facility becoming antiquated in only a few years.
With the growing adoption of cloud and colocation into enterprise IT strategies, many end users are exploring various options to monetize existing assets, minimize data center costs, and even shift the burden of those costs from capital expenditures to operating expenses; in turn deploying cost savings to support core business initiatives. With no one-size-fits-all strategy, these solutions can include:
• Multi-regional site selection
• Own vs. Lease vs. Hybrid solutions
• IT capacity planning and forecasting
• In-house to off-site migration
• Sale Leasebacks
• Asset disposition
The Variables of Value
While there is a ravenous appetite from investors for opportunities to in the data center space, end users with legacy assets should be cautious when considering sale leaseback and disposition strategies. Not all data centers are created equal, and not all facilities are “undiscovered gems” ripe with investment potential. While advancements in data center design and rapidly evolving technology are two of the core factors contributing to facility obsolescence, these often extend beyond what software updates or the replacement of outdated equipment can fix. Examining whether the facility itself can support innovations like higher density servers that use significantly less square footage, processors that use less power or need less cooling, advances in cooling technology and evolving bandwidth or network considerations all come into play.
The questions that potential buyers focused on occupancy and/or retrofit opportunities ask look very similar to the ones enterprise users are likely asking themselves:
• Can the facility sustain future IT equipment?
• Can it accommodate expansion plans?
• Is there sufficient power permitted and available to upgrade the facility?
• Is it even possible to upgrade the utility feed to procure more power?
Investment buyers will place varying emphasis on factors that impact their potential returns:
• What is the credit quality of the existing tenant?
• What are the data center market fundamentals where the facility is located?
• What is the quality of the asset?
• What is the existing lease term?
• Is there a value-add/expansion opportunity?
All of these factors can have a profound impact on asset value and any underlying data center strategy is often best accomplished with the help of advisors that a proven track record of similar projects. Below are a handful of assignments CBRE has recently been involved (and their respective outcomes):
How the data center market as a whole absorbs, re-purposes and adapts to the challenges of legacy facilities and growing obsolescence will be an influential factor in the evolution of the sector as an emerging real estate asset class. Forward thinking enterprises that are interested in relieving themselves of owning data centers will act quickly, low interest rate environments and investors’ appetite for these assets are contributing to high valuations and may adjust give macroeconomic conditions.