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Thursday, October 3, 2013

Emerging Trends in Data Center Real Estate in North America: The Rise of the Multi-Tenant “Wholesale” Option

By: Jim Kerrigan (Chicago)

When companies look at their various data center options they find themselves with two choices: building their own data center, and outsourcing. On average, companies typically spend $2,000/sf or $2,000,000 per megawatt to build their own data center. By outsourcing, a company has a greater range of cost options, including cloud providers (Amazon, Rackspace, Azure) colocation companies (Equinix), managed service companies (Savvis, Server Central), or web hosting companies (ServInt, Singlehop, Rackspace).
In addition, in the U.S. there is now approximately 22 MM sf of multi-tenant “wholesale” data center space (this does not include the aforementioned space). Currently the wholesale model offered by companies such as Digital Realty Trust, COPT, and DuPont Fabros doesn’t exist in Canada. It will emerge during the next three years and give traditional Canadian colocation companies such as Black Iron, Pivot, Peer1 and Q9 a run for their money. Simply put, the wholesale model allows corporations to have their own dedicated data center with dedicated infrastructure in a multi-tenant building. More importantly, the wholesale model is three to four times less expensive than colocation. The demand for this type of product began in 2005 with the rapidly growing data center needs for companies such as Facebook, Yahoo, and Microsoft. An industry expert recently stated that 80% of servers in the U.S. are still housed internally (i.e. within a company’s HQ or office space). The market has matured, and today the tenant base is very diverse including financial institutions (Fidelity Information Systems), airlines (United Airlines), insurance companies (Guardian Life), and everything in between.
Data centers have emerged as a new type of real estate, but corporate decision making is often still handled by the information technology (IT) department. In fact, more than 75% of the data center site selection is made by IT with no input from corporate real estate, legal or finance departments. A vast majority of data center transactions do not take into account growth, abatement or tenant improvement allowance. On a recent 2 MW transaction, for example, not having a real estate broker cost the tenant $4 million or $28/sf annually. Opportunity or problem? Depends if you’re an investor (private equity firms, pension funds, National Real Estate Advisors) or a tenant.
        For a more detailed understanding of current happenings, please click here for our October data center newsletter. 

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