Real Estate Fundamentals in The Global Multi-Tenant Data Center Sector Continue Their Strong Performance
May 23, 2013 - Robust demand along the entire spectrum of third-party data center providers - including the wholesale, colocation, managed services and cloud segments - has fueled strong market fundamentals and the rapid transformation of data center markets across the globe. "The sector's strong global performance bucks the prevailing macro level trends of a sluggish global economy that has been dotted with regional recessions, hesitant growth and widespread uncertainty," said Sean Brady, senior director and co-founder of the Cushman & Wakefield Global Data Center Advisory Group.
The rapid adoption of technology and its impact on data center real estate shows no sign of slowing anytime soon with demand being driven on several fronts. Broadly, it's the usual suspects: the increase of internet and mobile device users, broadband penetration and e-commerce. Basically, the ongoing evolution of the digital age continues to follow exponential growth patterns in line with Moore's Law in both mature and emerging economies around the world. This strongly translates to space and infrastructure demand related to content channels in spanning media, gaming, mobile apps, social networking and financial services - to name a few.
Enterprise and corporate users are also facing a critical point-in-time evaluation of their data center needs in an environment of ever-decreasing IT budgets. Capital expenditures and operating expenses are being squeezed at the same time that increased redundancy, security and accessibility of network and critical systems are being recognized and driven by C-level executives. This is prompting demand for colocation data center space, which provides a low-cost outsourcing model in space that is ready for occupancy today. The public and private cloud-based storage and backup providers are presenting additional viable solutions for outsourcing, and organizations continue to struggle with security and access issues in implementing "bring-your-own-device" (BYOD) work environments that allow employees to work remotely and utilize their own laptops, tablets and mobile devices. According to Brady, both of these options are great solutions for part or all of a corporate client's data center, and the Global Data Center Advisory Group can help the client understand the available properties in any given market and the Total Cost of Ownership (TCO).
U.S. Data Centers: Sporadic Oversupply in a Strong Market
Many of the top-tier data center markets in the U.S. struggled with "on again/off again" leasing activity in 2012, mirroring the uncertainty that was pervasive in the entire U.S. economy leading up to November's presidential election and the lingering "fiscal cliff" issues. While data center market fundamentals were generally strong, the result was increasingly competitive pricing and healthy supply levels that were often trending slightly ahead of demand. However, that volatility is diminishing as tenant activity in major U.S. data center markets is showing renewed vigor in recent months: the San Francisco Bay Area and Northern Virginia - two of the largest data center markets in the U.S. - tallied strong absorption in both the wholesale and colocation segments in the fourth quarter. Leasing volume was headlined by large deployments by several Fortune 100 companies tied to supporting their cloud service offerings. The renewed velocity reversed a months-long trend of somewhat stagnant activity in these markets and dramatically shifted the supply and demand dynamics. Both regions face near-term supply constraints as a result of these transactions as well as the renewed level of tenant requirements that are active in the market. The increased activity seen in these two areas is a likely precursor to a trend that is expected to proliferate across most U.S. markets in 2013, namely a broad strengthening across all data center market segments as delayed requirements and pent-up tenant demand move from the sidelines and into the decision-making phase.
Several markets currently sit at key inflection points, most notably New Jersey and Manhattan. Leasing activity in New Jersey was particularly slow in 2012 by historical standards, with the estimated 16 megawatts leased during the year representing only half of the historical annual average of the past five years. Hurricane Sandy had a dramatic impact on the data center market in the entire New York metro area, essentially putting all leasing transactions "on hold." Many customers are still sorting out the impact - both on their deployment decisions and on their operational needs - but several trends are beginning to emerge in the aftermath of the storm. For Manhattan tenants, locations in New Jersey and areas beyond the metro area are being given strong consideration as viable options for relocating servers outside of Manhattan. More specifically, colocation demand from enterprise and corporate users who experienced significant downtime in their in-house data centers and server rooms is expected to rise significantly. All told, both wholesale and colocation demand throughout the greater New York area is expected to bounce back sharply in 2013. According to Brady, "facilities that were unaffected by the storm should fare particularly well in the short-term, and the pipeline of new facilities - ranging from Digital Realty, CoreSite, Internap, Equinix and Telx in New Jersey and Sabey and DataGryd in Manhattan - are expected to be met with healthy levels of demand as these facilities are readied for customers.
Underscoring the strong market fundamentals of data center real estate, the national construction pipeline continues to be robust, with nearly all established data center markets seeing variable levels of steady new supply. In fact, of the nearly twenty data center markets tracked by Cushman & Wakefield in the U.S., the supply pipeline is increasing in nearly three-fourths of the markets, and more than half of these markets are considered currently under-supplied. Emerging data center markets in the U.S. have generally seen the highest level of new construction activity over the past 12 months, including Portland, Las Vegas and Phoenix. Oregon has been a high profile data center magnet, with giants like Facebook, Apple and Google all recently constructing data centers in the Columbia River Valley and central Oregon. Metro Portland is now seeing an influx of new national providers, including Digital Realty, T5 Partners and Telx, all expanding into the suburban Hillsboro area, a hotbed of activity where operators are looking to leverage favorable tax incentives and proximity to three major cable landing stations to Asia. Southern California wholesale demand also continues to migrate to desert locales, spurring a swell of new supply in Phoenix and Las Vegas. "Aside from their close proximity to Los Angeles, both metros offer lower power costs and limited natural disaster risks and continue to see a steady stream of tenant requirements," said Jeff West, research manager and director of data center research.
With an active supply pipeline that has generally been one step ahead of demand over the past several years, national pricing is being pushed downward despite strong demand. This is particularly true in top-tier data center markets - on the average, wholesale rates decreased just over 5% nationally year-over-year and currently range between $140-$170 per kilowatt per month gross. Average colocation rates currently range at a multiple of 1.7 to 2.5 times wholesale rates, with a wide range of variability depending on a variety of factors, including the size of deployment, the tier rating and connectivity of the facility. The continued emergence of the "wholo" market - the blending of price bands in the wholesale and colocation segments that often involves wholesale providers lowering their size requirements and pricing to compete with colocation providers - has also undermined national pricing trends and continues to be an evolution of the multi-tenant data center market that is not strictly a function of traditional supply and demand dynamics. "Nearly all third-party data center providers are swimming upstream to capture more lucrative revenues," Brady said.
Europe: Strong Fundamentals Prevail Despite Wider Euro Zone Issues
European economies continue to struggle through the financial and economic issues plaguing the region over the past several years - and these issues will weigh heavily on the regional economies throughout 2013. The result has been significant constraint on IT spending and capital investment that has contributed to a cautious but still healthy leasing environment. "Data center leasing activity has been largely confined to smaller colocation transactions with only a handful of notable wholesale deals occurring in the second half of 2012 - a function of both tenuous business confidence and supply constraints in major data center hubs," West said.
While opportunities in emerging locations continue to see interest, the primary data center market in Europe remains concentrated in a handful of core cities: London, Frankfurt, Paris and Amsterdam. All of these markets are considered strong, landlord-favorable markets despite the economic factors that are dampening demand Tenant demand is steady and measured levels of new capacity are still being brought online to keep pace.. As the financial capital of Europe, London is the largest - and one of the most expensive - data center markets in Europe. Constraints on power, connectivity and availability have a significant impact on pricing. While price growth has remained relatively flat, average wholesale deals in the major European markets currently range between $190-$235 per kilowatt per month gross, roughly 10-20% higher than rates in the U.S.
Continued strong demand from the technology and media (TMT) sector has triggered new data center supply in Amsterdam and Frankfurt. Germany's economy is currently one of the strongest in Europe, and Frankfurt is serving as a focal point for data center growth. The early 1990s' adoption of Internet and broadband technology positioned Frankfurt's internet exchange point (DE-CIX) to become the largest in the world based on peak incoming data rate. Amsterdam also boasts one of the most network-rich locations in Europe, home to one of the highest densities of international fiber with direct access to several submarine cables that allow for low-latency global connectivity.
Market headlines in 2012 were dominated by real estate-driven mergers and consolidations among data center providers in multiple markets across Europe. Digital Realty acquired a 761,000-square-foot portfolio from Sentrum for nearly $1.1 billion - the three UK-facilities in the transaction were approximately 80% leased, providing both an existing income stream and available leasing capacity for the provider. Other transactions included Equinix acquiring Frankfurt-based ancotel GmbH, NTT purchasing an 85% stake in UK-provider Gyron and Telecity acquiring Finland operator Tenue Oy with an eye towards boosting their growth potential in the Nordic region and access to Russia and Baltic countries.
Asia: Operator Expansions Fuel Strong Growth and Pricing
The Asia-Pacific region continues to serve as the growth engine for the global economy and appears to be gathering momentum after a brief slowdown in the second half of 2012. The most established data center markets in Asia are those that serve as global financial centers and have the highest concentration of multi-national firms, including Tokyo, Hong Kong and Singapore. However, the broad Asia-Pacific region continues to see a rapid expansion of its data center market, as providers continue to look for entry points to capture the extraordinary demand potential in these emerging markets. While Asia currently accounts for more than 45% of global internet users, market penetration still stands below 28% (compared to 79% in the U.S. and 63% in Europe). Additionally, India and China together account for 30% of the world's mobile users - nearly 2.0 billion subscribers (compared to 322 million subscribers in the U.S.). By these metrics, the Asia-Pacific market is still significantly under-supplied, and pricing in the region reflects this imbalance. According to West, "While rents vary dramatically market to market - moreso than in other global regions - average wholesale deals for the Asia-Pacific range between $240-$360 per kilowatt per month gross , in upwards of 25% above prevailing rates in the U.S. Colocation prices average a similar multiple to that of other regions - typically 2.0-2.5 times that of wholesale rents."
Hong Kong is the most mature data center market in the region and serves as a gateway to both China and the broader Asia-Pacific region. Real estate restraints make data center expansion a challenge and dwindling supply is putting pressure on utilization in current facilities. There is virtually a zero percent vacancy rate for industrial buildings and land in Hong Kong, although the government is putting forward two hectares of land for data center development in the Tseung Kwan O industrial district for competitive bidding later in 2013.
Singapore competes with Hong Kong as the most desirable location in the region with a well-established data center market with existing infrastructure that can handle both connectivity and power demands. Several global providers are actively exploring expansion and entry in to the market as a hub for regional expansion.
International data center operators have found accessing China a challenge due to a confluence of factors. Data center facility design in both Beijing and Shanghai lag behind more mature markets in the region, and power constraints in major hubs serve as significant barriers to entry. The "Great Firewall of China" - an Internet filtering system originally designed to control information being exchanged through news feeds and social networking sites - often erroneously interrupts cloud services and causes significant delays when connecting outside of China as everything travelling over the public internet domestically must pass through it. Private network traffic can pass in and out of China without having to pass through the firewall system, but access to private networks are tightly controlled by incumbent Chinese carriers China Telecom and China Unicom. As such, demand from multi-national firms looking for strategic partnerships - ranging from western operators with a presence in China, local joint venture partners or central or provincial government entities - is very robust. Late last year, Microsoft engaged in a strategic partnership with 21Vianet, China's largest carrier-neutral data center provider. The provider will be licensed to operate and offer Office365 and Windows Azure in the country and began construction on a massive 452,000-square-foot (gross) facility in the Daxing District of Beijing to service demand.
Cushman & Wakefield's Global Center Advisory Group includes the real estate industry's most experience advisors within this highly specialized asset class. Focusing on Greenfield, industrial conversions, wholesale, collocation, managed services, Cloud, and corporate data centers and disaster recovery sites. The group includes 30 brokers, business continuity and crisis management, incentives and location consulting, cost segregation, appraisers, project and facility managers, and currently manages more than 20 million square feet of mission critical space. Contact Sean Brady Senior Director at 201 460 3342 or by email at firstname.lastname@example.org.