COVER STORY, JULY 2012

DATA EPICENTER
For companies in need, developers are finding a way to provide data center space.
John Nelson

Each month, more than 800 million unique users watch approximately 3 billion hours of video on YouTube.

In 2011, more than $68.6 billion of merchandise was sold on eBay, which pencils out to $2,100 per second.

On average, more than 300 million photos were uploaded to Facebook per day during the first quarter of 2012.

And all that data has to be stored somewhere, namely in data centers.

Companies ranging from social network giants to insurance companies need their information stored safely, and this upsurge in data is the primary driver behind the construction of new data centers.

“There is just this whole explosion of data,” explains Gary Wojtaszek, president and CEO of CyrusOne, a global enterprise colocation provider. “All that data basically resides in data centers, which is just going to get exacerbated by the explosion of new technologies. As those become more ubiquitous, the demand that they’re creating on data centers is getting even larger because of the flow through required of mobile devices.”

The evolving technological platforms such as smart phones and tablets have made the Internet more accessible, and the advances in the computation ability of mobile devices have led to an increase of data processing. For example, YouTube traffic from mobile devices tripled in 2011 compared to 2010.

“The need for processing space and storage and processing power are all going to continue to drive demand,” says Randy Thompson, managing director of Cushman & Wakefield’s Global Data Center Advisory Group. “All of the apps that you’re seeing for devices like the iPad are causing transactions to be consummated online.”

Another driver behind this uptick in data center demand is government regulation. Data governance regulations such as the Sarbanes-Oxley Act and the Health Insurance Portability and Accountability Act (HIPAA) are requiring more data storage and reporting, which has led to an increase of demand for servers and data center space.

“Government is getting more and more involved in regulating how we do business and demanding technology to step up,” says Bo Bond, managing director of Jones Lang LaSalle’s Dallas office and co-lead of Jones Lang LaSalle’s Data Center Solutions Practice. “That’s going to drive the need for storage, the need for data centers.”

WHY SUPPLY IS LACKING

Construction of data centers is slated to pick up in this next year because of the drivers for new space, but data centers are traditionally tough to develop because it requires a considerable amount of capital.

“We’re not building data centers as quickly as demand dictates. There’s definitely going to be more development in 2012 than in 2011 — it’s a performing asset class,” says Bond. “At the same time, it requires more capital and a lot more private equity.”

Capital is the chief barrier to entry for creating new data centers. A data center requires consistently cool temperatures, developable land, millions of dollars worth of equipment and the bricks and mortar associated with the space. All of these contributing factors make the price of developing a data center fairly steep.

“These are really expensive projects,” explains Wojtaszek. “Construction costs are well in excess of any other type of real estate investment out there, so that in and of itself was pretty foreboding because of all these heavy capital-type investments. If you don’t get high utilization of those right away, you’re upside down on the economics.”

“The capital constraints of getting into this business or expanding this business is significant,” continues Bond. “For some of these regional providers, they’ve had to go out in the private equity market to get an infusion of capital to keep expanding operations.”

The capital constraints are not just in the upfront costs of developing a center. The tax on land and the sales tax associated with refreshing the expensive servers and equipment every three to five years is another hurdle to development.

Data centers also require a knowledgeable staff for operating purposes. Both the facilities and information technology side of a data center’s staff need to be trained professionals in order for the center to function properly. Finding and training such technology-savvy individuals is another component that most other property types don’t have to deal with.

“The knowledge base is key. There are people who think they can just go prop up a data center and it works, but really to design, manage, operate, secure financing and make sure it’s profitable is important,” says Bond. “You have to have really good people who understand the business and the costs and how to manage those effectively.”

WHAT’S BEING BUILT?

Austin Met I is a 50,000-square-foot CyrusOne facility and offers dedicated cages and private suite options. Colocation facilities like this one are in high demand in Texas.

One of the results of having a steep development price is that companies are turning to renting space in colocation facilities, or multi-tenanted data centers. By leasing space in these colocation spaces, companies are saving themselves money while getting their data storage and processing needs met.

“Customers are recognizing that it’s no longer in their best interest to tie up a lot of their capital in building and managing very expensive assets,” stresses Wojtaszek. “A service provider, like CyrusOne, can either meet or exceed their level of quality that they’ve built in the old data centers.”

Of the data centers that are breaking ground around the country, a good number of them are colocation properties that will house servers for a wide range of users. These properties are developed, staffed and equipped by colocation providers such as CyrusOne, and the tenant pays to occupy the space.

“The trend for multi-tenant data centers for use by operators is widely accepted, and you’re seeing more and more companies do that versus building their own data center from their own capital,” says Bond.

Internet-based companies such as Yahoo and Google need their own data centers because of the amount of equipment and space needed to handle the online traffic. Most companies only need space for redundancy sake and don’t require many servers.

“The small- to medium-sized businesses are just taking racks, suites or cages in a larger data center operator’s facility,” explains Bond.

LONE STAR ACTIVITY

Texas is recognized as having a pro-business environment with one of the strongest economies in the nation, making it an alluring destination for data center development. Texas has a favorable tax situation, reliable energy source and destination cities such as Houston and Dallas that are driving demand for data center space.

The presence of companies that prefer to keep their data centers close by, known as “server-huggers,” has driven demand for Houston and Dallas developments. Bond expects that Houston will see an uptick in activity due to the presence of oil and gas giants as well as the Texas Medical Center, the largest medical center in the world. “Houston is going to see a lot of activity it has never seen before,” declares Bond.

Dallas has also made waves in the data center market and is currently on Bond’s short list of the top six markets in the U.S. for data center activity, along with Northern New Jersey, Northern California, Northern Virginia, Southern California/Los Angeles and Chicago.

Dallas benefits from having an abundance of national and international companies with headquarters or regional offices in the city’s metropolitan statistical area. “Dallas is a huge business processing outsourcing market. We’re having more and more data center providers coming in here on a speculative basis just because of the amount of activity,” says Bond.

The state also attracts data center development because it has a reliable energy source — the Electric Reliability Council of Texas (ERCOT), which provides energy for approximately 85 percent of the state. Having relatively inexpensive and reliable energy is vital for data centers, which have to operate at all times and maintain a certain temperature to keep from overheating.

“Data centers these days like to go where there’s an abundance of inexpensive power that’s reliable in an area where the capital investment has got a favorable tax treatment, so you’re seeing that in places like North Carolina, and you’re seeing it certainly in Texas,” says Thompson.

Texas and its municipalities are known to work with developers to attract data centers to their area because of the tax revenues that the properties generate. The costs associated with a center’s development and its equipment can be very beneficial for the government because of the sales tax on the millions of dollars it takes to develop and operate a facility.

The Pflugerville Community Development Corp. has been working with Arista Data Centers to bring a $210 million, 500,000-square-foot data center campus with four to six buildings to Pflugerville in the near future.

The site was chosen in part because of Pflugerville’s pro-business community. In addition, Stream Data Centers is constructing the Houston Private Data Center in The Woodlands and CyrusOne is repositioning a center in Dallas and delivered a center in Austin.

“Of all the markets, Texas is probably the one that has the most demand for data centers — primarily driven by the trends of Texas’ economy,” says Wojtaszek. “There seems to be development going on a little bit in Virginia and Chicago, but Texas seems to be the strongest market in the country.”

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