Data Center Investment

Historical

  • Since 2008,the largest data center leases that have been signed  are technology-related companies such as Google,Yahoo,Microsoft,Apple and Facebook.
  • Facebook has absorbed more wholesale data center space than any other company during the last two years. However,colocation and cloud companies are not far behind.
  • During the last two years,companies have shifted their focus from building their own data centers to leasing from third-party operators.
  • Some of the reasoning behind this is to reallocate capital to core operations,as well as the availability of wholesale space and competency of the operators.
  • According to Gartner,50 percent of data centers that were built prior to 2006 are obsolete due to power and cooling constraints.
  • There have been in excess of $3.5 billion of investment banking transactions within the data center space during the past 12 months.
  • Data centers are one of the only types of real estate to have experienced any appreciation during the last three years.
  • Despite more than 5.5 million square feet of stand-alone third-party data centers constructed in the last three years,overall vacancy rates have remained around 10 percent.

Future

  • There has been significant pent-up demand,led by telecommunications firms,digital television,social networking  and financial firms,looking for space in 2011.
  • Healthcare will provide an uptick in regional leasing activity in 2012 as companies determine their electronic medical records solution in compliance with HIPAA regulations.
  • The state of data center space is vastly different than that of the late 90s,and most experts believe that it would take more than $5 billion of investment  to over-saturate the market. That is unlikely to occur during the next 10 years.
  • The larger wholesale data center developers are increasingly doing smaller typical “colocation deals,” further blurring the lines between wholesale and colocation data centers.

Why Invest?

  • 20 percent annual revenue growth and recurring revenue.
  • Annuities,sticky customers and significant relocation costs (servers can cost up to $8,000 per server to relocate) are just some of the benefits of the data center sector.
  • Much of the recent investment transaction activity in data center space has been based on 10 to 12x EBITDA.
  • There are only five national wholesale data center developers. They are currently operating in 18 states.
  • Debt is still limited to providers with a proven track record.
  • The vast majority of tenants in multi-tenant properties double their space size during the term of the lease.
  • Strategic mergers and acquisitions,regional consolidations and IPOs (including REITs) will continue to provide exit alternatives for merchant developers.
  • The specialized REITs (Digital Realty Trust,DuPont Fabros,and Terremark),as well as other REITs (Carter Validus,Corporate Office Properties Trust,Allied and CoreSite) will also provide logical exit strategies.

By The Numbers

  • Average number of racks that can fit into a 10,000-square-foot POD is 320. Operators can generate as much as $19 million over 10 years in one POD.
  • Average cost to build a speculative data center is $1,000 per square foot to $1,400 per square foot.
  • Average cost to build a speculative Tier III data center is $8 to $10 million per megawatt.

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