The Future of Wholesale Data Centers

If you read our market reports,you may have read that some of the largest and most active customers of Wholesale Data Center space are large technology companies like Microsoft,Facebook,Yahoo! and Google.

With that in mind,you may have found today’s Wall Street Journal article regarding Facebook’s Prineville Oregon data center interesting.  The article is entitled:“Facebook Data Center is Boon for Oregon Town.”

Rendering of Facebook's Prineville Data Center

The article describes Facebook’s ambition to build yet a second data center in Prineville,just like the first 300,000 sf facility (the first phase of which is not even open yet!).  You may also have heard that Facebook is building a new data center in North Carolina.

There are countless benefits for large companies like Facebook to build their own data centers instead of leasing Wholesale Data Center space.  I’ll outline a few of them here:

1) Location: Ability to choose a location with low cost of power,cool climate (for free air cooling),low cost of real estate,low salary costs,local incentive packages,and good latency.

2) Control:Ability to design a facility that meets the unique needs of your company and your servers,manage it how you wish,and depreciate it.

3) Technology Cost Factors:Ability to employ technologies that Wholesale Data Centers may not,like:airside economizers,evaporative cooling,custom servers and racks,DC power,etc.  In Facebook’s case,they are employing new technologies (some of which they got from Google) like UPS’s on the rack level saving significantly on transmission and conversion loss.

4) Other Cost Factors:Quite simply,if you build your own data center,there’s no profit built in for the operator (DFT,DLR,etc.),so costs are lower.  Additionally,you have the ability to take calculated risks in your design and management that a Data Center Operator with many customers cannot take.

So it’s clear,that for large enterprises,needing hundreds of thousands of sf of data center space,owning your own data center is the more affordable route.  So why is it,that companies like Facebook,Google,Yahoo!,Microsoft and others are some of the largest tenants of DuPont Fabros,Digital Realty Trust,and their competitors?

From what I can tell,there are two answers to this question.  The first answer,is that the data center requirements of these companies are growing so quickly,that they simply cannot keep pace with demand and are forced to take whatever space they can get their hands on.  The second answer,is that in certain markets,it makes more sense strategically for these companies to take say a 10,000 sf pod from DLR than to build a stand-alone data center. I am of the opinion,that most of the space recently acquired by these companies is as a result of answer #1,not answer #2.

It’s well known that all of the companies I mentioned above are building or recently have built new monstrous data centers. So,this begs the question,if the largest customers of wholesale data center space are just taking space as a stop-gap measure,what happens when they finally have enough space in their new custom data centers to keep pace with demand?

Some would argue,that  global internet has been growing at a rate of over 400% per year and will continue to to do so for the foreseeable future,therefore,these big users will continue to gobble up wholesale space. Others will argue that given the rapid growth of the internet,even if these big users begin to vacate wholesale space,there will be other new companies to take their place.  But will these new companies find these 5-10 year old data centers compelling?  Will these data centers even be relevant to modern users in 5-10 years? If these data centers are compelling,will the wholesale providers be able to charge the same kind of prices that they charge today? Will they be able to charge more? Or,worst case scenario,by the time these spaces are vacated,will the wholesale data center market become so overbuilt that the older data centers will be unrentable and the prices on newer ones will be driven down?

I don’t have the answers to these questions,but I think we should keep the big users in mind as we consider the growth in construction of wholesale data center space throughout the country.  On the national level,I think that we all would agree that demand still outpaces supply,but as the wholesale market continues to be hot,we should keep an eye on the Facebooks and Googles of the world.

What do you think? What is the future of Wholesale Data Centers?

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