Curt Holcomb, Executive Vice President, JLL-Data Center Solutions
The data center industry is evolving at a rapid pace. Fortune 1000 companies and new internet-based businesses have continually growing data requirements that are increasing the demand for data center space. This has caused many new colocation providers and Data Center REITs to enter the fray, developing data center environments, primarily colocation space, to stay ahead of demand. The only constant in our industry seems to be change.
JLL’s recently released Data Center Outlook provides a great in-depth look at the trends impacting major markets across the US, as well as those on the rise.
Currently, Fortune 1000 companies are investigating their respective data strategies to decide how much of their data center requirements can transition to the cloud and how much should stay within their existing data centers, whether they be housed in colocation space or owned, on-site facilities.
The migration to the cloud, particularly for Fortune 1000 companies, is one of the more crucial discussions we are having with clients every day to insure they achieve their long-term objectives. It’s probably the biggest issue that users are having today.
Many of these companies are finding that their existing applications were not designed or rolled out “cloud-ready” and may take time, from a development standpoint, to get them in shape for deployment into the cloud. Integrating data and applications into the cloud can require expensive software redesigns that require time and can be very expensive.
But that’s not hindering the growth of collocation space. In fact, the cloud providers are injecting even more momentum into the colocation industry by taking down large blocks of colocation space to house their cloud operations. We are seeing colocation space supply increase across all major markets, including Silicon Valley, Dallas, Chicago and Northern Virginia.
What’s been interesting to see is the surge of activity in emerging markets like Atlanta, Denver and Phoenix, with Phoenix and Atlanta seeming to gain significant momentum with new colocation providers coming into their respective markets to satisfy the increased demand from cloud providers and the steadily increasing demand from the Fortune 1000 and internet-based companies.
In the major data center markets, activity remains strong, each in their own way.
One of the more active markets is Silicon Valley. Most of the colocation providers are located in Santa Clara, and that’s due to low energy costs versus the rest of California. The supply is somewhat constrained due to the availability of land to develop a new data centers but it’s very strong with a lot of demand.
Probably the second biggest data center market in the US is Dallas. Over the last five years, there’s been substantial absorption in the Dallas colocation market.
Most major colocation providers have established facilities here and they’ve been very successful in leasing their space. The Dallas market is different than most in that most of the demand seen is from Fortune 1000 companies and less from the cloud providers, which are taking down more space in Chicago and Northern Virginia. Dallas benefits from the lowest cost of power of any of the major data center markets, it’s location in the Central US and substantial fiber and communications infrastructure.
In the major data center markets, activity remains strong, each in their own way
Chicago is really two markets—downtown and the western suburbs. Both of these markets in Chicago have seen major investment by the major colocation companies, along with significant demand. Much of the demand is local in nature, but there’s also demand coming out of the midwest and east coast markets interested in setting up primary or backup facilities.
The biggest data center market in the world is Northern Virginia. It is home to all major colocation providers. They have facilities, some with large campuses of 50-plus acres with multiple buildings. Northern VA demand comes from all over the world and is driven by companies that have a need for colocation space on the east coast. This market has a lot of connectivity with almost all the major fiber carriers built out in the market, low-cost power with a robust power infrastructure and the largest choice of colocation providers of any market in the world.
Mergers and acquisitions among the colocation providers are very active. The two mergers of Digital Realty Trust purchasing DuPont Fabros and ViaWest-Peak 10 combining were really significant in the industry. Something to keep an eye on is the activity of the larger and medium-size players who have been acquiring local operators that have facilities in one to three markets. Additionally, many of the non-publicly traded REITs are becoming quite large by using this practice and acquiring these local and regional providers. As more of these privately held colocation companies continue to go out and buy smaller operators, they could be poised to go public with an IPO in the future.
From a technology standpoint, the increase in the speed of the servers installed in data centers has changed how data centers have been constructed over the last ten years. Moore’s Law says that the speed of computing doubles every 18 months. This means that these faster microchips or servers are pulling down exponentially more power to operate. These microchips and their servers are also generating an exponentially greater amount of heat. What that means for the data center business is that the investment in power and cooling infrastructure, continues to climb to power these servers and to cool the environment. This increase in computing power also means that more servers can be installed in the racks populating the data center floor. This creates a denser power environment that colocation operators have to design into their facilities. The typical colocation facility ten years ago was designed to accommodate a power density of 50 watts per foot. Modern colocation facilities are being designed at 150 watts per square foot with the ability to provide areas that can offer 250 to 300 watts per square foot. This denser power and cooling environment are needed to satisfy the requirements of the Fortune 1000, cloud providers and internet-based companies but it comes at a steep price as more infrastructure is needed to operate these facilities.
Consider this – 75 percent of the global data center activity happens here in the US. We’re seeing the data center requirements of US companies growing and taking down more colocation and data center space in the US. We’re also seeing a lot of companies from Asia and Europe establishing footprints and investing in US providers and product. Facilities being built today are state-of-the-art, Tier 3 facilities with at least N+1 redundancy, providing the user a lot of flexibility in meeting their data center strategy. The colocation industry is one of the fastest growing markets in both real estate and technology. Billions of dollars are being invested in this industry by institutional investors, private equity firms and other large sources of capital to increase the supply of colocation space and open up new markets for the colocation industry.
As the data center requirements of Fortune 1000, cloud providers and internet-based businesses continue to increase, colocation providers are well positioned to offer the market state of the art facilities and services to satisfy the complex data requirements of business today.