Does it make more sense to build your own data center, use a colocation center to house your gear, or lease turn-key space from a wholesale data center provider? The size of a requirement has historically been a key decision point in sorting out the economics of data center expansion. But capital, control and speed to market are also important considerations in determining the best approach, according to panelists at the Tier 1 Datacenter Transformation Summit last week in Reston, Va.

A significant number of enterprise companies still prefer to build their own data centers, usually out of a desire to control all aspects of their operation. Security is often a guiding principle for companies that build their own facilities. Many financial services firms build stand-alone data centers to ensure that their critical IT assets are not sharing space with other companies.

“We believe it’s economical for us to build our own data centers,” said Jeff Lowenberg of The Planet, a hosting provider with major operations in Houston and Dallas. “It’s also an issue of control. Nobody has our best interests at heart more than we do.”

Wholesale Benefits from Focus on Capital

The wholesale model, in which a developer leases finished plug-n-play data center space, is increasingly attractive to companies seeking 1 megawatt or more of data center capacity. One company that has made extensive use of wholesale space is Horizon Data Center Solutions of Dallas, which has expanded quickly by leasing space from Digital Realty Trust and Power Loft.

“It was really a CapEx issue and time-to-market issue,” said Lance Smith, the CEO of Horizon. “We are also concerned with the obsolescence of certain technologies in the data center sector.”

Wholesale space allows providers to avoid large up-front investments in data center construction, which typically can cost $1,000 to $1,500 for each square foot of finished space. With many companies seeking to conserve cash amid tight credit conditions, the wholesale model has gained favor.

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[datacenterknowledge.com]

For most commercial real estate developers, 2009 can’t end soon enough. In the tight financing market, credit was available for only the most fail-safe construction and development projects.

Many planned developments fell out of the pipeline as plunging demand for office, industrial, retail, multifamily and hotel properties forced some builders into default and caused others to delay or scrap their projects and development programs. Record or near-record negative net absorption and rising vacancies in most property categories recorded by CoStar Group virtually paralyzed business expansion and property development.

Amid the development gloom and doom, however, were tendrils of activity in certain property niches: medical office buildings, hospitals, data centers, government buildings, and student and senior housing.

Over the last 12 months, CoStar’s In The Pipeline has provided a window into the trends affecting office, industrial, flex, multifamily, mixed-use, hotel and public works developers. Let’s look back at some of the most widely viewed columns and items of 2009.

Read More Here

by Randyl Drummer for CoStar

[costar.com]

CoreSite currently operates two Bay Area data centers, as well as eight other facilities across the United States. The new three-building campus at 2901 Coronado Dr. is designed to gain LEED Gold certification. In addition to energy efficient design, CoreSite Santa Clara will offer security features such as mantraps, CCTV surveillance and biometric scanners.

CoreSite executives were unavailable Thursday do discuss the specific location of the property and whether any of the space has been pre-leased. The company builds and manages data centers and currently provides two million square feet of wholesale data center space and collocation services to 500 customers.

By expanding in Santa Clara, CoreSite is playing on the home field of Digital Realty Trust, a publicly traded data Center REIT headquartered in San Francisco. Digital Realty has been expanding in the Bay Area as well, but mostly by acquisition, and is a much larger player with 13.8 million square feet in 77 properties in 27 markets throughout Europe and North America.

In November, Digital Realty paid $90.5 million in cash and assumed debt for the fully-leased 185,000-square-foot Bayshore Data Center, which is located adjacent to Silicon Valley Power and US Highway 101 in the Santa Clara data center cluster. The seller, Inland Western Retail Real Estate Trust, paid $95.7 million for the three-building complex in 2005. The tenants are Sprint Communications, Equinix and Layer42.Net.

“Demand for data centers such as Bayshore continues to outpace supply by a margin of two to one,” one of the listing brokers, Gerry Rohm of HFF’s San Francisco office told GlobeSt.com at the time of the Bayshore acquisition, helping explain why CoreSite is moving forward with ground-up development here despite the overall economic conditions, and why Digital Realty is buying up existing properties. “There is limited new supply in the data center cluster coming online in the next three years due to a lack of construction financing, which will continue to drive up rents for data center services.”

In September, Digital Realty acquired 444 Toyama Dr., a 42,000-square-foot [net rentable] data center in Sunnyvale that is net leased through 2022 by a single tenant. A that time the company also announced the purchase of the interest it did not already own in 1525 Comstock, a 42,000-square-foot LEED Platinum data center in Santa Clara that is also fully leased. In August, the company acquired a 60% interest in Collins Technology Park, a seven-building, 787,000-square-foot development in Richardson, TX, that it plans to convert to a data center. Its JV partner is Dallas-based Skyrise Properties.

By Brian K. Miller for GlobeSt

[globest.com]

It is a smart move by DRT, but what are the motives behind it? Many companies diversify and do so for various reasons. DRT’s ability to design and build its own data centers goes without saying, but now they are taking there talents and offering it out as a service to the industry that already has design and build firms.

According to DRT, “The services are aimed at companies who want to retain ownership of their datacenter facilities (rather than lease space in one of our buildings)…but who want to tap into our expertise.”

The expertise that DRT is referring to is its data center team, but more specifically recently acquired Michael Manos who once was responsible for Microsoft’s data centers and now is the vice president of technical services for DRT. According to DRT, Michael Manos will be managing the new POD Architecture Services program.

“These services fill a gap in the market between a pure do-it-yourself approach and leasing wholesale space from an outsourced provider such as Digital Realty Trust. Many companies want to own their own datacenter, but they do not have the internal skill set and experience to successfully tackle a construction project with the scope and complexity of a major datacenter facility,” said Michael Manos. “By using Digital Realty Trust’s POD Architecture Services(SM), those companies can retain ownership of the facility and the process, while dramatically reducing the risks, costs and timeline by working with a team that has built hundreds of datacenters around the world.”

According to DRT the reason why they decided to diversify was to address the demand they were receiving from “companies and government agencies who know about us and like how we design datacenters…but who have a corporate/organizational directive to retain ownership of datacenter facilities despite the benefits of leasing and moving to an opex model.

In this case it appears that demand for DRT’s talent and understanding of the data center facility has created a new service for DRT. DRT’s choice to diversify and offer design and build services is a smart move and is an interesting addition to an already heavily populated design and build field.

A list of Digital Realty Trust’s fee-based POD Architecture Services(SM) includes:

• License Digital Realty Trust’s Turn-Key Datacenter(SM) design package, including its proprietary Design Engineering Guidelines, schematics, one-lines, BOMs, project/site basis and airflow modeling – enabling companies to benefit from the efficiencies of Digital Realty Trust’s proven model.

• Access Digital Realty Trust’s supply chain for procurement of datacenter components – providing companies with significant pricing advantages and accelerated delivery of equipment via Digital Realty Trust’s vendor partnerships.

• Benefit from Digital Realty Trust’s proprietary Gating Process(SM) – providing enterprises with a series of sign offs and checks that give them complete control of the program from ROM to Final Product with input and final decision-making power. Unlike traditional development methods for build-to-suit projects, Digital Realty Trust’s Gating Process(TM) provides customers with transparency and inputs at key stages of the project — from scope and schematic through commissioning and completion.

• Leverage Digital Realty Trust’s expertise in the datacenter construction management process, including negotiation of contracts, coordination with contractors and oversight of commissioning procedures – a key component of Digital Realty Trust’s Gating Process(SM).

• Take advantage of Digital Realty Trust’s expertise in the specific challenges related to datacenter development and project management, including obtaining contracts, securing permits, coordination with local agencies and service providers and building the facility – another key component of Digital Realty Trust’s Gating Process(SM).

• Benefit from Digital Realty Trust’s award-winning green datacenter and energy efficiency program and expertise.

• Receive support from the world’s largest wholesale datacenter company whose design, engineering, construction and operations teams are able to support datacenter projects of any size and location.

by Bob DeCoufle for The Data Center Journal

[datacenterjournal.com]

HCL also took over the data center’s staff and other operations, said R. Srikrishna, senior vice president for sales for the North America business of HCL’s Infrastructure Services Division. HCL actually acquired the data center in October but delayed announcing it until this month, pending the upgrade of the facility.

The data center, located in New Jersey, fits into HCL’s strategy to offer some services from locations close to its customers, Srikrishna said. The data center will in part be used to serve the unnamed customer HCL purchased it from, as well as offer services to other HCL clients.

HCL has already invested US$15 million to upgrade the 35,000-square-foot center to support eco-friendly technologies, virtualization, cloud computing, business continuity and mainframe management services.

HCL already has co-location arrangements with SunGard Data Systems for six other locations in the U.S., and will continue this arrangement, according to Srikrishna.

Customers want data center services delivered from locations close to them, he said. A customer in California, for example, would prefer to have services delivered from a data center in the state rather than from New Jersey, he added.

Although customers can save money by outsourcing IT services to India, this may not be the case with data centers, according to Srikrishna.

Setting up and running a data center in the U.S. is far cheaper because of India’s high electricity costs, Srikrishna said. Real estate — the other major cost for a data center — is on par and in some cases cheaper in the U.S. than in India, he added.

Indian outsourcers are increasingly looking to put data and software development centers closer to customers, including opening ones in the U.S. Some outsourcers also believe that hiring local staff reduces criticism in the U.S. that Indian outsourcers are causing job losses in the U.S.

HCL already has close to 5,000 staff in the U.S., and this is likely to grow, Srikrishna said. About 1,500 of the staff became part of the company after its acquisition last year of Axon Group, a SAP consulting company firm in the U.K. A large number of outsourcing contracts, particularly infrastructure services contracts, have required HCL to absorb some of the clients’ IT staff.

HCL is increasingly focused on delivering newer services that its customers do in-house, Srikrishna said. HCL will continue to use its centers in India to perform work that is cheaper to produce there, he added.

by John Ribeiro, IDG News Service

[pcworld.com]

Computerworld – As Hurricane Ike bore down on Houston one Friday last September, the Continental Airlines’ flight operations center, located on the 14th floor of a glass-sided downtown high rise, suddenly went dark. For the airline’s pilots and flight crews, however, business proceeded as usual.

Here’s why: At that same moment, 42 miles north of the city and some 60 feet underground — in a hardened Cold-War era bunker built by a paranoid millionaire oilman to survive a nuclear holocaust — Continental’s backup data center took over. Throughout the ordeal — from Friday morning, as the storm approached, through Saturday, when winds above the Westland Bunker in Montgomery, Texas, gusted to 125 miles per hour, until Sunday evening, when operations resumed in Houston — the airline managed an 89% on time rating for its global flight schedule.

Locating a backup data center in an underground bunker may seem like overkill, even in a hurricane zone. But the facility met all of the airline’s requirements — including cost, says John Stelly, managing director of technology at Continental. The bunker, run by real estate partnership Montgomery Westland, has been converted into 33,000 square feet of rack-ready data center space complete with air conditioning, redundant network and power sources, uninterruptible power supply systems and backup generators.

Continental leases 2,000 sq. feet underground and another 12,500 sq. feet of office space above ground, in a hardened building complete with 3-inch-thick bulletproof windows. The airline can house its entire operations staff of up to 125 people at the backup site.

After Hurricane Katrina, Continental began looking for a fallback data center for use during hurricanes. Westland “was far enough away to be out of harm’s way but close enough for folks to drive to,” Stelly says. The blast-resistant facility is admittedly a bit much for even Continental’s backup needs, but the four-feet-thick walls and high security entrance are nice extras, Stelly says.

Also, connectivity options at the Westland facility were a plus. The network and power feeds for the bunker were sourced from areas well away from Houston, while pricing was competitive with above-ground co-location facilities.

Workers in Iron Mountain's control room at The Underground monitor systems operations as well as external factors like the weather.

Rise of the underground

With a renewed focus on data center outsourcing and space in high availability facilities in short supply, investors such as Montgomery Westland have snapped up and renovated abandoned mines and military bunkers in the hopes of cashing in.

Since 2007, for example, Cavern Technologies has operated a data center 125 feet below ground in an abandoned limestone mine. The mined out area underground, which covers 3 million sq. feet, is 15 minutes outside of Kansas City, Mo. Unlike other mines, the Cavern facility was created with the idea of reuse in mind, so floor space isn’t irregularly shaped like other underground facilities can be, says president John Clune. The area’s relatively low electricity costs, at 3.5 cents per kilowatt-hour, help to make operating costs lower than those in other parts of the country, he adds.

Another facility, The Bunker, is a decommissioned, 50,000 sq. foot Royal Air Force bunker that operated until the 1990s. The facility is inside a hill near Dover, England and it now hosts data centers 100 feet below ground. “People get a picture of a hole in the ground. That’s not the case. It’s a state-of-the-art data center,” says Paul Lightfoot, director of managed services for The Bunker. Clients range from businesses running mission-critical Web applications to a financial services firm that runs online trading systems. “We do everything from basic square footage to fully maintained systems,” he says.

Iron Mountain is among the oldest and best known providers of underground storage and data center space. Known for storing everything from backup tapes to old movie reels in The Underground, its repurposed limestone mine in rural Pennsylvania, the company has seen its electronic storage and leased data center space business increase while its traditional paper record storage business has slowed. “It is now the fastest growing component of our business,” says vice president Charles Doughty. In addition to leasing rack-ready space, the company offers data center design, hosting and management services.

But while interest is up, the number of actual customers leasing space in its underground data centers remains small. Iron Mountain counts five operating data centers in its underground facility, including its own. But with 60,000 square feet of available data center space and another 145 acres undeveloped in the facility, Iron Mountain has plenty of room for more.

Underground data center facilities fall into two categories: Abandoned mines, like Iron Mountain’s, and decommissioned military bunkers such as InfoBunker, a subterranean facility just outside of Des Moines, Iowa. InfoBunker leases data center space to organizations ranging from a local telephone company to government agencies about which Jeff Daniels, a vice president at the company, says he can’t talk.

On the demand side, an increase in extreme weather events, heightened concerns about security since 9/11 and the need to provide higher levels of security to comply with regulatory requirements have made these spaces more attractive to some organizations. Underground facilities offer security and structural protections that would be cost prohibitive to build from scratch.

Meanwhile, the recession and credit crunch have made it harder to get funding to build new data centers, and organizations have become more accepting of the idea of using co-location facilities to house mission-critical data center operations. “Demand for computer space is stronger than I’ve ever seen it [and] the supply is so small, so inadequate,” says Peter Gross, vice president and general manager at HP Critical Facilities.

Basic co-location space isn’t the problem, says Jon Bolen, chief technology officer at Westec Intelligent Surveillance. The surveillance-monitoring service, based in Des Moines Iowa, serves clients such as McDonald’s Corp. and Zales Corp., and recently completed a search for a hardened facility for its own backup data center. During this search, Bolen saw a general lack of high-end infrastructure, of enterprise-class data center space. “If you need space that is as good or better than the space you would build there’s a shortage of places you can go.”

This shortage has given the underground facilities an opening to pull in larger data center clients. Cavern says it is negotiating with Fortune 500 clients looking to lease spaces of 30,000 to 100,000 square feet. However, most clients are smaller organizations that don’t require so much space; more typical would be a hospital that leases 1,500 sq. feet.

One might assume that IT organizations would have to pay a premium for bunker space. After all, the cost of building such a structure is high, and special venting and air-flow systems are required. But IT executives say they’ve driven deals where the total cost of ownership is competitive with above-ground facilities. Because they’re repurposing existing space that the government or a mine operator paid to build, providers say they don’t have to pass on the original construction costs for the structures and can afford to be cost competitive.

Consider the cons

Before deciding to go underground, IT executives need to identify potential limitations, experts say. Even things as simple as ceiling height can be a challenge. Continental’s data center space in the Westland bunker has 10-foot ceilings, and putting full-height racks on top of an 18-inch raised floor was a tight fit. “We had to come up with a design to allow us to use full-height racks while providing sufficient airflow,” Stelly says.

Another concern: While computer systems may be protected in a bunker, critical infrastructure needed during a disaster, such as generators, fuel tanks and air conditioning cooling towers, may be above ground. That could be a problem if the catastrophe you need to worry about is a tornado, warns Westec’s Bolen.

Bolen recounts how one company claimed that its hardened facility could withstand a direct hit from an F3 (158 to 206 mph) tornado. But the air conditioning and generators were outside. “When an F3 hits, those generator and HVAC units are going to come off their pads,” he says.

Westec ended up taking space at InfoBunker, about 45 miles away from its offices, Bolen says. The 65,000 square foot Cold War command bunker, designed to withstand a 20-megaton nuclear blast, maintains all infrastructure, including generators, fuel and cooling equipment, 50 feet underground.

Another consideration is that these underground facilities tend to be in rural, out-of-the-way locations. The facilities may be too far away from a company’s primary data center, and finding local lodging for staff in a disaster situation may be difficult. Continental had to find office space and lodging accommodations for more than 100 operations staff during Hurricane Ike. Fortunately, Montgomery Westland had hardened above-ground office space as well as access to local lodging.

Underground facilities do have a few other advantages. The limestone floors at The Underground have a virtually unlimited load rating, while the walls maintain a constant temperature of about 55 degrees and act like a heat sink for some of the waste heat that comes off data center equipment. The limestone walls absorb 1.5 BTUs per hour per sq. foot of wall space, Doughty says.

Cool stuff

The green aspect of going underground is what attracted Marriott International. It wanted to move from an outsourced “cold site” disaster recovery service to managing its own hot site backup data center. Management wanted a hardened, secure facility in a location that was within a day’s drive from Marriott’s Bethesda, Md., headquarters. And it wanted to make sure the facility followed the company’s focus on environmentally friendly best practices, according to Dan Blanchard, Marriott’s vice president of enterprise operations.

Last year, the hospitality business completed the build-out of a 9,000 sq. foot remote backup data center at The Underground. Blanchard says that although the extreme level of security, including armed guards, exceeded his requirements, the idea of reusing an old mine rather than breaking new ground appealed to Marriott. “It’s a definition of recycling to use the space that was a mine and convert that fairly inexpensively to its next use, which for us is a data center.”

Energy efficiency also factored into Marriott’s decision, Blanchard says. While Marriott’s data center uses a traditional chiller as its primary cooling system, the backup is a prototype free cooling system. That prototype, designed by Iron Mountain, uses an air-to-air heat exchanger, drawing 55-degree air from the 1,000 acres of unused space within the mine. “The air is the exact temperature of what you would bring in with mechanical cooling,” Doughty says. Iron Mountain also is experimenting with a system that would pull cool water from an underground lake within the mine.

An abandoned mine may conjure up images of damp walls and dripping ceilings — but that’s not the case here. “You have pumps and a lot of protective devices,” says HP’s Gross, and all of the facilities claim that dampness is not a problem. Doughty says The Underground is naturally dry due to its location and the type of limestone above the mine.

Air quality also is good, he says. The air in the Iron Mountain facility is relatively clean and non-condensing, he says. “As soon as you put heat to it moves away from the dew point,” and that makes it a good choice for cooling, he says.

Blanchard says the new Recovery and Development Center, which is used for software development until needed in an emergency, costs half as much as he previously spent on power. Some of that is attributable to relatively low cost of power in Pennsylvania (5.5 cents per kWh). The rest comes from efficiencies of design and the characteristics of the underground environment.

Gross cautions, however, that cooling efficiency gains specific to the location are probably not all that significant. A well-designed data center today can cut power consumption in half by using new energy efficient equipment that can run at higher operating temperatures, by optimizing airflow designs to allow intake air temperatures to rise as high as 85 degrees and still keep equipment within operating temperature limits, and by picking a location in a colder climate, where water- or air-side economizers can be used to take advantage of cool outside air as weather permits.

Security, Gross says, is the primary benefit of using an underground facility to host a primary or secondary data center. But for most of his clients, the ability to get people to the backup data center in a hurry, connectivity options, and finding a facility that meets budget are priorities. Underground facilities usually don’t beat out above-ground sites in his clients’ evaluations, he says.

Still, Continental and Marriott are among a small number of enterprise operations using underground facilities. Rakesh Kumar, an analyst with Gartner Inc., says he is unaware of any Gartner client that is currently leasing space in one. The primary benefit of such sites, he says, is that they are designed to be highly resilient — often to military specifications. That’s important for some government data centers. “But for most commercial enterprises, it probably will not be such a major requirement.” IT executives considering underground data center space should check into expansion capability, energy efficiency and how electricity use is metered, he says.

By Robert L. Mitchell for Computer World

[computerworld.com]

As U.S. government agencies consider the move to cloud computing, where will their clouds be hosted? Terremark, a hosted service provider to U.S. government customers, has built a data center specifically for that purpose.

Terremark’s data center in Culpeper, Va., is designed with the high-security requirements of government agencies in mind. The facility, which opened last year, features blast-proof exterior walls, traditional co-located servers, and a glass-enclosed room of multitenant servers that are shared by customers. Department of Defense-approved fences and 12-foot berms line the perimeter. More than 250 motion-sensor cameras send video feeds to the security office.

“This building is like a secure bunker, and the campus is like a military base,” Terremark senior VP Norm Laudermilch said during a tour of the location this week.

The federal government’s Data.gov and USA.gov are among the Web sites now running on Terremark’s infrastructure-as-a-service offering, called Enterprise Cloud. A number of other agencies are soon expected to announce their own plans to host applications on the service. Terremark also serves companies in the private sector.

As with Amazon (NSDQ: AMZN) Web Services, customers of Terremark’s Enterprise Cloud pay for CPUs, storage, and memory on a flexible per-use basis. The service can support basically any application that runs on Windows or Linux.

To deliver its Enterprise Cloud services, Terremark employs VMware hypervisors and management tools. In addition, Terremark developed its own tools and wrote custom code to round out its data center management platform. Terremark is rolling up network security data, customer reporting, and ticket generation and management up into an integrated tool. The company also developed its own storage and server management tools.

Terremark backs up its services with a 100% up-time SLA. The company has rows of flywheels — 660-lb metal discs that spin at 7,700 RPM — to keep the power running briefly in the event of an outage. Those are backed up by massive, diesel-powered Caterpillar generators that will kick in 7 seconds later.

Terremark’s facility has a 24×7 security operations center with internally developed intrusion prevention and intrusion detection capabilities. FISMA auditors recently spent more than two weeks checking out Terremark’s systems. The company is one of the few co-location vendors accredited by the General Services Administration to handle classified data.

Terremark has completed one data center on the Culpeper campus. A second facility is scheduled to open next year at the same location, and three other data centers are planned there. Terremark originally budgeted $250 million to construct the site, but the company will likely need to raise that estimate.

One vehicle entry point is manned with armed guards, wedge barriers, and reinforced gates to prevent unauthorized entry. Another, for delivery trucks, requires vehicles to pull through a set of garage doors, to be searched before going through a second set of doors. The undersides of trucks are checked with mirrors, while specially trained dogs sniff for bombs.

Customers with special security requirements can get 9-gage steel mesh installed under the data center’s raised floors as an added precaution, and those housing classified or sensitive information don’t just have metal cages around computer equipment but floor-to-ceiling concrete walls with locked doors.

Demand for Terremark’s Culpeper facility is strong, with up to 40 tours going through the facility on a given day. Terremark anticipated that it would take 18 to 24 months to sell out co-location space in the first data center, but it did so within 5 months, said Laudermilch.

By Information Week

[informationweek.com]

On Monday the State Finance Committee approved the sale of $300 million in bonds to fund the construction of a new data center and office complex for the Department of Information Services. Plans call for a 160,000 square foot data center with a 160,000 square feet of office space.

Read More at Data Center Knowledge

By Rich Miller for Data Center Knowledge

[datacenterknowledge.com]

By Dave Jacobs, Llenrock Group

Oh the irony of it all. Consumer spending is way down, and so the retail sector has been hit hard. Unemployment is at 9.5% and climbing by the day on its way to 10%, and so the office sector is hurting. People are traveling less, and have less discretionary income, so the hotel sector has been battered. Portfolios of industrial property that would have traded sub-7 CAPs 18 months ago are now trading at double digit CAP rates. Even multi-family, a sector success by way of comparison, has felt the impact of tenants looking to double up, rent growth beginning to flatten, and has yet to see, in some markets, a wave of supply from condo projects-gone-bust mess with occupancy rates.

Another BLACKSWAN niche that may prove resilient Data Centers. That’s right, the same sector that fueled the mini recession earlier this decade and is lovingly referred to as the dot-bomb era is currently partying like its 1999. How is that possible, you ask? Several factors are at play.

Demand is Different

Back at the turn of the millennium, data center demand was bursting at the seams from seemingly every start up company on Earth. Of course, the ability to grow was fueled mostly by venture capital, and every start up needed, or wanted, data center space. When these low revenue/ridiculously highly leveraged companies failed, data centers emptied out and were sold at bargain basement prices.

Now, instead of poorly capitalized start ups driving demand, heavy hitter companies are leading the charge. There are several reasons for this. First, since 9/11, major corporations are legally required to have backup sites for information to protect against the threat of a terror attack on their main infrastructure. These have to be off site, and since most major corporations are located in urban centers, that means these sites are often in suburban areas at least an hour away from headquarters. Secondly, we have seen the rise in bandwidth sucking websites like Facebook, You Tube and MySpace. These types of social networking sites demand a huge amount of electricity that only data center space can provide.

2. Supply is Constrained

When the data center stock was sold after the fallout, many of the suburban buildings were adaptively reused for other purposes. This constrained supply naturally. Furthermore, as construction costs soared a few years ago, nobody built much of anything on spec, let alone a data center whose bad taste was still in every developer’s mouth from 2001.

Furthermore, many of these powerful electricity-sucking facilities need to be strategically located close to a major power source like a substation, or a fiber conduit. Locating further away from these sources makes it more expensive to gain access to the necessary power, which isn’t conducive to keeping costs down for landlords or tenants. This is especially the case in urban environments, which makes adaptive reuse of old vacant office buildings or warehouses much more challenging if they aren’t in the ideal location.

3. Growth is Organic, not Economic

Unlike most other sectors whose growth is usually tied to economic factors like jobs, consumer spending and housing prices, data centers are not. Demand is outstripping supply by a healthy margin, and demand for this type of space is projected to grow substantially over the next 5 years. One only need to look at the newspaper industry to see why. Newspapers are failing across the country because more people are choosing to get their news either via the television or online.

The availability of broadband to all but the most rural of areas has changed our society in dramatic ways. We all know how its changed the way we live; now the growing importance of data centers is real time evidence of its impact to our infrastructure and the real estate investment community. The ever swelling waves of data need to be stored somewhere and data centers are where that will likely be. Corporations will move their file rooms to online servers. Warehouse and stock room inventories will be tracked and managed online. It is a natural progression of the way we will work, and live.

Don’t believe the hype? Digital Realty Trust, the biggest REIT of data center space, has an 11-million-square-foot operating portfolio that is 95% leased. Demand appears high and new average rents are three-times higher than expiring rents. Hence its strong fourth quarter earnings report a few weeks ago, which included a 43.4% jump in FFO to $68.9 million ($0.76 per share). For the year, FFO was $230.3 million ($2.62 per share), up 27.8% from 2007, and adjusted FFO was $2.48 per share, a 21.0% jump from 2007.

As Baird analyst Will Marks points out, “We believe that many corporations are likely to look for ways to cut costs in 2009 and one way to cut costs is to outsource data center operations.” “This trend should benefit DLR.”

While there are industries and niches that run cyclical with, and counter cyclical to the economy, the data center market, unlike all of the rest, seems to know no valley no matter what the economy is doing. Sounds like a sales pitch you say? Then just click on the following - Cloud Computing –   and imagine the future.

Case In Point

In my former life as an investment sales broker, I had my hand in selling several data carrier hotels. While at Marcus & Millichap’s Philadelphia office, we listed for sale only a 42,000 square foot, former Hires rootbeer factory turned data carrier hotel, due to its proximity to the old Philadelphia B & O rail line, which you might recognize from a Monopoly board. In a grid based city like Philadelphia, access to fiber lines that run underneath rail lines is essential to harnessing power for a data carrier hotel. It was for this reason that this obscure, dated four-story building was bursting at the seams with tenants big and small, institutional and startup, who sometimes rented as little as 43 square feet of space to house fiber conduits and racks, but paid over $100 per square foot for the space.

In a market where even at the top of the cycle, product seldom traded for more than $175/per square foot, this building eventually sold for $15.3 million dollars, or $364 dollars per square foot, more than double the cost of trophy office buildings in Center City. The truth of the matter is that if these buildings are well situated with access to robust power sources (substations or generators) and conduit fiber lines and have little competition or low barriers to entry, they can be just as big cash cows as the best parking garages or self-storage facilities, if not even better. These items are of paramount importance, because when you look at a price per square foot figure as healthy as the one cited above, you can quickly understand that replacement cost must be thrown out the window. While it is important to understand the supply and demand factors, as it is with any property, you need to understand that you are essentially buying cash flow in the form of the value of the sum of leases, rather than the brick and stick real estate that houses them.

CEO Steve Smith said Equinix has a full sales pipeline and is running out of data center space in key markets. To address this looming imbalance, the company has acquired a large data center in Frankfurt and will add additional space at its huge New Jersey data center.

Perhaps more importantly, there was a shift in tone in the comments from Equinix executives. “We’ve begun to think about being more opportunistic in the second half of 2009 and into 2010,” said Equinix President and CEO Steve Smith, who noted that Equinix recently raised $314 million and the “future capacity constraints we expect to face from accelerating fill rates in key markets.”

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By Rich Miller for Data Center Knowledge

[datacenterknowledge.com]