Crunch Time: Demand Holding Steady, For Now

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This is part four of a five-day series examining supply and demand in the data center market, and how it may be affected by the credit crunch and economic slowdown. See the introduction, part one, part two and part three for more.

Can the current boom in data center demand be trusted? To answer that question, the industry’s largest companies have turned to their customers, making detailed inquiries about their requirements – how much space they will need, when they will need it, and in what market.

This unprecedented level of customer research has led to broad agreement among the industry’s leading executives, who say demand for data center space and services remains strong, and is likely to continue. In analyst calls and interviews, this view has been shared by executives of Digital Realty Trust (DLR), Equinix (EQIX), DuPont Fabros Technology (DFT), Switch and Data (SDXC), Terremark (TMRK), Savvis (SVVS), 365 Main and i/o Data Centers.

Many are survivors of the industry bust of 2002-03, and familiar with the consequences of getting the demand equation wrong. They’re cautious, but confident that customer demand is driven by mission-critical needs that will survive a slowing economy.

Tracking Key Indicators

Client surveys at Equinix have found that 85 percent of current customers plan to expand space in one or more regions over the next 12 to 24 months. “We’re basing our growth plans on quantitative data from our customers, not industry reports or projected industry growth rates,” said Equinix CEO Steve Smith. “We are tending to shine the headlights on key indicators on a more regular basis, so we can look further out in the quarter. There is very, very steady demand.”

“Demand continues to be very healthy,” said Miles Kelly, the VP of marketing for 365 Main. “We read all the concerning news, and double-check with our existing tenants and prospects. When a company makes a choice to seek 10,000 square feet of data center space, it’s a well-vetted decision. It’s not like a CIO walks out of a hot server room and says ‘go call 365 Main.’ These are very complex requirements, and when the RFQ arrives, it’s been well thought out.”


“We still see demand outpacing supply in both northern Virginia and Chicago,” said Hossein Fateh, President and CEO of DuPont Fabros. “We’re cautious about (demand), and certainly don’t have a crystal ball, but we’re very pleased with the activity we’re seeing. Our sales team has seen increased demand.”

That doesn’t mean that the weakening economy and credit crunch have had no impact. Capital is dear, and that is influencing companies’ approach to their data center space. As we noted yesterday, several providers report that financial companies that would ordinarily build their own facilities may lease data center space instead.

Digital Realty reports that capital considerations have influenced the type of space being leased. “We’ve seen the mix kind of move more toward a 50/50 breakdown between the Powered Base Building – which is the more highly improved shell – versus the full Turn-Key Datacenter,” said Mike Foust, the CEO of Digital Realty.

Higher Rent, But More Capital

Clients leasing Powered Base Building space typically build out the space themselves, while Turn-Key Space is finished by Digital Realty and delivered “move-in ready.” The difference: in the most recent quarter, Powered Base Building space leased for $40.65 per square foot, while Turn-Key space leased at $125 a square foot. The shift to Turn-Key space signals that many tenants are willing to pay higher rent to avoid a large up-front capital outlay to finish the Power Base space.

“I think that trend is going to continue into the first half of 2008 based on our pipeline,” said Foust.

Terremark CEO Manny Medina says new business has shifted towards managed hosting services deployed on Infinistructure, the company’s utility hosting platform. Infinistructure lets customers run their applications on Terremark’s infrastructure, with no need to buy or install hardware.

“We have seen is a lot of our customers coming to the Infinistructure platform, because basically they’re reducing their total cost of ownership and at the same time increasing their level of services,” said Medina. “We have not seen anybody who says the current economic environment is preventing them from going ahead and expanding.”

Shift Up The Value Chain

The shift to managed services offers more revenue per square foot. A growing number of providers have shifted from basic colocation to managed services, moving up the value chain to pursue higher profit margins. If customers balk at colocation price hikes, these providers are increasingly willing to let them walk and fill the space with managed services customers. An example is Savvis, which had a basic colo customer hand back 65,000 square feet in mid-2007, and has already replaced the monthly revenue while leasing half the space.

This trend has shifted the supply equation in ways that are not widely understood, according to Tony Wanger, Senior Managing Director of i/o Data Centers.

“There’s clearly colocation space being added, but there’s also space being subtracted,” said Wanger. “What tends to happen is the space gets born is colocation space, but then grows up as managed services. I’m not sure we’re before adding (basic colo) supply on a net basis. It works out relatively well for people like us.”

As these shifts continue, data center builders will continue to query customers often and keep a tight watch on demand trends. Margie Backaus, the chief business officer of Equinix, said staying current is a business imperative. “We have a lot of good data and updated information,” said Backaus. “This really isn’t information that’s five or six months old. This is really fresh data that the customers just provided to us. So we feel really good about it.”

About the Author

Rich Miller is the founder and editor at large of Data Center Knowledge, and has been reporting on the data center sector since 2000. He has tracked the growing impact of high-density computing on the power and cooling of data centers, and the resulting push for improved energy efficiency in these facilities.