Over the past three years, Facebook’s insatiable demand for data center space has been a major factor in the growth of the wholesale data center industry. Now that Facebook is building its own data centers, its changing needs will continue to impact the market.
Facebook says that it will gradually shift its server capacity from leased data centers to company-owned facilities, migrating out of many third-party facilities as its leases expire. “There will be a shift, but it will happen over time,” a Facebook spokesman said. The gradual nature of the shift will lessen its impact, and Facebook’s providers have plenty of advance notice to line up replacement tenants.
$70 Million in Annual Leasing
The social network currently spends more than $70 million a year leasing “plug-n-play” wholesale data center space from at least four providers, including Digital Realty Trust, DuPont Fabros Technology, CoreSite Realty and Fortune Data Centers. As a result, the impact of Facebook’s exodus from third-party space will be spread across providers, as well as time.
Facebook represents between 4 percent and 20 percent of total annual revenue for these providers, who have at least four years before the first migrations will occur, according to an analysis of financial data from wholesale providers. In the period from 2015 to 2018, Facebook will be vacating a significant chunk of wholesale real estate. The company says it intends to shift capacity to company-owned space, but will evaluate each lease on its merits as its needs evolve – meaning it could keep some of its leased space.
This timetable also suggests that Facebook will step up its data center construction program around 2014 to create expansion space as it migrates server capacity ahead of lease expirations. It recently opened its first huge data center in Prineville, Oregon and is building a second facility in Rutherford County, North Carolina.
Wholesale A Good Fit for Facebook
The wholesale solution proved ideal for Facebook as it grew rapidly, allowing the company to build a substantial data center footprint in both Silicon Valley and northern Virginia. In the wholesale data center model, a tenant leases dedicated, fully-built data center space. This approach offers greater control and security than shared colocation space, and is quicker and cheaper than building an entire data center facility. The tenant pays a significant premium over typical leases for office space, but is spared the need to invest large amounts of capital in data center construction.
In 2009 Facebook concluded that it had outgrown the model – that its data center economics favored a shift to building its own data centers.
The shift to company-built facilities has influenced how Facebook approaches its wholesale space. In recent deals, Facebook has negotiated shorter leases, cutting five-year and seven-year deals instead of the 10-year leases favored by the wholesale providers, most of whom are real estate investment trusts (REITs). Investors in REITS favor long-term leases because they provide predictable revenue.
Five- to Seven-Year Transition
With its strategy, Facebook is using wholesale space as an interim solution in a five- to seven-year plan to transition to its own infrastructure. This allows Facebook to continue to deploy capacity quickly, even as it gradually ramps up its data center construction program. That has led to a scenario in which Facebook is leasing new wholesale space in some markets even as it builds its own data centers in others.
Here’s an overview of Facebook’s leases with publicly-held wholesale providers:
- Digital Realty Trust: Facebook currently spends $30.1 million a year on four facilities it leases from Digital Realty (DLR), which total 231,648 square feet of space in Silicon Valley and northern Virginia. That’s Facebook’s largest commitment to any single provider, but represents just 4.6 percent of Digital Realty’s annual revenue. Digital Realty will have the longest lead time to prepare for any transitions, as its leases with Facebook have an average of 86 months (about 7 years) remaining.
- DuPont Fabros Technology: Facebook is the second-largest tenant for DuPont Fabros (DFT), with annualized base rent of about $22 million, which is at least 20 percent of DFT’s annualized base rent. Facebook’s leases, primarily in northern Virginia, have an average remaining term of 6.5 years. (77 months). DuPont Fabros has a strong track record in re-leasing space when large tenants move into their own data centers. In its early years, leases with Microsoft and Yahoo provided more than two-thirds of revenue for DuPont Fabros. It has worked to diversified its tenant base, and now has 27 customers.
- CoreSite Realty: Facebook is the largest single customer for CoreSite, paying $11.5 million in annualized rent for 74,112 square feet of space in three facilities, including an entire building in Santa Clara. Facebook represents 12.6 percent of CoreSite’s lease revenue. CoreSite may also be the first provider to have a major lease expiration, with the 50,000 square foot Santa Clara lease expiring in March 2016.
How big a challenge is Facebook’s future migration? Data center providers have dealt with similar transitions as Google, Microsoft and Yahoo shifted from leased space to company-built infrastructure. Facebook’s inventory is a big chunk of space, but will be vacated gradually and is spread across multiple providers, avoiding a scenario in which any single provider will be left with a huge overhang of space to fill.