IMN Outlook: Optimism About the Future, But With Caveats

Data center investors and developers expressed a sense of cautious optimism about the industry’s future at last week’s IMN Conference on Financing, Investing & Real Estate Development for Data Centers in Santa Clara, Calif.

While the data center industry remains strong and resilient, there are several factors on the horizon that could pose challenges, including lengthening sales cycles for some types of deals, and an increasingly competitive landscape in some geographic markets.

Here’s a summary of some of the issues that both data center operators and investors highlighted in discussions at the IMN event.

“The time to close a deal in 2012 is longer than it has been in the past,” said Zane Alsabery, CEO of Alchemy Communications. Alsabery gave an example of one customer, a bank, which was expected to take 6 months but ended up taking 12 months. Both the first-day keynote panel and the audience generally agreed.

The reason for the lengthening sales cycle  is that upper management is becoming involved in the decision process more frequently, which was not the case in the past. Michael Higgins Senior Vice President of Data Center Servers at Internap said he also has noticed more of a C-level presence , as well as increasing third-party representation in the form of agents and the broker community playing a bigger role.

Mark Waddington, Chief Business Officer at QTS (Quality Technology Services) said he’s been seeing more complex deals as customers seeking more options beyond standard colocation.

Basically, the sales pipelines at the beginning of the year for the industry looked incredible, panelists say, but deals have been taking longer than expected, and look a little different. There’s also a lot more hand-holding involved in these deals to match the longer sales cycles.

Pricing has stabilized and now the industry is seeing more long term deals, with 10 year+ terms, as opposed to back in 2009, where there was, as the second day keynote described, “weird, short deals.” Internap’s Higgins said he is seeing more greenfield projects now, rather than retrofits of existing buildings.

Fundamentals are gradually recovering at the property level, said Stewart.

California Markets

The conference was in Santa Clara, so there was an understandable emphasis on the California market, especially southern California. Alchemy’s Alsabery believes it’s a different, competitive market “I have more competitors in downtown LA in the same building than I have in all of Orange County,” Alsabery said. Investors said that California is a difficult market for new projects because of regulation and power costs. There’s less out-of-state business, and California is dominated by the server- hugging mentality, with clients wanting to stay close to their equipment.

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About the Author

Jason Verge is an Editor/Industry Analyst on the Data Center Knowledge team with a strong background in the data center and Web hosting industries. In the past he’s covered all things Internet Infrastructure, including cloud (IaaS, PaaS and SaaS), mass market hosting, managed hosting, enterprise IT spending trends and M&A. He writes about a range of topics at DCK, with an emphasis on cloud hosting.

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