365 Main: Embracing the Server Hugger
Local markets are different from national markets, and require a different approach. That’s the philosophy behind 365 Main’s acquisition of 16 data centers from Equinix, which was completed late last year.
The transaction marked a re-entry of sorts for 365 Main principals Chris Dolan and James McGrath, who had been tracking the industry from the sidelines since the original 365 Main portfolio was acquired by Digital Realty Trust in 2010. After weighing a number of deals and strategies, Dolan and McGrath saw an opportunity in the growing demand for data center services in second-tier markets.
Their chance came when colocation provider Equinix looked to divest many of the data centers it acquired in its 2009 acquisition of Switch and Data, a provider that built its strategy around second-tier markets. Equinix, on the other hand, is one of the dominant players in the largest and most connected colocation markets. The facilities in the smaller Switch and Data markets weren’t an ideal fit for Equinix, and by mid-2012 represented just 2 percent of the company’s revenue.
“Some of these assets didn’t fit the Equinx profile,” said Dolan. “The opportunity I saw, with 50 percent utilization across the portfolio, was to build relationships with the customers and enhance the services.
National Player, Local Focus
“We’re a national player with local focus,” said Dolan. “There’s demand in the local market. People want to be close to their equipment. Our brand is strong in this industry, and we thought this was an ideal entry point with a cash flow portfolio.”
Dolan says 365 Main can bring new energy to these properties. Cities like Indianapolis, Detroit, Nashville, Buffalo and Cleveland were never going to be high priorities when compared with the huge financial interconnection ecosystems Equinix served in its big-market data hubs. But 365 Main finds these geographies “intriguing” and sees a real opportunity for a provider that takes these markets as seriously as its customers do.
“We’re really finding these people need communication,” said Dolan. “Now we’re investing in these facilities and they can expand and these data centers. It really comes down to this customer service component that was missing.”
“What we like about this portfolio is that it takes us into markets like Buffalo,” he added. “We can have a local sales presence in small markets. The competition becomes geography-based. The customer usually has a preference, and competition is localized.”
Growth in Second-Tier Cities
365 Main was formed to operate a San Francisco data center after AboveNet filed for bankruptcy in 2003. Over the next seven years, the company expanded to operate a national network of five data centers with 200 customers and 919,000 square feet of data center space. The portfolio was bought by Digital Realty in 2010 for $725 million.
Dolan and McGrath continued to monitor the industry, looking for opportunities to begin building again. Two other original 365 Main partners, J.P Balajadia and Kevin Louie, left to form Rubicon Data Centers, which is building a new data center in Reno, Nevada.
The new 365 Main isn’t the only provider focused on building a network of facilities in smaller cities. Companies like Peak 10 (southeast), ViaWest (western U.S.) and Colospace (New England) are long-time players in this market. More recently, Xand has been building a network of facilities in the Northeast through acquisitions, and Compass Datacenters and ByteGrid have been targeting second-tier markets with wholesale data center offerings.
The interest in regional markets is driven, at least in part, by supply issues in both investor capital and data center space in first-tier markets. Investors are keen to put money to work in the data center business, which has outperformed other sectors of the real estate market in recent years. That liquidity has contributed to increased competition in markets like Silicon Valley, northern Virginia and New Jersey. That, in turn, has prompted some investors to focus on smaller markets ,where local businesses face growing data management challenges and competition is less intense.
“I spent time looking for areas where there were unmet needs,” said Dolan. “I didn’t want to compete in (major markets) on wholesale, with private equity players moving. So our focus shifted.”
More Expansion Ahead for 365 Main
Dolan said Equinix had made improvements to a few of the properties, but some were still identified as Switch & Data buildings. “Part of our plan is to do a lobby and data center freshen up,” said Dolan. “Each of these data centers has a unique story. I’m pleasantly surprised with the amount of customer activity. The carriers are probably the most sticky customers. We have 10-plus carriers in each center.”
365 Main is focused on these 16 markets, but will likely be adding more.
“The strategy is to continue to grow through acquisition and perhaps greenfield builds,” said Dolan. “We are looking at the broader map, for sure. There is a lot of interest in the industry from private equity perspective, and everyone wants to get in. We’re very connected in the investment banking community, so a lot of opportunities are crossing our desks.”