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Study: Data Center Supply Near All-Time Low

Data center vacancy rates will reach an all-time low in 2010 as available space is absorbed and the credit crunch squeezes new construction projects, according to an analysis by Grubb & Ellis.

Data center vacancy rates will reach an all-time low in 2010 as available space is absorbed and the credit crunch squeezes new construction projects, according to an analysis by commercial real estate specialist Grubb & Ellis.

The situation is becoming critical for companies with large requirements, according to Jim Kerrigan, the director of Grubb & Ellis' National Data Center Group, who said he can currently identify only six options in the United States for data center users who need more than 7 megawatts of power or more than 50,000 square feet of contiguous space.

"The problem is that we have too many large tenants chasing that space," said Kerrigan. He doesn't quantify the supply/demand imbalance in terms of square footage, but says the looming shortage is as acute as he's seen. Kerrigan is an industry veteran who has specialized in data center real estate since 1999, and been involved in millions of square feet  of leases involving the industry's leading players. 

Kerrigan said several traditional data center hubs are facing acute shortages of space that can accommodate large users in a short time frame. "Northern Virginia has some issues because there's major demand there," said Kerrigan, nopting a recent series of large leases. "We still don't know about the government requirements coming out of the stimulus package, which could have a big impact on supply. Santa Clara (Calif.) also has a big supply issue right now."  

Santa Clara Supply Squeeze?
Both DuPont Fabros Technology (DFT) and Terremark Worldwide (TMRK) have bought land in Santa Clara for larga data centers, but postponed construction to focus their investment in new facilities in the hot Virginia market. Space in Santa Clara is in demand because the city has cheaper power (about 7 cents per kilowatt hour) than many other areas. Santa Clara is served by Silicon Valley Power, while most surrounding towns have PG&E as their primary utility. 

As early as the fall of 2007, eroding conditions in the real estate market began to pinch data center construction (as we noted in our "Crunch Time" series in March of 2008). Lenders grew wary of data center projects, and speculative construction ground to a halt. While some developers continue to pursue build-to-suit projects, the "lease first, loan later" scenario means longer construction timetables.

Financing Impacts Time to Market
Kerrigan says that his assessment of supply doesn't include projects that have yet to secure construction financing, as those facilities may have dificulty meeting timetables for some of the current tenant requirements. 

In a market update for his clients, Kerrigan urged data center users to work ahead on data center requirements.   

"It is imperative that users pay closer attention to ramping/expansion as they determine how much space/power that they will ultimately need," writes Kerrigan. "There is likely to be an increase in demand from industries that are newer to data center space (digital television and healthcare companies) and from businesses currently housed in antiquated space. In addition, numerous financial institutions have entered the market for large disaster-recovery solutions throughout the country."


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