Multi-tenant data center pricing trends are not an easy subject to broach. In North America, each market has different dynamics. Coupled with an industry evolving beyond power and ping to other services, dissecting raw space and power from everything else is further complicated.
For these and many other reasons, it’s nearly impossible to come up with a blanket statement that pricing is going up or going down. However, the consensus among many is that it has generally bottomed out in the U.S., and much firmer pricing is expected in the near term. These findings largely agree with a recent Cushman & Wakefield report. However, several industry watchers mentioned an abundance of X-factors that will impact data center pricing.
The Floor is Firm
Industry players and observers from Colliers, Wired Real Estate, Jones Lang LaSalle, and North American Data Centers all predict flat but stable pricing. What happened to get here, and what's going to happen going forward?
In 2011, colocation providers and industry observers had noticed an upward trend in pricing during previous years as the industry took off. The sentiment was increasing competition would slow or reverse the trend, and those sentiments were right.
"Over the last 4-5 years, we've seen a 7.5 percent drop in pricing,” said Bo Bond, managing director, Jones Lang LaSalle. However, Bond also notes that last year was just a few points down. "The trend of falling price compression is starting to level out,” he said.
Dynamic Ceiling Harder to Peg
Another big discussion in 2011 was around blurring lines, or convergence, between wholesale and retail colocation and its potential impact on pricing.
Convergence is once again the big trend – the convergence of infrastructure and IT. Infrastructure providers are increasingly becoming IT service providers as well, offering services beyond running the facility such as cloud or managed services.
“A key driver that’s affecting pricing is the notion of ancillary services,” said Tim Huffman, executive vice president, Colliers Technology Group.
Because deals are increasingly about more than space and power, it influences the price of space and power.
It affects data center pricing in many ways. Huffman argues a provider is more likely to cut a deal on the space and power if it sees opportunity in other buckets like services.
It also means providers will continue to price aggressively on large strategic wholesale deals and make up revenue across other higher-margin customers. Providers will try to "average out" the revenue per square foot between low priced big deals and higher margin, hybrid customers.
Raising the overall average takes the discussion away from weak pricing in big deals on Wall Street, moving the discussion to rising pricing per square foot averages. This phenomenon can be seen in recent Internap and QTS earnings.
Huffman explained that in addition to protecting a provider from raw data center pricing sensitivity, services also make customers stickier. It can also provide flexible deals where if a customer doesn't use expected space, that difference can go towards services.
"Providers purely in the middle [retail colocation] are going to suffer if they don’t have services," said Huffman. "That bucket will incrementally shrink.”
The largest retail colocation player Equinix doesn't offer direct cloud services but differentiates beyond space and power with interconnection and private cloud connectivity. It also recently acquired professional cloud services firm Nimbo.
Other Factors Impacting Pricing Going Forward
Location has always been a factor in data center pricing and will continue to be so. For example, Cushman & Wakefield's pricing range per market varies greatly in locations like Chicago -- around $125 to $185 per kilowatt per month -- a massive window.
It is hard to create an overall trend for every market in the country, said Jim Kerrigan, managing principal, North American Data Centers.
Kerrigan also notes that even in strong markets, the volume is often too low to project a trend. "Dallas, Virginia, Chicago are three huge markets with very little supply online currently, and a lot coming online this summer,” he said.
“That supply-demand curve can turn based on a few large deals,” said Bond.
Data centers are also spreading out. Emerging markets are landing more deals that arguably would have gone to core markets, increasing competition and aggressive pricing.
“If there’s no supply, it doesn’t mean the market doesn’t need supply; it means guys are fulfilling space elsewhere,” said Kerrigan.
Further complicating the issue is that pricing doesn't always move with supply-demand dynamics, as Jeff West, a director at Cushman & Wakefield recently noted. Kerrigan argues that supply can create demand.
Another factor in pricing is not all data center space itself is created equal. Space with more redundancy is more expensive to deliver than less. Customers are getting better at accurately assessing their needs and providers are more flexible in delivering custom space, making pricing fluctuate within even a single facility.
Just-in-Time Builds Stabilize Pricing
This flexibility is the result of better "just-in-time" building, or incremental building. Just in time building means there are fewer speculative builds, which firms pricing.
“Just-in-time inventory is changing things around to the detriment of tenants and favor of landlords,” said Kerrigan.
Another theory around just-in-time is that pricing slightly decreased in the last few years because building efficiently allowed aggressive pricing. This partially explains softer pricing leading into the last quarter of 2014.
Pricing is expected to be firmer going forward because these efficiencies have already largely been factored in, resulting in a new, firmer floor being set.
“A few years ago it was more expensive to build," said Bond. "Now their margins are a little better. But pricing is starting to bottom out.”
There has been criticism toward public companies aggressively pricing big name deals. Cushman & Wakefield noted that there would be increasing investor pressure on public companies to not aggressively price. Both Kerrigan and Bond are skeptical that aggressive pricing for banner deals will stop.
"Are they really as firm on pricing as they say [on investor calls]? I don’t think so,” said Kerrigan.
“Credit is king with a REIT," said Bond. "I do believe in core principles, that bigger credit and larger deals get better pricing.”
There will always be customers that only need white space. However, big wholesale deals, a popular measuring stick for industry health in the past, are a less effective measure today.