Crunch Time: Wall Street May Buy, Not Build

Financial firms that initially planned to build their own data centers are weighing the option of leasing space instead.

Rich Miller

March 6, 2008

3 Min Read
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This is part three of a five-day series examining supply and demand in the data center market, and how it may be affected by the credit crunch and economic slowdown. See the introduction, part one and part two for more.

Will the huge losses in the U.S. financial sector affect the fortunes of the data center industry? The cuts in Wall Street are making their way to the data center, but perhaps not in ways you'd expect, according to the leading data center developers. Digital Realty Trust and Equinix say they are getting increased inquiries from financial firms that initially planned to build their own data centers, but are now investigating the option of leasing space instead.

"The downturn in the economy has led to increased interest in our product," said Bill Stein, the CFO of Digital Realty Trust (DLR), the largest real estate investment trust focused on data centers. "When you think about the financial institutions as a vertical, clearly they've lost a lot of capital in the last couple quarters. They still have IT application needs that need to be housed somewhere, but they now don't have as much capital as they once had for capital investment. So they're far more interested in an operating lease solution which we can provide."

"We definitely heard from a couple customers that in this economic environment that they are more prone to outsource their colocation needs as opposed to build from a CapEx perspective," said Margie Backaus, the chief business officer at Equinix (EQIX). "So as they look at where they're going to deploy their own capital, outsourcing is becoming more attractive to those segments. So I would say that's actually an upside we're seeing within a few segments."

Concerns that problems in the financial markets might affect new data center construction were heightened in late November, when HSBC postponed a huge data center project in upstate New York, citing the "business climate." HSBC had planned to build a $139 million data center in the small farm town of Cambria.

But in late January HSBC announced plans for a build-to-suit data center construction project outside London, which will be built by Digital Realty. So even HSBC, which had appeared to be gun-shy about new construction, is still building. But data center companies have all increased their demand research and conversations with customers.

'Just no change'

"We are not na™ve enough to believe that there is not going to be some slowdown in some decisions from financial institutions," said Steve Smith, the CEO of Equinix. "But it's mostly going to be on the project side and the application side of their businesses. This is mission critical infrastructure activity in these centers and all our conversations have suggested that there is just no change in the kind of content and infrastructure that they have deployed with us."

Phil Koen, the CEO of Savvis, said his company's Proximity Hosting has shown no sign of slackening demand. Proximity Hosting allows hedge funds and trading operations to locate their equipment near the servers operated by major exchanges, allowing accelerated delivery of quotes and market information.

"This is kind of interesting, because obviously this is directly targeted to the financial vertical," said Koen. "And given all the press out there concerning the concerns with financial, this continues to be a very nice service that we offer. And the reason is quite obvious: it's strategic. With the movement towards more automated trading, this allows our financial customers to improve their ability to execute in automated world."

The write-downs on Wall Street may actually boost demand in one key area: risk management. Firms that were surprised by larger than expected losses in their subprime mortgage holdings appear to be increasing the computing power dedicated to analyzing the relationships between complex financial instruments. "There has also been demand from Wall Street firms that are looking to expand their risk management computational capability in this environment," said Digital Realty CEO Michael Foust. "That's driving need for more space on the data center side."

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