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Data Center Absorption Forecast: Is Supply Creating Demand in the Various U.S. Regions?

 
Feb 16, 2017
  • The New York/Tri-State will continue to be a soft market going forward
  • Inexpensive power, connectivity and the most effective cost of ownership also play a part of the current deals being made
  • Dallas and Phoenix have excellent supply right now but the demand is in Chicago
  • When cloud services need a site it usually happens quickly, so those providers who are ready with supply will be in the best position to act
  • The lack of supply in some markets will force the shift to secondary submarkets
  • Dallas could have a big year due to limited supply in other markets
  • Institutional investors are increasingly interested in the data center space and may begin to create some traction soon
  • When the financial services players begin to embrace the cloud it will become watershed moment for the industry

ASHBURN, Virginia – The Washington, D.C. & Mid-Atlantic Data Center Summit brought together active and innovative data center developers, investors, capital sources, end-users, engineering firms, consultants and public sector executives to explore trends and industry predictions for the coming year. One roundtable was a session on the evolution of demand in the various U.S. regions compared to the northern Virginia market. Participants in the session were Jim Kerrigan, SIOR, Managing Principal & Founding Member of North American Data Centers; David Spiewak, Managing Principal at DJS Group LLC / Next Tier HD; and Allen Tucker, Managing Director of Jones Lang LaSalle. Moderating the group was David Tolson, President & CEO at DBT-DATA.

To begin the discussion, Jim Kerrigan of North American Data Centers spoke about absorption in the American markets. Chicago, according to Kerrigan, was one of the largest markets for data usage, but interestingly two of the largest users in that area are less than one year old: CyrusOne and Microsoft. This proves that supply creates demand, says Kerrigan. Minnesota has proven to be the softest market right now, according to Kerrigan, which may be due to some legislative changes. David Spiewak of DJS Group LLC / Next Tier HD, added that the New York/Tri-State market will continue to be a soft market going forward. Although he does admit there have been some recent leases revolving around cloud services and this is encouraging. Spiewak predicts that retail data centers will continue to grow in the tristate area but he does think it is easier to do business elsewhere given certain geopolitical hurdles. Allen Tucker of Jones Lang LaSalle pointed out that the focus should be on locations where supply is strongest. Supply dictates demand, says Tucker. Inexpensive power, connectivity and the most effective cost of ownership also play a part of the current deals being made.

Spiewak then addressed the Southern markets, specifically Florida. He said that the market has really picked up recently with Google taking two megawatts in a recent deal in Miami. Kerrigan added that the Southern Florida market is crowded and many are shy from revisiting the area as it is very expensive to build anywhere in Miami. But Kerrigan did say that it is the gateway to the South American Latin markets and this may spur some deals soon.

Tucker then addressed supply in the current American markets. He explained that Dallas and Phoenix have excellent supply right now but the demand is in Chicago – for the time being. Tucker says that data centers are technically difficult to build, but as more get completed the supply and demand may shift. The key to predicting the next good market will be supply and the ability to scale services when needed. Tucker says that when cloud providers need a deal it usually happens quickly, and those providers who are ready will be in the best position to act. Tucker explained that the major cloud providers are not construction companies, so they prefer trusted players to provide service and scale quickly. Kerrigan added that he predicts the larger cloud players like Amazon a nd Microsoft will continue to grow in-house plans for proprietary data center build outs and start to migrate away from third parties. He says that security is the main driver behind this trend. He also predicts that the vacancies made by some of these large cloud players will be absorbed by the colocation and enterprise clients.

Tolson then asked the group about submarkets and who might be the popular locations on the horizon. Kerrigan said that the shift to smaller tertiary markets is already happening as capacity comes online. He believes that this will have a dramatic impact on the market over the next year or two. Spiewak said that supply will be the determining factor going forward and he remains bullish for 2017 as that supply comes online. But the group collectively agreed that the lack of supply in some markets will force the shift to secondary submarkets simply due to the lack of offerings in some traditional areas. Spiewak believes Dallas could have a big year due to this ‘squeeze’ effect of limited supply. Tucker also pointed out the when looking at the Northern Virginia market there are not many sales transactions occurring currently. But he sees institutional investors increasingly interested in the data center space and may begin to create some traction soon.

Kerrigan then spoke about client migration and who might move to the Virginia area from the dense Northern markets like New York and New Jersey. He said much of the migration to other markets, especially for enterprise clients in the financial verticals, depends on how they determine the liquidity of their portfolios. He said each company is different, but the prospect of profitably selling a data site center makes the relocation costs worth the effort. This cycle will continue if these portfolios can withstand the financials. Tucker added that the banks also evaluate the total cost of ownership as a large part of portfolio value. He explained that many times relocation to a different market makes sense from a simple cost of management perspective, and not purely on resalable profits. Tucker also said that compliance is a factor, as well as the ability to shift much of the enterprise needs to cloud services. He predicts that when the financial services players begin to embrace the cloud it will become watershed moment for the industry. Finally, Tucker believes that the banks will seek connectivity as one of the main draws when evaluating data center sites going forward. The heavy transaction loads banks experience will require large data pipes and those with the providers and markets with strong connectivity infrastructure will be in the most advantageous position to close deals.

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