Traditionally, corporations built and owned their own data centers. The reasons for this included limited availability of market alternatives, the strong need to own and control the asset, and specialized security requirements. In the past, there were few options for third-party providers that would build and manage the infrastructure with the same diligence used by large corporations. The rapid rise of the colocation, managed services, and cloud sectors have provided industry choices for enterprise users providing for reduced capital requirements, quicker delivery and more flexibility. Simultaneously, data centers were growing in size and cost and as a result, taking longer to build. The market added choices and reliability levels as good if not better than corporate-run facilities. The impact has been a shift away from large companies building and owning their own data centers. This prompted many corporations to sell their data centers outright or through sale/lease-backs in 2017, a trend which is expected to increase in 2018. In addition, legacy corporate data centers are often not located in the markets where they need to be to either provide low latency solutions or low cost power and tax areas.
What Trends are Causing Shifts in Data Center Location and Specification Needs?
Hyper scale cloud providers offer the option of increased flexibility, reducing the value of operating one’s own facility. The cloud continues to grow rapidly, resulting in more distributed data centers. As more applications are moved to the cloud, computing and storage capacity is being moved to the edge of networks to reduce latency. Reducing latency has been a key consideration for determining the locations of facilities. The cost of outages has been growing, resulting in increased incentives for higher uptime requirements. New technologies and design improvements have allowed for reduced energy consumption, leading to large energy savings while overall requirements have continued to grow rapidly. Companies have been locating facilities where they can take advantage of renewable energy sources including wind and solar to reduce facilities carbon footprints in a push for “Greener” data centers. Locating a facility in colder climates also results in energy savings through use of “free cooling”. There has also been an increased shift towards analyzing and processing data vs storage and disaster recovery.
Who is Selling and Why?
- Small- and medium-sized businesses
- Shifting towards the cloud
- Large Corporations
- Need to optimize their portfolios
- Consolidate portfolios (often because of M&A activity)
- Shift locations to better meet their changing needs
- Gain capital to use in other business areas or shifting corporate strategies
- Avoid large capital costs of upgrading aging facilities
- Reduced IT load taking advantage of moving applications to the cloud
- Reduced overall IT load, leading to the selling of excess capacity
What Does the Future Hold?
More and more companies are shifting to cloud platforms instead of managing their own data centers. Thus, cloud and colocation will continue to grow as more corporations deploy hybrid cloud IT solutions, and we expect to see fewer corporate owned and managed data centers. Technological advances such as chip processing power and server capabilities are able to do more and more in a smaller footprint as well as design improvements such as heat containment in row cooling and DCIM (Data Center Infrastructure Management) systems will continue to increase the efficiency of newer facilities, while older facilities are forced to upgrade to keep up. These trends make it difficult for corporations to predict and plan a long-term IT strategy. Some large corporations with ample capital and foresight will continue to build and own their own data centers, believing that this is the most effective long-term solution for their needs. Relative to the overall IT cost of a data center, the cost of the land and building is small, so real estate costs will not be as important for determining the best solution as other factors such as connectivity, taxes, incentives and the cost of power.
Randy Borron is a Vice Chairman at Cushman & Wakefield with 30 years of experience in data center and telecom switch site acquisition and lease negotiations, and more than 35 years of experience in commercial real estate. His data center expertise covers site selection, lease negotiation, portfolio strategy, real estate strategic planning, and account management.