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Undersea Cables: Driving Value or Merely Moving Data

by Gene Williams, Senior Director/Data Center Practice Group Lead, Valuation & Advisory and Kevin Imboden, Director of Research, Data Center Advisory Group

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While of absolute necessity to global internet connectivity, subsea cables have often received little or no attention from the data center world until a failure or other mishap occurs. The telecom companies and specialist providers that formed and installed the networks were merely another part of the global framework, and cables were used as just another piece of the puzzle. This old modus operandi is undergoing rapid change, with content companies, data center operators, cloud providers, and private equity investors now choosing to invest in new cables to increase speed to end users. Over the past five years, cloud providers have increased their capacity ten-fold in an expansion correlated with the movement of enterprises from their own facilities to hybrid cloud strategies. This impact has led to billions invested in new cables and a corresponding effect on local data center markets.

Google has been at the forefront of cable investment, adding more pipeline among regions with increased usage of Google Cloud Platform. Since 2010, the company has invested either on their own or with partners in thirteen subsea cables, with the Dunant cable announced most recently. In a release discussing this investment, Google cited low latency, the ability to provide higher capacity, and guaranteed bandwidth as important factors in this decision. Using similar logic, Facebook and Microsoft have teamed up on a couple of recent cables, including Marea that linked the U.S. and Spain and HKA connecting the U.S. and Hong Kong. Not to be outdone by cloud rivals, Amazon has also participated in a couple of projects, with investments in the Jupiter (alongside Facebook) and Hawaiki cables connecting the U.S. and several countries across the Pacific.

From 2018 to 2020, 18 new cables are projected to come online globally, with several locations anticipating multiple new connections.

Los Angeles will receive five new cables, with the previously mentioned Jupiter connecting LA to Japan and the Philippines, PLCN and HKA connecting LA to Hong Kong, the NEXT cable linking the city to Australia, New Zealand, and several islands across the Pacific, and the Curie cable linking LA to Chile. On the East Coast, Virginia Beach serves as the closest coastal connection point to the global data center capital in Northern Virginia, and the city will be seeing three new cables linking to locations in Brazil, Nigeria, South Africa, and France. These cables are spurring interest in Virginia Beach itself as a data center target; the city has launched an incentives package and local utility Dominion Energy is constructing a $300 million wind farm to produce cheaper and more efficient power. Two large sites have either sold are in process, with new operators Globalinx and Assured Communications Advisors coming online with their initial projects. In a similar vein, the just-lit and previously mentioned Hawaiki cable connecting the Portland area with New Zealand and Australia provides further impetus for area investment alongside cheaper power than some other locales on the West Coast. The Hillsboro suburb of Portland now anticipates a tripling in size over the next five years with operators like QTS snapping up sites in the area and further expansion planned by Digital Realty, T5, Flexential, Infomart, and EdgeConneX.

In terms of adding value to individual properties, the real questions is whether or not landlords will be able to achieve higher rental rates for the additional connectivity.

Our expectation is that excellent locations will remain as such, achieving rental rates at the high end of the range on the national scale. Subsea cable connectivity is unlikely to push rents in locations such as Northern Virginia or Oregon, as these locations already enjoy excellent connectivity. However, in locations such as Los Angeles, Virginia Beach, Seattle, and Portland, where power costs and natural disaster hazards have limited data center development, we expect rental rate growth to be region-specific and primarily based on the availability of data center supply.

Spiking demand in locations such as Los Angeles could result in rapid absorption of recent additions to supply. If this occurs, rental rate increases will likely follow. Most project that the addition of subsea cables will impact tenant demand; however, the impact on rental rates remains to be seen. While we are knowledgeable regarding recent transactions proximate to major points of presence achieving significant rental rate premiums, these deals have not been the direct result of subsea cable connectivity.

As the backbone of international connectivity, subsea cables will continue to enable worldwide commerce and communication over the long-term. After years of slow, telecom-funded growth following the dot com collapse, enterprises once again see the wisdom of investing in this infrastructure upon which we all depend. In the near-term, completion of these connections in specific locations within the US should have a positive impact on tenant demand, while impacts on rental rates and valuations remain to be determined.

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Gene Williams, MAI, CCIM, MRICS, is a Senior Director in our San Jose office and the Practice Leader of Valuation & Advisory’s Data Center Practice Group. Mr. Williams has a background in finance, underwriting and appraisal. He has performed commercial property appraisals since 1988 and has been a member of the Appraisal Institute since 1994.

 

kevin-imboden-data-center-researchBased in the San Francisco Bay area, Kevin Imboden is Director of Research for Cushman & Wakefield’s global Data Center Advisory Group. Since 2007 Kevin has expertly interpreted real estate, retail, and economic data while leading large global research teams of researchers. His experience includes 8 years at Real Capital Analytics, most recently as Director of Research.

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