The colocation industry started in the late 1980s and early 1990s when corporations were looking to outsource the facility side of the earliest data centers. Companies that had traditionally hosted their first switches, servers, tape storage, and mainframes in modified telco closets within their corporate offices, determined the amount of risk associated with managing the mechanical and electrical systems was detrimental to the operations of their corporate structure.
Further, the telecommunication and connectivity requirements to move this immature data throughout the U.S. and globe became much more rigorous as well. Therefore, the first colocation facilities started in fiber rich buildings with moderate mechanical and electrical support called carrier hotels. Carrier hotels were typically found in the central business district of most major cities where there happened to be an abundance of newly laid fiber with direct access to the local exchange, tandem, or most prominent central office. As time progressed, the aggregation of the carriers into these buildings caused these buildings to become much more important to intra and interstate communications.
As the needs grew on the server and mobile devices started their hockey stick growth, carrier buildings continued to be relevant in the data center industry, but the needs for power and cooling started to elevate drastically. Many of the earliest “build it and they will come” venture capital-backed data center providers were ahead of their time. The facilities were built to handle the internet growth but the demand was not there to support this new supply that was bleeding out to the suburbs of major markets across the U.S.
Therefore, the post dotcom bust set the colocation industry back a few years as corporate users (we now refer to as enterprises) began to gobble up these speculative assets. As dot-com data centers were being sold to the likes of financial institutions, insurance companies, big box retailers, etc., this diminishing supply of data centers attracted the attention of many investors and earlier data center operators, which would soon be referred to as multi-tenant data center (MTDC) operators.
Once all the ‘90s venture capital backed, speculative data centers had been absorbed in the early 2000s, the MTDC industry, which was still in its infancy, started to construct the next generation of data center across the suburban U.S. in cities where the demand was most. Northern Virginia, Santa Clara, Northern New Jersey, Los Angeles, Dallas, Chicago, and others saw rapid growth based upon an upswing in data center demand.
Most providers either took a rack and cabinet approach (retail colocation) to their offering combined with significant access to connectivity or by building scalable power and cooling (wholesale colocation) to handle larger requirements of the enterprises. Many of the growing MTDC operators sought out the tax benefit of becoming publically traded real estate investment trusts (REITs) so they could have generous access to public capital which, outside of operational excellence, was one of the largest barriers to entry in this growing marketplace and new real estate asset class. Early REITs like Digital Realty (DLR), DuPont Fabros (DFT), CoreSite (COR), Quality Technology Services (QTS), and Equinix (EQIX) started to expand geographically across the U.S. and some internationally to service the growing demand of their clientele.
Today’s MTDC market is littered with large operators that are extremely well capitalized, and have international footprints and a multitude of service offerings from cloud to colocation to managed and other related services. As the demand continues to outpace supply as we approach the latter half of 2017, the MTDC market is buying and building at scale. Most are using the MTDC operator’s deep pockets to leverage large land holdings, scalable campus infrastructure, and supply chains that allow for just-in-time delivery of large mechanical and electrical systems that the enterprises and smaller data center operators do not enjoy.
This competitive advantage supports the next phase of demand which has risen over the last few years by the cloud service providers (CSPs).
As the demand grew in the cloud space, many of the CSPs who had traditionally built and operated their own data centers to support their massive ecosystems have turned to the larger MTDC operators to fulfill their needs by accessing their scale and speed to match the CSP’s deployment schedules. 2016 blew the doors off the records books with U.S. absorption levels in the 350 MW range for CSPs alone. The first half of 2017 has reported approximately 187 MW of CSP absorption in U.S. MTDC facilities. Recalling that many CSPs still build and operate their own facilities, the impact of the cloud in the data center industry is overwhelming. This relatively new real estate asset class is attracting capital from all corners of the globe as it appears to be sustainable for years to come. Look for this to continue.
LOOKING TO THE FUTURE
So where does the data center market go from here? Below are the four trends that are dominating the 2017/2018 conversation:
The cloud is now headed to global markets. 2016 saw incredible absorption driven by cloud demand. Today, large scale cloud service providers are looking overseas to fill out their global footprint.
Mergers & acquisitions (M&A) heavy hitters continue to the tune of $10 billion. Several massive acquisitions and buyouts were announced within the data center industry in 2017, setting pace for a record breaking year. We are halfway through and already passing $10B.
Absorption of data center capacity is normalizing for now. Coming off a wild year for leasing, the first half of 2017 depicted reserved absorption as users continued to work through capacity they picked up in 2016. Strong growth in the enterprise sector (financial, retail, technology, insurance, and medical) is a positive sign for investors.
Data center users crave more power to deploy artificial intelligence (AI) and go global. Data center industry heavyweights are preaching about their growing need for data security and AI, and how it will affect their business going forward. Machine learning and the compute behind it will change technology like no other milestone to date.
The future of the data center is bright as you study positive fundamental supply and demand principals, the appreciation of data center industry in the public markets, and rapidly changing information technology. In sum, colocation and how it supports any and all technology is a mainstay of international business. It supports both enterprises and consumers that exponentially drive for faster and greater sums of information and data.