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Data Center Market Profitable, But Older Properties Need To Keep On Their Toes

Want to make big bucks? Consider getting into data centers, but be prepared to shell out to upgrade them every decade or so.

Data Center Market Profitable, But Older Properties Need To Keep On Their Toes
Microsoft Chief Technology Advisor Dave Crowley

"The data center market has been booming since 2012, both in terms of new construction and global demand," Microsoft Chief Technology Advisor Dave Crowley said. He will be presenting at Bisnow's Data Center Investment Conference & Expo South on June 26 at the Infomart Dallas. "Profit potential for data center owners remains strong and margins are better than those available for other kinds of commercial construction, including Class-A office space."

Crowley said market competitiveness and improving technologies have made it more cost-effective for enterprises to move their workloads off-premise into independently operated data centers.

"Explosive growth in cloud computing has radically increased the size and economic impact of data center investments made by the four major service providers — Amazon, Facebook, Google and Microsoft — in the United States and [around] the globe."

Strong data center locations are characterized by a low cost of energy, land attributes, water resources, government incentives and the availability of long-haul and metro dark fiber diversity, Crowley said.

Data center

That fits Dallas-Fort Worth, one of the most active data center markets in the U.S., according to CBRE's DFW Data Center Market Update for the first quarter. With power costs ranging from 3.8 cents to 6.5 cents per kilowatt hour, no shortage of fiber connectivity, attractive tax incentives and a low hazard-risk profile, DFW is attractive to enterprise users, including social media and financial services, CBRE said. Demand for space is strong, and so is the upcoming supply.

During Q1, there was steady leasing activity in Dallas, with 9.4 megawatts of net absorption in the co-location market, and the development pipeline is strong, with 47.4MW under construction, CBRE reports. New deliveries in the first quarter included DataBank bringing its 144K SF Plano facility online, and RagingWire and Zayo completing expansions in their existing facilities.

Also, acquisition activity has remained strong, with the most notable transaction being Equinix’s purchase of the Infomart building at 1950 North Stemmons Freeway in Dallas for a reported $800M.

John Major
Page principal/Science & Technology John Major

Even in strong markets like DFW, data centers, especially older ones, will need to be upgraded to stay competitive in the coming years.

"Institutional and private equity investors are evaluating legacy data center opportunities across the U.S. in primary and secondary markets, looking for undercapitalized or aging facilities which can be upgraded to accommodate the demand for secure cloud and hosting services," Page principal/Science & Technology John Major said

For data centers constructed more than 10 years ago, operational challenges often include stranded power, limited cooling, and aging or inefficient equipment, Major said. 

"For a legacy data center to be competitive in the future, it will need to employ strategies for improving capacity, reliability and efficiency. Often this means improvements such as airstream containment, air side economization, elevated set points, transformerless UPS and 415V power distribution."

Both Crowley and Major will be speakers at Bisnow's full-day Data Center Investment Conference & Expo South on June 26 at the Infomart Dallas.