Aging Corporate Data Centers Are Tough To Redevelop, But May Represent A Growing Opportunity
Legacy corporate data centers are becoming relics, and turning them into modern facilities may be more trouble than it's worth. But redevelopment opportunities exist, and more may be on the horizon.
As major companies increasingly outsource their IT infrastructure to third-party colocation and cloud providers, many are looking to offload and monetize their unused or underutilized self-operated data centers, facilities that are increasingly viewed as relics of a dead model of digital infrastructure. But buyers have often been hard to come by, as these outdated data centers — many more than a decade old — fail to meet the needs of today’s colocation industry.
These legacy data centers do present an opportunity for certain developers, particularly facilities located in strong data center markets. Experts tell Bisnow that the number of potential use cases is growing: from colocation retrofits to cryptocurrency and high-performance computing. At the same time, the challenges of adapting these obsolete sites amid a rapidly changing digital infrastructure landscape makes establishing valuations and making deals particularly challenging.
“At the end of the day, it's all really a financial underwriting exercise,” said Kristina Metzger, executive vice president at CBRE and head of the firm’s North American Data Center Capital Markets team.
“What can you buy it for, what’s it going to cost to get it to today’s market standard, and what’s supply and demand like in that specific market?" Metzger added. "If you can get one of these facilities for pennies on the dollar you can make the numbers work, but there's not necessarily a one-size-fits-all approach.”
It wasn’t all that long ago that large companies were all building out their own large self-operated data centers to house their IT infrastructure. Ten to 15 years ago, with global digital transformation already well underway, corporations built facilities that not only met their needs at the time but had plenty of additional capacity to house what most believed would be a rapidly growing need for server racks and other IT infrastructure. They wanted to be able to grow into these data centers for years into the future.
Yet it soon became clear that, in most cases, using colocation data centers run by third parties was far more cost-efficient, and the emergence and eventual ubiquitous adoption of cloud services further reduced the need to host servers in self-operated data centers. As outsourcing to colocation and the cloud became the norm, many companies didn’t just fail to grow into the large data centers they built, they saw their need for on-site server space go down.
“Most legacy data centers were built in an era where these enterprises believed that, due to historical trends, they would continue to grow their footprint in their own facility and ultimately completely fill out the facility. Well, it's been the exact opposite,” said Mario Calderone, vice president for real estate at Serverfarm, a data center provider that specializes in redeveloping these properties. “These enterprises are realizing that their on-premises compute needs are actually shrinking.”
This migration of corporate computing power from self-operated data centers to colocation providers like Digital Realty and Equinix, or to cloud giants like Amazon Web Services, Google and Microsoft, is arguably the single largest trend shaping the data center industry today. And it is driving a reciprocal trend of corporations looking to unload and monetize empty or severely underutilized data centers. Industry insiders say companies are eager to shed these facilities, which cost about the same to operate whether they are full or operating at a fraction of their capacity. According to Calderone, most companies looking to sell their data centers to Serverfarm are using less than a third of their space.
A survey of 1,600 IT leaders published earlier this year from IT company Aryaka signals that more of this inventory may soon be coming to market. Of those 1,600, 51% said they would close all their traditional data centers in the next 24 months. An additional 27% planned to close at least some.
Yet despite the unprecedented global demand for server space, experts say it can be hard to find buyers for legacy enterprise data centers because the buildings themselves are of little use to the colocation providers who comprise the bulk of the potential buyer pool.
Many of these enterprise data centers are ill-suited for colocation in part because they are often smaller than typical colocation buildings. Size matters when it comes to the economics of data centers, where the staffing model and many fixed costs for necessities like insurance and security are similar whether the building is three megawatts or 25 megawatts. These economies of scale make it hard for smaller facilities to be competitive in the market.
Additionally, because enterprise data centers were designed for a single user, many have systems that might not be completely adaptable to multitenant colocation. While tenants in a colocation data center might expect cooling, power and other critical infrastructure to be segregated between users, in an enterprise data center these systems might be shared across the entire server floor. Such a setup could be a nonstarter for potential tenants.
Other design elements of enterprise data centers, many of them more than a decade old, may not allow the installation of present-day IT infrastructure. Ceiling heights required in server rooms have increased. Perhaps most critically, higher density computing has resulted in the load capacity needed for server floors increasing beyond the limitations of many older data centers.
“Think of how fat a Zack Morris cellphone was 10 years ago and what it was capable of doing compared to how thin and slick phones are now and how much compute power it has. That same evolution has taken place in the data center,” CBRE’s Metzger said. “We now have more compute per square foot, which requires way more power per square foot, which then requires more cooling per square foot, and this means the facilities themselves have to be able to support it.”
Metzger and other experts say that despite these limitations, some enterprise data centers present an opportunity for certain data center developers and operators.
In constrained markets like Northern Virginia and Southern California, where enormous demand for server space is running up against a limited supply of suitable land, legacy enterprise facilities fetch interest just for the power and connectivity available at the site, even if it means razing the existing data center and starting over. The enormous premium on developable land in these markets can be seen in AWS’ purchases of offices, data centers and other brownfield sites across Northern Virginia, most of which the company intends to demolish to make way for state-of-the-art facilities.
For a certain subset of data center operators, such as Serverfarm, retrofitting outdated data centers is a central element of their business model. According to Calderone, the company looks for legacy data centers in strong secondary or emerging data center markets that could support a modern retrofit, particularly facilities in which the current owner will lease back the part of the data center they were already using.
Serverfarm completed one such project in November: the addition of 110K SF of server space to a former insurance company data center outside of Atlanta, renovated while the existing tenant continued to operate in 40% of the space.
While these sale and partial leaseback agreements are one of the creative elements to make these deals pencil, Calderone emphasizes that executing these deals requires understanding exactly what a future retrofit of the facility entails. Few developers have the experience with this kind of project needed for these determinations, particularly when these renovations often have to be done while a tenant is active in the building.
“It's a huge challenge, not only because of physical limitations but because the data center is live and you have a company in there running critical workloads,” Calderone said. “You’re talking about doing a very significant surgery on a patient that is up and working, and it takes a huge skill set in order to do that.”
As demand for server space skyrockets, and as markets that were previously data center hinterlands become emerging hubs or edge markets, industry insiders say that more of these former enterprise data centers will emerge as viable options for redevelopment into colocation facilities as the digital infrastructure landscape shifts beneath them.
But other possible data center use cases are merging as well, most significantly cryptocurrency mining. Unlike a colocation data center, a crypto mining data center doesn’t need to be near a population center or other data centers to reduce latency. It doesn’t need redundancy, sophisticated cooling systems or backup power systems. All it needs is access to power. This makes crypto mining — along with high-performance computing for other blockchain or research applications — a great fit for old enterprise data centers that are smaller, less sophisticated or located far from potential colocation customers.
Crypto mining is an emerging revenue stream that corporate data center owners are eager to utilize, says Russel Bruno, CEO of AceHost.com, a Tampa-based data center provider that operates both colocation and dedicated cryptocurrency mining facilities.
“We’re in talks right now and closed on two deals with large companies allowing me to use the large warehouse space that’s connected to their data centers because they’re sitting on additional power,” Bruno said. “For them, they have thousands of square feet sitting there for their data centers, and they’re wanting to utilize their utilities, so just in the last six weeks we’ve had almost 500 inquiries for crypto mining.”
Between new use cases, shifting data center markets and the complexity of evaluating the value of a site versus the capital investment needed to update an old facility, CBRE’s Metzger says these facilities present an enormous underwriting challenge. It’s a problem deeply familiar to ServerFarm’s Calderone, who says the complexity of valuations when it comes to outdated data centers will continue to be an impediment to deals.
“We're in discussions with a data center in New Jersey, an older legacy facility with some old mechanical and electrical infrastructure that will require significant capital investment to modernize, but it sits in a good location with robust fiber network connectivity,” Calderone said. “It’s creating a pretty heated discussion about the value of all that stuff.”