IT execs turn to leasing data centers instead of building their own

Enterprise data center construction has slowed to a crawl in the recession, but there is one spot that's growing brighter every day. That's because most companies aren't building their own data-center space, but they are leasing it in ever-increasing numbers.

In turn, businesses like Digital Realty Trust -- which offers move-in ready, enterprise-scale data center facilities that include security and rack-ready raised floor space with redundant power, cooling and network infrastructure -- find they can't get new space online fast enough to meet demand. These firms, sometimes called wholesale data center facility operators, typically cater to large enterprise customers and high-tech firms that need large amounts of floor space.

For its part, Digital Realty Trust has begun focusing more on the enterprise data center market by offering custom data center design, construction and management services. Some enterprises are also working through co-location providers, which provide smaller, caged space in a shared facility and offer less flexibility on the design.

The increased demand for leased data center real estate is being driven by reluctance on the part of IT, and on their executive management, to make the capital investments needed to buy and build the infrastructure for themselves.

Nobody has the capital to build new data centers right now, says Michelle Bailey, analyst at market research firm IDC. And the glut of data-center space, developed during the dot-com boom, has finally filled up in recent years, leaving enterprise-class data center real estate in short supply. "Anyone moving forward with new space has to consider a third-party operator," she says.

Data center stats
Internet data center demand is expected to continue to outpace supply through at least 2013, according to Tier 1 Research.

As credit markets slowly pull back from the abyss, IT executives have begun to engage in preliminary discussions with consulting firms about new data center designs, but most enterprises aren't yet ready to walk the walk when it comes to building a new data center facility themselves -- even if they can line up the financing.

In an uncertain market, CFOs are skittish about financing a capital expenditure that can easily top $100 million. "They're all spooked. They don't want the risk of having debt increase," says Carl Weddle, director of IT at Quality Trailer Products Inc. The problem, he says, is that when income is tight, the only way to fund an infrastructure project is with debt.

Financial executives are still funding some data center investments -- especially those that reduce operating costs, such as virtualization projects that consolidate physical servers -- and some organizations are starting to build private cloud infrastructures. But that that doesn't mean that they want to take on mortgage debt for a new facility.

They are, however, quite willing to lease. That's driven up demand for raw data center space, despite the downturn, and created shortages in markets ranging from London to Washington D.C. to Silicon Valley.

Digital Realty Trust claims a 95% occupancy rate and has been gobbling up properties of late, increasing its rentable space footprint from 12.9 to 14.9 million square feet over the last 12 months. "We're seeing very strong demand, driven by a number of factors, including the tight capital markets," says Chris Crosby, senior vice president, corporate development. Gartner Inc. also reports an uptick in enterprises looking for data center space.

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