In Search of Data Center Space

Many CIOs are leasing from third-party providers instead of building their own data centers, but there's a shortage of space in some markets.

Capital constraints during this economic downturn have led many CIOs to lease data center space instead of constructing their own facilities.

In turn, businesses like Digital Realty Trust Inc. -- which offers move-in-ready enterprise data centers that include security and rack-ready raised floor space -- have found that they can't prepare new space fast enough to meet demand. These businesses, sometimes called wholesale data center facility operators, typically cater to large organizations and high-tech companies that need large amounts of data center floor space.

Digital Realty Trust has begun focusing more on the enterprise data center market by offering custom design, construction and management services. Some enterprise IT operations are also working through collocation providers, which provide smaller, caged space in shared facilities and offer less flexibility on the design.

The increased demand for leased data centers is being driven by reluctance on the part of CIOs to make the capital investments needed to buy and build such facilities for themselves.

Nobody has the capital to build new data centers right now, says IDC analyst Michelle Bailey. And a glut of data center space developed during the dot-com boom has finally been filled 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," Bailey says.

As credit markets have slowly started to pull back from the abyss, IT executives have begun preliminary discussions with consulting firms about new data center designs. But most enterprises aren't yet ready to build new data centers themselves -- even if they can line up the financing.

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

Financial executives are still funding some investments inside the data center -- 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 doesn't mean they want to take on mortgage debt for a new facility.

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

Digital Realty Trust claims that its facilities are 95% occupied, and it has been gobbling up properties of late, increasing its rentable-space footprint from 12.9 million square feet to 14.9 million over the past 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 for corporate development at the San Francisco-based company. Research firm Gartner Inc. also reports an uptick in enterprises looking for data center space.

Some organizations are using hosted space as a stopgap measure until their own design and construction efforts get back on track, says Gartner analyst Dave Cappuccio. Others are using leased facilities to host entire data center operations.

Collocation Revisited

In the past decade, large corporations have changed their view of leased services. "The 'co-lo' model has gained a lot of acceptance since the dot-com days. Even financial institutions are not afraid to use them," says Peter Gross, vice president of Hewlett-Packard Co.'s Critical Facilities Services unit, which primarily designs data centers and doesn't lease space.

Online brokerage Scottrade Inc. is one such financial firm. CIO Ian Patterson worked with a third-party facility provider, which he declined to name, to host a new data center in Scottsdale, Ariz. The facility will alternate between functioning as a backup disaster recovery site and as the primary data center that handles performance- and bandwidth-intensive online trading activity. The vendor provides the facility; Scottrade installed and manages its own equipment.

The site will initially function as a backup data center. "Our working plans are to flip over to it in the June/July time frame in 2010. Every six months we'll flip facilities to run them hot," Patterson says.

With plans like that under way, the financial market's purse strings have loosened for the stronger providers of collocation facilities. For example, data center facilities provider DuPont Fabros Technology Inc. had to temporarily halt construction of new data centers last year but has since secured funding to move forward. And in January, Digital Realty Trust sold more than $600 million in unsecured notes to fund operations and continue adding capacity.

For now, however, the demand for space continues to outstrip supply, and that has left many businesses with few choices for their enterprise-class data centers.

Some businesses still prefer to do it themselves. Thin-client terminal manufacturer Wyse Technology Inc. is setting up a private cloud in its data center in India and is planning for a possible expansion. "The funding is available," says Chief Innovation Officer Henry Fieglein. Wyse has enough cash to fund the project internally -- and its management is willing to commit the resources.

But Wyse is an exception. Fieglein, who says he has talked to many enterprise IT executives about their data center plans over the past year, acknowledges as much. "Yes, the money is being freed up, but I haven't seen anyone purchase the land and everything else to build a data center," he says.

The recession may permanently change the way that many organizations approach the build-out of new data centers. Certainly, service providers are banking on CFOs pushing business their way. But whether the current strong demand for data center space and managed data center services is a bubble or a permanent trend won't be clear until the economic recovery begins in earnest.

For his part, Gross says he doesn't expect to see that happen for at least another six months.

This version of this story was originally published in Computerworld's print edition. It was adapted from an article that first appeared on

Copyright © 2010 IDG Communications, Inc.

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