Panelists at a Bisnow Media “Data Center Outlook” event on February 3 agreed that federal data center consolidation, limited federal funding, and the expansion of virtualization technology and cloud computing are all creating new opportunities—as well as significant challenges—for private sector data center developers and service providers. While some geographic areas (particularly northern New Jersey) have experienced some overbuilding, the data center industry is not expecting to see another crash like the one it experienced in 2001 anytime soon. The industry has matured and changed quite a bit in the past decade; one major difference is that developers are no longer building large amounts of spec data center space. Instead, operators are doing just-in-time buildouts to meet users’ needs as they arise. Savvy developers who understand the market, have access to capital, and build the right types of data centers at the right scale in the right places are those who are most likely to succeed in coming years.
The “raw explosion” of digital content brought about by the increasing use of mobile computing—and the fact that many existing data centers are antiquated—is driving growing demand for new data centers, said DBT-DATA founder David Tolson, whose firm acquires, develops, owns, and operates data centers for a wide range of tenants. Another key factor driving demand is outsourcing—that is, companies and agencies moving their data management operations out of house—added Digital Realty Trust senior asset manager Scott Morrow, who oversees a portfolio of approximately 2 million square feet (185,806 sq m) of data center space in northern Virginia.
In fact, the federal government’s data center consolidation efforts, cloud computing initiative, and concurrent budget constraints are creating opportunities for private data centers. Kevin Jackson, general manager of cloud services for NJVC, a global information technology (IT) provider to the U.S. Department of Defense (DoD) and the U.S. Intelligence Community (IC), [note to editor/Marty/Dan: keep upper case; the IC is a formal coalition of 17 federal agencies…] spoke about the impacts of the federal government’s rapid transition into the cloud, and about the assistance it will need from the private sector in making that transition while maintaining security and accessibility. The 2012 Defense Authorization Act, he noted, directed the DoD to do two things: develop a department-wide cloud computing strategy and procure its cloud services from the private sector. This act essentially directed DoD not to create its own cloud, but rather to become a consumer of cloud services from private providers.
Mike Clemson, senior director of facilities for Carpathia Hosting, a commercial provider of data center space and services to both federal government and private sector clients, noted that in order to get the federal cloud into the commercial markets, private data center providers will need to achieve “authority to operate” (ATO) status. Federal auditors must issue ATOs to private providers who plan to provide cloud services to the government. “Once those ATOs are issued, you’re going to begin to see an explosion into the commercial data centers and clouds supporting the federal agencies,” he added.
Even then, data center operators will be faced with the challenge of helping federal agency IT departments figure out how to migrate their programs and data into the cloud. “It’s going to take some very creative and innovative approaches for how government and industry will work together,” commented Jim Flyzik, president of the Flyzik Group and former senior adviser to the White House Office of Homeland Security and Treasury Department CIO. “This is going to be an interesting process to watch,” he added, noting that funding is the biggest challenge facing the federal government’s cloud computing and data center consolidation efforts. Flyzik suggested that collaboration between government and private industry could reduce costs and increase efficiency, but only if the two sectors can come up with “a formal model of how we share services. It will be a huge challenge to the government procurement and acquisition industry to come up with new, creative ways to get where they want to go, because old models of procurement and acquisition are not going to work.”
Added Jackson: “The march to the cloud will happen. The only question is, will agencies do it in a planned, consistent, secure manner, or will it be shotgun, piecemeal?”
How have data center tenants’ needs and wants changed? The data center industry is moving toward a service provider model, noted Steel Orca COO Dennis Cronin, and most users no longer want to own or operate their own data centers—meaning the demand for co-location facilities (i.e., those with more than one tenant) is growing. Companies focused on providing data center services should “integrate their hardware, software, facility, and services into one package for clients,” Cronin added. Dottie Spruce, vice president for business development for data center provider CyrusOne, noted that as they adopt new technology, data center tenants are growing significantly more quickly than in the past—meaning that many need additional power within the first year of their contract. She also noted that more clients (about 75 percent of new business in 2010, up from only 2 or 3 percent in past years) are also looking for disaster recovery/workforce recovery facilities—things like conference rooms and other “people comforts.” Finally, transparency is becoming increasingly important to tenants, she said, which means that clients are asking for more information than ever before about how data centers are operating and what vendors are used to provide services, as well as for ongoing reporting about every aspect of data center operations.
Tenants also want green technology, although “the number-one question is whether anyone will pay for it,” said Cronin. While the typical data center design controls interior temperatures with hot and cool aisles (in which cool air blows up from the floor into every other aisle and hot air is recovered through ceiling vents over the “hot aisles”), today’s data center designers and developers are exploring more efficient cooling systems, including piping liquid coolant (which, in some cases, is simply water cooled by being circulated through outdoor pipes) directly to heat-recovery units installed on each rack of servers. Steel Orca is building a 300,000-square-foot (27,871 sq m) “next-generation green-energy digital utility center” in Bucks County, Pennsylvania, at the former site of U.S. Steel’s Fairless Works, that will use electricity generated by solar, wind, and landfill gas to supplement power off the grid, and will also use water from an aquifer and the nearby Delaware River as a coolant.
Where is the money to build these next-generation data centers coming from? Chris Lucas, a senior research analyst with Robert W. Baird & Co., noted that real estate investment trusts’ low cost of capital gives them an advantage over private players. “Capital structures are set up for permanent financing, and credit facility markets are wide open for public markets.” Private markets just don’t have the same capacity right now, he added. “It’s tough for private equity players to compete on the real estate end of the data center industry,” concurred Marty Friedman, partner and managing director with DH Capital.
ULI–the Urban Land Institute