Instant Message: Data Centers Are Hot

America’s obsession with social networking on sites such as Facebook and its fascination with new technology like Apple’s iPad are spurring one of the hottest trends in the real estate industry today: construction of data centers.

A substantial amount of money is being invested in such construction, from private equity firms to high-net-worth individuals to pension funds to publicly traded companies, says Randyl Drummer, senior editor at CoStar Group, a leading provider of commercial real estate information in the United States.

“A new industry of owners and specialized builders of wholesale data centers and shell buildings has sprung up to meet the new demand,” Drummer says. “Mandates that the health care industry go digital are expected to help drive the market for new data center facilities aimed at smaller and mid-cap medical users. Investor interest in data center assets has heightened as inventory has filled, with several experienced operators launching initial public offerings or selling shares to raise development and construction capital.”

Increased demand has also been noted by Doug Hollidge, CEO of Charlotte, North Carolina–based Five 9s Digital, a provider of real estate solutions for mission-critical facilities, including data centers. “IPhones and iPads alone are an example of the huge amount of bandwidth needed to run the heavily used applications on the devices, from streaming video to games,” he says. “Businesses are consistently turning to cloud computing, where off-site companies handle and manage all of a certain business’s technology on a scalable basis. All of the information, storage, and transmission must go through the servers within a state-of-the-art data center.”

Facebook, for instance, is spending more than $200 million to build a 145,000-square-foot (13,500-sq-m) data storage farm in Oregon that will house all the information from its 500 million–member site. Washington state is also attracting data storage centers for Microsoft, Yahoo, and Ask.com.

Privately held Five 9s Digital focuses on North Carolina, Hollidge says, noting that Apple and Google have new data centers in the state, and American Express is planning a $400 million data facility in Greensboro. In addition, elected officials have decided data centers and technology are important to the future of the Tar Heel State. “The area has highly reliable, expandable, and clean power located in the Duke Energy footprint, low cost of power, low disaster-prone area,” adds Hollidge. “State and local incentives are very aggressive, and the water and sewer infrastructure to handle the cooling requirements are often in place.”

Hollidge’s advice to would-be data center entrepreneurs? “I would tell them to stay out of it, because we really prefer not to have competition,” he jokes. But while Hollidge emphasizes that real estate developers have a unique opportunity to fill a growing demand for data center space, he cautions that developers, financiers, and others must recognize that the data center arena is different from traditional office, industrial, and other commercial real estate asset classes.

“The development team must have a good history with a very solid technical understanding of the client’s needs and specific requirements, and then be able to execute with a full team of experts,” he says.