Capital Concerns Boost Interest in Colocation

Sure, cloud computing is the hot trend. But many of the enterprises evaluating their data center requirements are focused on another “C” word: colocation. Industry executives attending this week's Data Center World conference in Las Vegas say many companies continue to see growth in their data center infrastructure, but are seeking to conserve capital. That’s prompting them to consider alternatives, particularly colocation.

“This economic downturn has created an upswing in the need for colocation space, so clients can move to a leased environment instead of an owned environment,” said Gerard Gallagher, CEO and President of Fortress International group. “We’ve been doing site selection services and data center expansion studies for about 10 years, and until this year hardly anyone ever asked us to determine if a leased option made sense. Now every single client wants to have a leasing opportunity evaluated.”

A November AFCOM survey of data center managers found that 40 percent said budget constraints are forcing them to delay or cancel a planned physical expansion or relocation. "Because of this, we believe we’ll see an increase in outsourcing as data center space gets tighter and capital spending drains up," said AFCOM founder and past president Leonard Eckhaus. Tier 1 Research has also predicted a surge in demand for colocation space due to the economic crisis.

The strength in the colocation market could be seen in the fourth quarter results for Savvis Inc., which said that despite the brutal economic conditions in October through December, colocation revenue was up 6 percent from the previous quarter and 34 percent from the same period a year earlier.

That demand is leading some colo providers to build new faciliities, according to Richard Sawyer, a principal in HP’s Critical Facilities Assurance unit, who said the colocation sector “is sustaining a lot of data center engineers right now. The need (for colo space) is there, and is driving the development of data centers.”

One example of this trend is The Planet, which in December announced it is leasing 86,000 square feet of space in Plano, Texas and plans to invest up to $50 million to convert the site into a data center dedicated to its growing colocation business.

Sawyer said new construction is needed because the surplus in data center space from the years after the dot-com boom is history. “The market chewed up all inventory between 2002 and 2007,” he said. “In about 2005, the business realized that it needed more data centers.”

But the economics of building data centers has changed because of the credit crunch, according to Jim Simonelli, senior vice president of APC by Schneider Electric. “In colocation, the funding model has changed,” said Simonelli. “It used to be ‘build it and find customers.’ Now it’s ‘find a customer and then build.’”

“The colo folks have capex issues as well,” said Tad Davies, executive vice president of The Bick Group. “I think you have a really interesting dynamic. What we see is the strongest players getting stronger because they can build, and the weaker players working harder to manage their existing assets.” That effort to generate additional revenue from existing facilities will likely mean higher colocation prices in some markets, he said.

Fortress International's Gallagher also said the strong demand for colocation space is affecting pricing. “I think the reason that supply hasn't kept up with demand is that supply isn’t keeping up with demand,” he said. “It’s harder to find space, and we see pricing creeping up.”