Data Center Market Spotlight: New Jersey

Our theme this month is site selection. From electricity costs and network infrastructure to the available pool of skilled workforce, data center site selection is one of the most complicated and important business decisions a company makes. Data center location affects everything from the cost of doing business and overall company agility to the quality of user experience. And, like every other aspect of the data center business, where companies choose to put their critical IT infrastructure and why is changing because of … you guessed it: the Cloud. This month, we’ll examine these trends more closely.

From The Sopranos to Jersey Shore to Chris Christie, there’s always something that keeps New Jersey in the spotlight. The Garden State of course has a lot more to offer than gangsters, trashy reality TV, and flamboyant politicians, and one of those things is a sizable data center industry that’s been recently undergoing some changes.

Once among the country’s most active wholesale data center markets, New Jersey is now seen as a place where retail colocation and other smaller-footprint services are going strong, while wholesale business in the traditional multi-megawatt sense is slowly drying up.

At least some of the lull in demand for large wholesale deals in New Jersey can be attributed to a slowing demand from the financial services industry, which has historically driven the bulk of demand there, according to the commercial real estate firm Jones Lang LaSalle. But there’s also a broader trend that runs beyond New Jersey: fewer and fewer companies are in need of big wholesale-type data center deployments. The users that have been driving the recent spike in wholesale leasing are the largest cloud service providers, and they tend to cluster in specific markets, such as Northern Virginia and Silicon Valley. New Jersey is not one of those markets.

“New Jersey has not been a very favorable market for wholesale,” Jabez Tan, senior analyst at Structure Research, which specializes in data center markets, said. “That’s been confirmed by a lot of players there.”

What makes various towns in New Jersey attractive as data center locations is proximity to New York City. It is close enough to serve customers in the city but it is also a lot cheaper. Another factor that makes the state attractive for data center operators is the fact that there are lots of data centers there already. The industry’s clustering instincts play a big role in site selection, and places with lots of data centers attract more data centers.

Wholesale Weakness

While New Jersey is cheaper than New York, however, it is not cheaper than Northern Virginia, which has some of the world’s biggest data center clusters. Hence, a wholesale data center specialist like DuPont Fabros Technology has a sprawling and thriving data center campus in Northern Virginia while trying to get rid of a single facility in New Jersey it has struggled to fill.

On DFT’s first-quarter earnings call, CEO Christopher Eldredge said there was no shortage of interested buyers for the company’s NJ1 data center in Piscataway. “We have now progressed through multiple rounds of bidding,” he said. “It's not unrealistic to assume a third-quarter 2016 closing.”

CoreSite, one of DFT’s chief rivals, has done well in New Jersey this year. Jersey was one of its strongest markets in terms of leasing activity in the first quarter, CEO Tom Ray said on the most recent earnings call.

However, there is one important “but” to consider. CoreSite provides both wholesale and retail colocation services, and the strong Q1 in New Jersey is attributable to the latter rather than the former. In fact, Ray highlighted New Jersey as a particularly weak wholesale market.

“Regarding the wholesale market segment, we continue to believe that balance between supply and demand remains favorable in the Bay Area, less favorable in New Jersey, and is more at equilibrium in our other markets,” he said.

Of the 12 leases CoreSite executed in the first quarter in both New York and New Jersey data centers, only one was for 5,000 square feet. The rest were all under 1,000 square feet.

One of the biggest wholesale players in New Jersey is Digital Realty, and all of its non-Telx wholesale facilities in New Jersey are more than 90 percent occupied, but that’s because Digital hasn’t been expanding capacity as quickly as it used to.

Providers Confident in Demand for Smaller Deals

Providers who aren’t after multi-megawatt deals appear to be chugging along nicely in New Jersey, and there’s even a new player that entered the market this year.

Agile DataSites was officially unveiled in January and launched its first two data centers in New Jersey and Pennsylvania. The New Jersey facility, launched in March at the site of a former pharmaceutical lab in Princeton, is a 280,000-square foot property with access to about 45MW of power. While ADS is marketing a mix of data center services, from wholesale to hosting and managed services, CEO Jeff Plank expects its sweet-spot will be similar to the three deals with service providers it’s working at the moment, which range from 80kW to 100kW.

ADS is targeting IT and communications service providers, healthcare companies, and retailers. Its strategy relies to a great extent on its service provider customers, especially those that help enterprises build hybrid infrastructure that consists of a mix of their own servers and cloud services, according to Plank, expecting to benefit from the enterprise push to the cloud the likes of Amazon, Microsoft, and Google have been promoting.

IO, which has been in New Jersey since 2011, operating a massive data center facility in Edison that used to be a New York Times printing plant, has also seen the size of the deals on the market shrink. David Mettler, the company’s VP of sales and US market director, said even “the definition of wholesale has come down in terms of size of the deal.”

There aren’t as many multi-megawatt deals in New Jersey as there used to be, and IO now considers a metered-power deal that’s “several hundred kilowatts” in capacity to be wholesale. And, multi-megawatt deals aside, activity in the market has been healthy, according to Mettler. “We’ve seen pretty good activity in New Jersey,” he said.