CoreSite Doubles Down on Expansion in Core Markets

CoreSite executives said the company is focused on maximizing the value of its existing assets around the U.S. rather than expanding into new markets on the company's third-quarter earnings call Thursday.

CoreSite is one of the largest providers of data center services in the U.S. It's business model combines both leasing wholesale data center space -- the way the likes of Digital Realty Trust and DuPont Fabros Technology do -- and providing retail colocation with a focus on network interconnection services -- the model close to its big competitor Equinix.

The company repoted about $70.5 million in revenue for the quarter -- up from $60.6 million it reported for Q3 last year. Net income was about $3.1 million, and earnings per share were $0.14 -- flat year over year.

CoreSite is doubling down on growth in Tier I markets where it already has presence. “We’re investing in depth rather than breadth,” said CFO Jeff Finnin on the call. “No need to get into new markets. It’s nice over time, but no pressure.” The company said it can double the amount of sold net rentable space on the land it already owns.

Growth in edge markets is not independent of core metros

While there is a growing amount of edge data centers, and lots of players are building in Tier II markets, CoreSite believes growth there will depend on healthy growth in the core data center markets.

The company is adding about 130,000 square feet in five markets by the end of next year. Boston is in pre-construction for 15,000 square feet and there's room for another 70,000 square feet of space. Denver, Chicago and New York expansions are coming next year, and a second facility in Virginia is expected to open soon.

Expansion costs around $4-4.5 million per megawatt in its current markets. The expansion cost is low because the company is focused on expanding in existing markets where it has built out shells and some of the core infrastructure already.

Healthy demand across core markets

CoreSite, a real estate investment trust, saw healthy leasing activity during the quarter, which is a continuation of the trend major REITs reported in Q2.

A significant chunk of the nearly 70 leases the company signed in the quarter were with network and cloud providers, viewed as especially valuable customers because they boosts the data center’s connectivity and cloud ecosystem. Big leases came from the digital content vertical.

Interconnection revenue was up 20 percent quarter over quarter. Interconnection revenue is also growing rapidly for Equinix, which reported Wednesday that it had become its fastest-growing business segment. Within the segment, services that provide private connectivity to public cloud services were growing the fastest, Equinix said.

Demand in New York and Virginia has not let the abundance of available data center space in those markets upset the pricing. The one market where pricing is rising notably is Chicago. Rent price is increasing in the market, as has been indicated by many providers. There’s a lot of space anticipated to come online in the future but the near-term supply is limited. The area will be inventory constrained in the next 12-18 months.

Rent has solidified as sublease space has been absorbed in Santa Clara.California. There was some concern over a large capacity coming online quickly as the result of tenant moving out. The "sublease vacuum" had a few providers worried. CoreSite's statements echo Vantage Data Centers execs who recently commented that pricing has stabilized following a sublease dash.