DFT Sees Slower Leasing in Several Markets

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The exterior of one of the northern Virginia data center properties operated by DuPont Fabros Technology.

Leasing at new data centers built by developer DuPont Fabros Technology has been slower than expected in several key markets, the company said today,  DuPont Fabros said it remained confident in the long-term outlook for the data center market, but that given the current pace of leasing it is lowering its revenue guidance for 2012.

Shares of DuPont Fabros (DFT) were down by about 6 percent in midday trading on the New York Stock Exchange, declining $1.49 a share to $24.01. Shares had been as much as 9 percent lower in after-hours trading last night.

CEO Hossein Fateh said leasing has been slower than expected in New Jersey and northern Virginia, but about on track with expectations in Silicon Valley. DuPont Fabros has recently opened new data centers in each of these markets.

"Leasing in New Jersey has been slower than expected," said Fateh. "Northern Virginia remains a solid market for us. Although leasing has been somewhat slower than expected in this market, we have no concerns about leasing this space due to the demand."

Competition in Santa Clara

Analysts have also been focused on DFT's leasing progress at its site in Santa Clara, California, known as SC1. Santa Clara is a particularly competitive market, and DuPont Fabros has been able to lease 25 percent of the first phase of SC1, including a new 2.28 megawatt lease announced Tuesday.

"We have competition in Silicon Valley, but we also have the majority of the available space," said Fateh, who said competition had caused a "market disruption" in Santa Clara. In other markets, he said, the slower pace of leasing was tied to internal decisions by customers, rather than compeittion from other wholesale data center providers.

The company's assessment of the market, shared in its quarterly earnings call, raised a key question for the industry: is the leasing slowdown specific to DuPont Fabros, or a broader change in the demand trend that could affect other companies? We'll know more in coming weeks, as other players in the data center industry report their earnings.

Will DFT Continue Building Big?

DuPont Fabros builds some of the largest data centers in the industry, which gives the company the ability to rapidly lease space in active markets. But when demand slows, it leaves the company with a larger volume of vacant wholesale space, placing pressure on the company's leasing efforts. Other players in the wholesale data enter sector tend to build in smaller increments than the 13 megawatt to 18 megawatt phases that DFT brings to market.

Fateh defended DuPont Fabros' focus on building big, but said the company will adjust its construction plans for the second phases of SC1 and ACC6, deploying new space in chunks of 9 megawatts or even 4.5 megawatts at a time rather than 18 megawatts. But he said the focus on larger facilities is driven by the economics of the data center market.

"We believe that as a landlord operating for the long-term, these are the buildings we want to own," said Fateh, who said 36 megawatt facilities offer economies of scale not available in 10 megawatt buildings. "We feel very comfortable with our market and our product."

Emergence of "Super Wholesale"

Fateh said DuPont Fabros was seeing more interest from companies with "super wholesale" requirements of 10 megawatts or  more of critical power. In the past, companies with these large space requirements would be candidates for a stand-alone data center. But now some of these companies are doing comparison shopping between build-to-suit opportunities and wholesale data center space.

"We're seeing these deals in the market," he said, noting that these huge requirements were limited to a small number of companies, but represent a substantial new opportunity for wholesale data center operators. Deals of this size could rapidly fill large swaths of wholesale space, with the tradeoff that they might also involve slightly lower returns on capital.