Digital Sees Momentum for Build-to-Suit Business

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The raised floor area in a Digital Realty Trust data center.

In recent months, several leading technology companies with a history of building advanced data centers have hired Digital Realty Trust to build their new facilities. Digital Realty will build custom data centers for colocation provider Equinix in northern Virginia and Seattle and for storage vendor NetApp in Hillsboro, Oregon.

The announcements are a sign of growing momentum for Digital Realty's build-to-suit data center business, in which the company has sought to move beyond its core business of building turn-key "wholesale" data center space.

"Customers are continuing to outsource their data center requirements and are looking for a number of flexible alternatives to meet their long term needs," said Michael F. Foust, Chief Executive Officer of Digital Realty Trust. “As a result, we have seen a significant increase in demand for our Build-to-Suit solution. The Build-to-Suit solution provides each customer with a customized data center facility to meet their long term IT infrastructure needs."

Favorable Supply Chain Economics

The build-to-suit offering allows Digital Realty (DLR) to build larger projects than the 1 to 2 megawatt pods that it leases in its turn-key business. Build-to-suit data centers also have a better risk profile than wholesale multi-tenant projects, which are typically built either on a speculative basis or based on a commitment from an anchor customer. In either scenario, the project goes forward before it is entirely leased.

The build-to-suit approach also allows customers to take advantage of the favorable supply chain economics developed by Digital Realty Trust, which is the world's largest operator of data center space with more than 17 million square feet of space in 100 properties in 30 markets throughout Europe, North America, Singapore and Australia.  With that portfolio and its active construction and maintenance programs, the company is able to buy in bulk and

Over the past two years, Digital Realty Trust (DLR) has been expanding its product offerings to target the market for build-to-suit data centers. After launching the initiative in the U.S. in early 2010, the company expanded it internationally earlier this year.

Build-to-Suit is Largest Leasing Component

In the third quarter of 2011, Digital Realty leased 96,000 square feet of Build-to-Suit space at an average annual rental rate of $112 a square foot, compared to 54,000 square feet of Turn-Key Datacenter space leased at an average annual GAAP rental rate of approximately $164 per square foot (see full details in the company's leasing update for the quarter, which was released Wednesday). The wholesale turn-key offering has been Digital Realty's most popular offering in recent years, but over the past year there has been growth in its Powered Base Building product (undeveloped space with the power and fiber connectivity already in place) as well as build-to-suit projects.

"We have designed a suite of high quality, flexible, and cost effective solutions ranging from Powered Base Buildings and Turn-Key Datacenters to customized Build-to-Suits and scalable data centers for growing companies," said Foust. "When combined with our financial strength and global footprint, we are uniquely positioned to meet both local and multinational enterprise customers’ requirements across industry sectors."