Strong Leasing for Digital's Turn-Key Projects

Since its IPO in 2004, Digital Realty Trust (DLR) has built out more than 1 million square feet of raised floor data center space without a tenant commitment. This volume of speculative construction would once have seemed unlikely, given the flurry of overbuilding that led to the data center glut of 2002-03. But the program, now branded as Turn-Key Datacenter space, has proven to be a centerpiece of Digital Realty's business.

Digital Realty's Turn-Key space has been snapped up by customers including Savvis (SVVS), EDS, Computer Sciences Corp., British Telecom (BT), Cogent (CCOI), Net2EZ, Edmunds.com and CyberVerse. On Tuesday, Digital Realty announced that government hosting specialist Carpathia Hosting has leased 25,000 square feet of Turn-Key space in northern Virginia.

"Turn-Key Datacenter space is really a core product for us and fuel for Digital's long-term growth," said Chris Crosby, Senior Vice President of Technical Services for Digital Realty. "It's our move-in ready data center product. We've got a who's who of the Fortune 100 (as customers)."

Digital Realty has commenced 34 leases for 118,000 square feet of Turn-Key space and signed new leases for another 190,000 square feet thus far in 2007. A lease commences when the tenant occupies the facility, which often lags the lease signing by a few months. The program is accelerating in 2008, as the company currently has 440,000 square feet of new space under development. Construction usually begins without a signed lease from a tenant. Digital is focusing its new construction in the most active markets for data center leasing, and conducts ongoing research among its existing customers to assess their needs.

Digital builds out its Turn-Key space using a pod architecture that divides each property into compartmentalized data centers of between 8,000 and 12,000 square feet.

"It's typical when we're doing our Turn-Key space that we don't have a lease signed, but it happens pretty quickly," said Digital Realty CEO Mike Foust. "Typically a lease is signed within 30 to 60 days after a pod is completed."

The pod approach is central to the program, providing an architecture that is standardized in many respects but flexible enough to customize elements of each pod for individual clients. Some pods within a facility can be designed for high-density installations, while others can have lower power and cooling requirements, allowing both Digital and its customers to make efficient use of space and energy resources.

"The pod architecture is one of the unique advantages we have," said Crosby. "We're not building barns. The pod architecture allows you be capitally and architecturally efficient. We also don't reinvent the wheel every time. It allows us to be nimble and adjust the specs as needed. We can really match to the market and not build that behemoth white elephant."

Most pods will have dedicated power and cooling resources, including generators and UPSes. Companies leasing multiple pods can share infrastructure across several pods. "One of the fundamental issues (with open data center designs) is the lack of control," said Crosby. "Not sharing things is a very important concept for the Fortune 500."

By building out pods and selling finished data center space, Digital is able to lease the space at a much higher rate, as shown in the company's 2007 leases. Digital Realty's Turn-Key space has averaged $146 per square foot in annualized rent, while its Powered Base Building (pre-wired for fiber and power for client build-outs) leased at $34 a square foot and non-technical space averages $19 a foot. As for the economics of the Turn-Key program, the company doesn't disclose its average construction costs, but said most buildouts range from $500 to about $920 per square foot.

"With the growth we see going forward, we think it is a very viable long-term business model," said Crosby.