Data Center Demand Remains Healthy

What's the current outlook for data center demand? Earlier this month DuPont Fabros Technology (DFT) said leasing at its data centers has slowed slightly due to a longer sales cycle for enterprise companies.

Is this a growing trend, or specific to the experience of DuPont Fabros? A review of second-quarter conference calls for the other publicly-held data center specialists finds demand for data center space remains healthy, and outpaces supply in the most active markets of Silicon Valley and New York/New Jersey.

"We continue to see a very attractive pricing and strong demand for our market, particularly for our Turn-Key Datacenter product," said Michael Foust, CEO of Digital Realty Trust (DLR). "We continue to see a significant lack of supply necessary to meet this demand, and DLR is one of the few data center providers actively building speculative Turn-Key space across our major markets."

Foust said that despite the challenging economy, Fortune 1000 companies, Internet companies and systems integrators continue to make "significant investments" in IT infrastructure. "Our teams are experiencing strong demand in the major markets in the U.S. and Europe especially for our Turn-key product," Foust said in the company's Aug. 6 conference call (see full transcript).

Demand outpaces supply in many markets, according to Digital Realty CFO Bill Stein. "In Silicon Valley right now there's not much space at all," said Stein. "We're actually working on a couple of buildings on our Space Park Drive site (in Santa Clara) that will be coming online in the next nine months, so we're hoping to get ahead of the market there for that. But right now there's definitely a lack of supply.

Supply also lags demand in the greater New York market, according to Equinix (EQIX), which exceeded Wall Street's revenue expectations and raised its guidance for the third quarter and full year 2008 (see conference call transcript).

"What I would tell you is things are about as strong as they have ever been," said Equinix Chief Business Officer Margie Backaus. "I think you will continue to see announcements made by the REITs (Digital Realty and DuPont Fabros) for wholesale build in some of our market. But again, we track those extremely closely and the majority of the capacity coming on in these markets is mid '09 maybe. So we continue to be very, very happy with what we see as a big gap and find demand still strong in the markets we are in."

Switch and Data (SDXC) reported strong demand for its new data center space in Dallas, Toronto and Silicon Valley, helping the company post strong earnings for the second quarter of 2008.Based on that strong performance, the company once again raised its revenue guidance, hiking its total 2008 revenues by $2 million to $170 million while raising EBITDA guidance from $53 million to $55 million.