Exclusive: Digital Realty Sells Huge Healthcare, Data Center Building in Philly

Digital Realty has sold a 14-story mixed-use building in downtown Philadelphia for $161 million to a national healthcare-oriented real estate investment trust, company executives told Data Center Knowledge. This is Digital’s third transaction this year, as the company continues to sell off properties it doesn’t consider core to its strategy.

The building has some retail, telecommunications, and data center tenants, but most of its 700,000-plus square feet is occupied by medical offices. Bought by the San Francisco-based data center provider and developer in 2005, it is a prime example of what the company describes as “non-core” properties in its portfolio it has been getting rid of in an initiative announced last year.

Indicative of the changes affecting the entire data center provider industry, Digital, one of the world’s largest data center landlords, has been going through a major transformation. In addition to optimizing its asset portfolio, the company, whose business has historically relied on big space-and-power leases, has been pursuing a strategy of partnering with providers that can add value to its buildings by offering tenants things like managed hosting, cloud, or cloud connectivity services. It has also placed more emphasis on retail colocation business than it has done in the past.

New C-Level Exec Team in Place

There have been big changes at the top of Digital’s management team as well, starting with the departure of its founding CEO Michael Foust in March 2014. The company’s long-time CFO William Stein was appointed permanent CEO last November.

Just this April, Digital appointed Andrew Power, a former Bank of America Merrill Lynch exec, to replace Stein in the CFO role, and former CoreSite COO Jarrett Appleby became COO at Digital. Also in April, the company appointed Michael Henry, who previously served as CIO at Rovi, as the first CIO in its history.

Demand for Healthcare Space Outpaces Data Center Demand in Philly

With a new senior leadership team in place, Digital continues to dispose of real-estate assets that are not essential to its newly refined strategy.

As the healthcare sector in and around Philadelphia grew, driving demand for medical offices in the market, the building at 833 Chestnut St. picked up more traction over time among healthcare tenants than it did among data center tenants, Peter Rosenbaum, vice president of acquisitions and investments at Digital, said. It is adjacent to the main building of the Thomas Jefferson University Hospital, and its location has proven to be a deciding factor in its fate.

Today, only between five percent and 10 percent of the building is occupied by data center space, including a meet-me room. The sale to a national healthcare-oriented REIT, whose name Digital execs declined to disclose, doesn’t mean companies that are taking data center space there will become second-class tenants, Michael Darragh, senior vice president of acquisitions and investments at Digital, assured.

“Most of these data center clients are also clients in [our] other buildings,” he said. “We don’t want to leave them with a bad taste in their mouth.”

The building’s new owner has hired a national company that will take over management of the data center space there.

Not a Big Wholesale Data Center Market

While the region has numerous tenant-owned and operated enterprise data centers, Philadelphia has traditionally been primarily a retail colocation market as far as data center providers are concerned, Darragh said. Such markets usually have one or two major multi-tenant data centers that sufficiently address the demand. Philly’s big data center hub and carrier hotel is 401 North Broad Street, owned by New York-based Amerimar Enterprises.

After Profitable Deal, Six More Buildings on the Market

Digital expects sale of its Chestnut Street property to generate cash net operating income of about $9.3 million this year, representing a cap rate of 5.8 percent. The company expects to gain about $77 million in the second quarter on net proceeds of $149 million the sale is expected to generate.

Also this year, Digital sold a 170,000-square-foot office building in suburban Boston for $31 million, and a vacant former 70,000-squre-foot data center in Brea, California, for $14 million.

The company has identified six more properties in this portfolio it wants to part with this year. Ranging in size from 14,000 square feet to about 310,000 square feet, all six are non-data-center facilities, housing technology office or technology manufacturing space.