Internap to Move Out of Major Manhattan Data Hub

111-8th-Avenue

The exterior of 111 8th Avenue, one of the premier carrier hotels in Manhattan.

Internap Network Services will move a data center out of a prominent Manhattan data hub and relocate customers to a new facility it is building in New Jersey, the company said this week. Internap's decision to migrate its operations out of 111 8th Avenue illustrates the shifting tides in the greater New York data center market, which has seen a flurry of new projects emerge in the wake of Superstorm Sandy and questions about Google's plans for 111 8th Avenue.

Last October Internap announced that it would build a 100,000 square foot data center in Secaucus, a growing data center hub in northern New Jersey. At the time, the company said it expected that its two Manhattan data centers would near their capacity in the next 12 months. But in Thursday's earnings call, Internap said it plans to migrate its operations out of a 75,000 square foot facility in 111 8th Avenue and move them into the Secaucus facility. The New Jersey site will open late this year, allowing nearly a year to move customers between facilities.

"Prior to the lease expiration at the end of 2014 for our data center at 111 8th Avenue, we will migrate our colocation and hosting infrastructure into our new data center in Secaucus," said Eric Cooney, President and CEO of Internap, who said there were "various reasons" the company decided not to continue at 111 8th Avenue.

Speculation About Google's Plans

Google's stance on data center tenants at 111 8th has been the subject of much speculation since Google acquired the building in 2010 for $1.9 billion. "In the wake of that deal, there is growing concern that as these data centers’ leases expire Google will take over the space for its own use," The New York Times noted last year. That hypothesis will likely gain support from the exit by Internap, which helps accelerate customers' web performance, yet is checking out of one of the Internet's leading connectivity hubs.

111 Eighth Avenue is among the world’s most wired buildings, and one of the two key Internet intersections in Manhattan, along with 60 Hudson Street. The 2.9 million square foot property occupies an entire city block in Chelsea and houses major data center operations for Digital Realty Trust, Equinix, Telx and many other providers and networks.

After initial speculation that Google acquired the building to control a strategic Internet intersection, the company said its goal is to gain office space for its growing business operations in New York.

“It’s not about the ‘carrier hotel’ space,” said Jonathan Rosenberg, Google's Senior Vice President for Product Management, in a 2011 earnings call. “We have 2,000 employees on site. It’s a big sales center, but also a big engineering center. With the pace at which we’re growing, it’s very difficult to find space in New York. There are very few buildings in New York that can accommodate our needs. This gives us a lot of control over growing into the space.”

Google declined comment on Internap's decision to move out, and whether Google is seeking to eventually occupy third-party leased space at the building. Internap had no additional comment on its decision beyond Cooney's comment that it was guided by "various reasons."

Not Driven Solely By Cost

But during the earnings call Thursday, Cooney suggested that the move wasn't driven by economics. Internap operates its own data centers, but also leases space from third parties. The company has been shifting its focus from leased space to company-owned data centers, which offer better profit margins. But Cooney noted that Internap's facility at 111 8th was a company-controlled data center.

"In terms of the cost savings from a pure colo in 111 8th to colo in the Secaucus data center, there's probably a modest (cost) improvement, but not a massive improvement, because 111 8th isn't a partner data center for us," Cooney told analysts. "Certainly, rents are cheaper in Secaucus, but recognize that our 111 8th rent was derived from well over 10 years ago in terms of the market pricing in New York. So clearly, current rates are significantly higher than they were at the time we negotiated that deal. So again, we'll still see modest costs or margin benefit, but probably not as dramatic as you might expect going from a partner facility into a company-owned facility."

Internap's space at 111 8th Avenue is one of two data centers the company operates in Manhattan. The other is at 75 Broad in Lower Manhattan, one of the buildings that experienced flooding problems during Superstorm Sandy last October.

Internap will open its Secaucus data center in the fourth quarter of 2013. The first phase will be 13,000 square feet, suggesting that it may build additional phases quickly as it migrates customers from the Manhattan site.

The Manhattan data center has seen a flurry of new projects since Google's acquisition of 11 8th Avenue, including Sabey's Intergate.Manhattan (375 Pearl Street), new space from DataGryd at 60 Hudson Street, a new Telehouse facility at 85 10th Avenue, an expansion by 365 Main, a renovation at 325 Hudson Street, and most recently the announcement that Telx will build a new data center at 32 Avenue of the Americas. There have also been new construction projects in northern New Jersey, with new buildings underway for CoreSite and Digital Realty as well as Internap, Telx and IO.