Apple Deal Highlights Industry's Recovery

The market for Internet data centers continues to heat up, with a flurry of new deals involving major Internet companies. Within the last three weeks, Apple, Yahoo, Microsoft and Hewlett-Packard have all announced deals to acquire new data centers. The expansions by tech's biggest names are the latest headlines in an extraordinary recovery for the data center industry, which was in dire straights just two years ago. Rampant overbuilding during the dot-com boom proved disastrous when the market collapsed, as debt from network buildouts pushed many providers into bankruptcy. Data center prices collapsed as supply outstripped demand, and dozens of facilities changed hands in bankruptcy or distress sales.

That's all changed now. Yahoo outbid several other contenders for a former WorldCom data center in Newark, Calif., paying at least $45 million for a 107,000 square foot property. The seller was Stream Realty, a Dallas firm that was a big buyer during the market trough several years ago. The outlook for data centers has changed completely, especially in Silicon Valley, Stream Realty's Robert Kennedy told Commercial Property News this week. Recent deals have absorbed the market overhang, boosting properties once contemplated as data centers but then "repurposed" for alternate uses when demand evaporated.

The recent buying has come from multiple sectors, as shown by transactions from recent weeks:

One of the most significant factors supporting demand for data centers is the market for delivery of video over the web, which will require large amounts of digital media to be stored in facilities offering high-speed access, and mission-critical reliability to ensure that consumers will have uninterrupted, around-the-clock access to downloads on demand.

Hollywood's likely need for data center space has boosted the Los Angeles data center market, including the sale of two major facilities last fall. Other regional markets showing strength include central Washington State, where Microsoft and Yahoo are each locating facilities, and Chicago.

The data center industry has absorbed the space left over from the crash. But has it fully absorbed the lessons? At least one recent project begs the question. A Virginia startup plans to spend $80 million to build a 140,000 square foot data center on spec - with no tenant lined up to lease the space.