Vacant Facebook Space Gets Leased Up in Silicon Valley

When Facebook migrated servers from leased data centers to its ultra-efficient server farm in Oregon, it left behind acres of empty space in Silicon Valley. The shift provided a major test of how a key data center market handles the exit of a major player, particularly when Facebook announced plans to sublease its vacant space, a strategy that loomed as a potential headache for landlords.

These data centers are now being filled with servers from companies like Alibaba, Groupon and Internap. About 7 megawatts of data center capacity has been leased by new tenants, most of whom have wound up working directly with landlords.

"Facebook has had success subleasing their space in Santa Clara," Avison Young principals Jim Kerrigan and David Horowitz reported in their most recent market update.

The Challenges of Subleasing

The success in filling Facebook's old space in Silicon Valley offers a hopeful sign for other data center markets where large tenants are vacating data center space, either to move into company-built data centers or to shift cloud capacity across a national or global footprint. That is especially true in northern Virginia, where Yahoo has announced plans to sublease 24MW of leased data center space in the heart of the nation's busiest data center market.

Last June, Facebook confirmed that it was seeking to sublease space Santa Clara, Calif. This prompted fears that the move would disrupt the pricing dynamics in the Santa Clara market. Facebook had to continue paying its landlords but could sublease the space at a discount to recover those costs.

The wholesale data center providers in Silicon Valley have been actively involved in the deals. These landlords do not name their tenants. But industry sources, along with market reports from Avison Young, provide outlines of the deals that have filled the former Facebook space:

The CoreSite deal reflects the pragmatism with which landlords have been working with both Facebook and prospective tenants in the Silicon Valley market.

"We believe it's an attractive win for both the existing customer at SV3 and the new customer at SV3," Tom Ray, CEO and president of CoreSite, in the company's earnings call. "We were able to offer an aggressive, customer-friendly rental rate for the new customer, by which CoreSite, the new customer and the old customer all came out ahead of where they otherwise would have been."

Ray said the five-year deal with the new customer was at below-market rates, but noted that "the old customer will continue to pay some degree of rent, and the net of the new rent and old rent is favorable compared to the old rent."

Yahoo Marketing Virginia Space

Will this approach work in northern Virginia? Last month wholesale data center specialist DuPont Fabros Technology said that Yahoo has decided to sublease 24 MW  of space in two DFT data centers in the Ashburn market.

In a company earnings call Hossein Fateh, DFT's CEO and president, said, "I believe subleasing this space may be difficult.Yahoo tells us they're not vacating ACC2 until the end of the year, leaving only 9 months of term. The remaining term at ACC4 is between 3 and 5 years. Customers who spend this much capital require a longer lease term and visibility for extension rights to justify that expense."

Fateh also noted that tenants who sublease space are not eligible for state-level incentives, including Virginia's sales tax exemption on servers and storage equipment. "There is specific language within the legislation that there must be a direct relationship between the landlord and customer in order to receive the benefits," said Fateh.

If the Silicon Valley experience is any indicator, Yahoo and DuPont Fabros will likely need to collaborate to succeed. "If they do subleasing, we'll obviously be happy to work with them," said Fateh.