Cloud Computing and Data Center Growth

Smart phones, big data, the internet of things: the technological data explosion has fundamentally changed the real estate business and the data center sector. Demand is only set to rise. However, will cloud computing be the biggest challenge facing third party providers of data center storage? Pat Lynch, managing director of data center solutions at CBRE, talks to PrivcapRE about the true impact of the cloud, the uncertainties corporations face in assessing their future technological needs and the real costs of running a data center. PrivcapRE: Is the trend for data center ownership in the U.S. moving towards third-party providers or in-house operations? Pat Lynch, CBRE: The trend is definitely towards third-party ownership of data centers. And from the investor perspective, that why there’s a significant opportunity in the data center space. I have been in my role at CBRE for three years, but I come out of the corporate world, and [just a short time ago] the idea of using third-party data providers was considered risky. However, there’s been a dynamic shift in the last 24 months, where people view quality third-party providers as a better investment and safer than having in-house operations. One dynamic is the uncertainty [of corporations] as to their future IT platform requirements. Most companies cannot answer that question outside of 24 months, let along long-term, so what they need is a provider of those facilities, rather than building a data center costing $1,500 to $2,000 a square foot.

How will cloud computing impact the third-party owners of data center space, considering that Google, IBM, Amazon, and Microsoft are in a data center build-out race, spending billions of dollars each quarter on future capacity? Lynch: Without a doubt, cloud computing is going to absorb a significant amount of computing power. But to use “cloud computing” as a definitive term, it’s like using “office building” as a definitive term; it doesn’t reflect the fact there’s Class A, B, and C space and office-sharing spaces such as Regus. Different companies operate different facilities at different cost levels, and the industry has to be better at defining all those differences. You also need to consider what can and cannot go into the cloud. Credit card information, bank financial information, won’t necessarily be housed in cloud computing, and different country regulations will likely be more or less restrictive on that issue. Will there be any fallout from the growth of cloud computing?

Lynch:  Where I believe the fallout will be is in office spaces around the world, which still house telecom plazas or have servers in the HQ or small data centers. Take healthcare facilities or university campuses. I visited one university recently, and it had 25 different data centers in 25 different buildings on one campus. That’s a very poor, inefficient use of not only IT computing, but power in general. Those spaces inefficiently using power for data needs, they will be the first to migrate away from it. I see significant upsides [for third-party providers]. You mentioned the cost per square foot of data centers. What’s the true cost of operating a data center? Lynch: It’s not about the land costs or the building costs. There is a very significant investment in mechanical and electrical costs. These buildings use 150kw per square foot, whereas a traditional office uses 10kw per square foot. Your investment tends to come out to $1,500 to $2,000 a square foot. But most companies then invest twice that in IT equipment, and you will be refreshing a piece of that IT platform every three years. Given the cost, is data center ownership more of a REIT business? Lynch: It would definitely appear so. There are several clients converting to a REIT model. I would add that data centers are absolutely institutionalized [in the real estate portfolio]. That will continue to evolve as the business grows.