Adoption of Cloud Services + Virtualization = Lack of Due Diligence? Insight From Jason Shepard, Cresa MCS at CapRE’s Southwest Data Center Summit

LOS ANGELES, CA — The opening session of CapRE’s Seventh Annual Southwest Data Center Summit: The Telecom Evolution was a Keynote Presentation by Jason Shepard, Founder & Managing Principal at Cresa MCS. Findings from Cresa MCS Annual Colocation Survey provided a snapshot in to the state of the industry, and as part of that discussion, Shepard provided some high level results about typical densities, utilization, and the impact of virtualization and Cloud computing on the colocation industry.

data center summit“One of my corporate clients had an on-site corporate data center with 10,000 square feet of raised floor,” began Shepard. “It was a legacy enterprise data center facility. After they had gone through their virtualization exercise, going to market, they went from needing 10,000 square feet, down to 20 cabinets. That’s 1500 square feet. So that was an 85% reduction of space when they went out to market. But still they’re still using the 30A-2 pole circuits inside that facility. So that’s just an illustration of the mass consolidation in this industry.”

“So I went to the colo providers and said look, how has this trend of adoption of cloud services and virtualization, been impacting your sales, within facilities? And their responses were as such,” he remarked, referring to the graphic below. “One company replied back that a user had consolidated 600 down to 300 kw. Another provider said no one is giving back space. Another said, people are consolidating their footprints, but they’re really going more dense. One said they hadn’t seen any changes, which I found interesting…The overall trend is that people really aren’t giving space back in the marketplace. They’re really trying to better utilize the space that they’ve already contracted for.”

“Now how many deals were completed directly?” he asked the room, pointing to the slide above. “56%. The average utilization is 51%. So you’ll notice a problem here. It’s just an outright lack of due diligence in the marketplace. And so the whole idea is for clients to make sure they’re doing that up-front due diligence when they go to the marketplace.”

Next, Shepard competed some very illustrative math. “Now, understanding that we’re talking about that 56% percent, I want to do that same math again. So if we’re looking at the math, that there are 10 cabinets are 50 kw, at the retail colocation model, we’re at $10,000 per month for $1,000 per circuit,” he explained, now refering to the slide below. “Versus wholesale, at a 70% load at 1.5 PUE for $4,000 USD.”

“What if we drop that, to the actual average utilization – not 70%, but 51.7%?” continued Shepard, slowly building to a rousing conclusion. “If you separately meter your power at 50 kw….we drop that from $10,000 a month pre-paid vs 51.7%, where you are talking a cost of power of $3,063 a month. Versus $10,000! For just ten cabinets. So this is just a matter of due diligence, going up into your colocation transaction management and doing that due diligence up front.”

Next, it got even more interesting. “What if we were to go from that $10,000 a month in a marketplace like Los Angeles, to Phoenix, where the cost of power is about six or seven cents? he rhetorically suggested. “If I were to do a deal with seven cents per kilowatt hour, at that same 51.7% utilization, I drop my cost of power every month right down to $1,981. That includes the PUE for those ten cabinets. So when I’m talking about CFOs, this is what opens that discussion up and they say, wow.”

Finally, he offered some insight on who exactly is advising people through these deals, revealing a third slide, below. “If 56% of deals are done direct, then for the balance, who are actually licensed?” he mused. “I’m a licensed broker in the state of California and I don’t need a real estate broker’s license to conduct IT services deals. But because I am a broker, I have a legal fee-sharing responsibility. Everything is above the board, dotting the Is, crossing the Ts, etc. But telecom agents? They don’t have any of this type of regulations.”

Concluded Shepard, “So a lot of these deals, you never actually know what’s happening. There’s a lot of misinformation happening in the marketplace. I found it interesting that only 5% of deals are being done by licensed agents.”

Jason Shepard,  Founder & Managing Principal, CRESA

Jason Shepard specializes in representing end-users in multi-market evaluation, site selection and acquisition of data centers and/or real property for data center conversion across North America. Widely recognized as an expert in this field, Jason is regularly asked to speak at industry events, has been quoted in multiple media sources and has a specialty consulting practice exclusively for data center occupiers. Jason’s platform evolved during the technology boom of the late 1990’s. While most abandoned the market after the crash of 2000, Jason committed to building a better knowledgebase and client service offering. Between a decade of data center tenant representation, the volume of completed projects and a multitude of consulting assignments, Jason’s experience is unparalleled in the industry.

Stay tuned for another CapRE Insider Report concluding his remarks on the slide above, including his recommendations. For more from Shepard, check out previous CapRE Insider Reports: