Carry on Wayward Leasing Executive: Chicago Insiders Discuss Evolution of Lease Terms
CHICAGO, IL — If anything’s certain in the data center industry, it’s uncertainty. This industry is changing in many aspects, and so of course the way that deals are struck and cemented follow suit. This was the crux of one of the signature panels at CapRE’s recent Greater Chicago Data Center Summit, Carry on Wayward Leasing Executive: Best Practices for Brokers, Marketers and Attorneys as Deals Grow in Size and Complexities. In this CapRE Insider Report, we dive right into this discussion.
“Lets go ahead and get into it!” began Moderator Jake Ring, Co-Founder & CEO of GIGA Data Centers, looking to his trusted panelists. “From our perspective, there’s been an evolution over the last five years in deal size. Gentlemen, what have you seen in that evolution? How have lease size, terms, and complexities changed in the last five years?”
Matt Gleason, General Manager at CoreSite kicked off the offerings. “I think generally, leases have gotten shorter. What used to be 5 year terms are now 3 year terms, or 2 year terms,” he replied. “Flexibility matters. Optionality matters. And on the lease term, we see a lot of requests for renewal options on the back end. Of shorter leases than we have had traditionally in the past. Some of that is just tenants getting a little bit smarter about what they’re buying and how they’re buying. Some of that is the cloud. They don’t know how they’re doing it or what they’re doing, but they know they need to do it, because the CFO told us we did.”
“So I think that the folks that are buying from us directly, whether it’s the procurement folks, or even the IT folks, just don’t have a clear roadmap, or as clear of a roadmap, as they did in the past,” he stressed.
Next, David Horowitz, Vice President for Data Center and Cloud Solution at T5 Data Centers chimed in. “Enterprise folks, there is a shift. From into the Cloud. And now we’re seeing a shift back, from the Cloud and into traditional data centers,” he observed. “One thing really to keep an eye on, is that the original data centers that were done seven or eight years ago, across the board, from our perspective, in the larger deployments, the utilization is very, very low.”
“And so for these original deals that were done seven or eight years ago, it’ll be interesting to see how providers respond to, companies that have leases that are coming up for renewal and want to downsize,” mused Horowitz. “And their rental rate is obviously seven years escalated. So comparing seven years ago to the runway of today, it’s pretty much higher scope. It’ll be interesting to see how providers respond to that.”
Next up was Doug Fulton, Senior Director of Business Development at Zayo Group- Zcolo. “And I think that when you see ramps in traditional data center leases, they’ve always been adding power,” he asserted. “And what you see in the longer terms now is the ramps that decrease power over time. Or at least the optionality to decrease a percentage of the power over the years. So they can stay in that environment but not contract as much as needed.”
Finally, Rafal Rak, Vice President for the Portfolio Management Group at Digital Realty chipped in his two cents. “We’ve also seen a lot of, whether it’s enterprise or hyperscale or Cloud, tying deals together,” he revealed. “Either under an MSA, or even, I may need an asset in Chicago now, but in a couple of years our business may shift. Our business may contract in one market or expand in another market. So someone mentioned flexibility. That’s been a key component to a lot of these agreements lately. The other pieces to that is the deal cycle and negotiation process has taken a lot longer, because of the complexity associated with tying multiple assets together.”