Up-Close with Cushman & Wakefield’s Sean Brady, CAPRE 6th Annual Greater New York Data Center Summit Speaker Offers Analysis of Tri-State Demand-Supply
by Brian Klebash
EAST RUTHERFORD, New Jersey – Cushman & Wakefield’s Sean Brady participated in an “Up-Close” interview in advance of CAPRE’s 6th Annual Greater New York Data Center Summit. The high-level conference will be held on April 19 at Convene in Manhattan, and bring together 400+ senior-level data center real estate and technology infrastructure executives from around the globe. Sean will moderate a panel focused on improving operational costs of modern data centers
Sean Brady joined Cushman in 1980, and over the past 30 years he has consistently finished in the top ranks in New Jersey and on a national basis. Brady is one of the founding members of Cushman & Wakefield’s Data Center Advisory Group (DCA Group), and has been working in this space since 1995. He completed the first colocation facility on the east coast in 1996 with Exodus Communications.
CAPRE: What has been most surprising to you about the Tri-State (New York and New Jersey) data center arena over the last 12 months?
Brady: We continue to see a decline in large data center transactions of 500 kW and above in the New York Metro Data Center (DC) Market. At the same time, the demand for Cloud Services continues to experience double-digit increases.
In general, the demand for power and space improved in 2016. Just over 5 mW was leased in New Jersey, which remains the “darling” of this Third Party sector. The Tri-State region’s five other submarkets combined saw a smaller transactional total. Demand last year stemmed more from new transactions than in 2015, when we saw the bulk of growth attributable to internal expansion. Pricing for space across all submarkets remained aggressive; some DC providers with strong activity have even begun to reduce their concessions.
As mentioned above, Cloud activity in the New York area is very strong, and it appears that companies are moving large portions of their servers to the Cloud as a panacea. We are somewhat concerned about where this demand will land, as the cost of electric and, in some cases, a lack of state incentives (depending on the structure of the Cloud transaction) may lessen the New York Metro Market’s competitive edge. In fact, Rockland County, N.Y., is the only part of the area with data center incentives, and the benefits are clear. Bloomberg, Blue Hill Data Services and JP Morgan Chase all have or will have Rockland County data center locations.
CAPRE: How would you describe the rate of absorption of new product in New Jersey and New York over the last 12 months?
Brady: Net absorption improved in 2016, particularly in Fairfield County, Conn.; Westchester and Rockland County, N.Y.; and Northern New Jersey. Absorption in New York City, Staten Island and Long Island remained flat. With a healthy amount of space available across the board, landlords are aggressive. Today is a fantastic time to outsource because of the quality of available offerings. In big markets, like ours, prospects will see the greatest variety in DC services, including:
- Big wholesale/modular wholesale/outsourced-owned data centers managed by third-party operators.
- Container solution/prebuilt/modular system solutions using power on demand.
- Public colocation/private colocation/colocation on demand.
- Managed services provided by national or local third-party providers.
- Cloud – Private, Public, Hybrid and Community, which can include services for IaaS, PaaS, SaaS, Storage, Database, Process, Applications, Integration, Security, Management, Lab or Testing as a service.
Due to the large variety of options, an increasing number of users and providers are enlisting expert teams with the knowledge and experience to understand specific user needs and match them to the best solution. Unfortunately, many other major markets in the U.S. also offer most of these services to enterprise clients.
The New York Metro data center market has a lot of quality space available, and with predicted lower net absorption and a continued trend toward smaller transactions, it will remain in this aggressive state, at least for the near term. Without a strong pipeline, most providers are no longer bringing speculative white-box space to market.
Pricing and concessions will be predicated by the amount of immediately available white space. So if a new tenant needs a quick block of space in a submarket that has had a few large deals completed, pricing could quickly change. Most providers do have large blocks of raw space available, but it may take six to nine months to deliver the raised floor space with all the mechanical and electrical required to make it operational.
CAPRE: What firm (investment or development) has been most interesting to you and why?
Brady: There are a few investment and development firms active in this area, but over-building has limited the current active pool. M&A activity in this area has come from CyrusOne and QTS on the development side, and Stonepeak Infrastructure as investors. CyrusOne purchased Cervalis in Norwalk, Conn., and Totowa, N.J.; and Sentinel in Somerset, N.J., and Durham, N.C. QTS purchased a major facility built by DFT in Piscataway, N.J., in 2016, and a McGraw Hill facility in Hightstown, N.J., in 2015. Stonepeak last year made a sizable investment in Cologix from Parsippany, N.J. These acquisitions were very smart and provided a low cost of entry into this Tier 1 market with minimal risk. The New York market has many large corporations with national deployments, and having local DCs to sell into locally and expand the current and future tenant into the other data centers in the portfolio nationally.
CAPRE: From a competitive standpoint, what market (Mid-Atlantic, Canada, etc.) is a threat to the Tri-State?
Brady: The Washington, D.C., market is perhaps the biggest threat to the Northeast. It is still in the U.S. (easier to get to than Canada by air – without a passport and subject to fewer weather delays), yet the cost of electric is lower or similar to its neighboring states. Washington, D.C. has $0.05/kWh pricing, in comparison to $0.10/kWh to $0.22/kWh in states to the north. Additionally, there is plenty of space, power and fiber capacity within the Northern Virginia Market. Washington, D.C., and its immediate surrounding area comprise a larger market than Montreal and Toronto combined, providing another advantage over eastern Canada. We do not see this “hierarchy” changing for several years – maybe never – especially due to the cost of power.
CAPRE: What do you expect to change in the regional market over the next 12 months?
Brady: We do not anticipate any dramatic change in the steady demand for data center space in our market area, with the possible exceptions of New York City, Long Island and Connecticut. The cost of space and power – in general – is the most expensive in New York City. Long Island and Connecticut also may become less attractive due to the cost of electric as compared to the other suburban submarkets in the New York Metro Market.
Overall, the regional market will remain relatively strong in 2017. Yet we believe that a significant portion of new activity will involve companies going to the Cloud and bypassing colocation for their DC needs. We already are seeing more and more colocation uses leaving for the Cloud and estimate that this type of move represents 10 to 20 percent of the transactions within the market today. As mentioned above, the concern lies in that when a user goes to the Cloud it could easily go out of our market area. And this trend has a good chance of growing.