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Data Center Outlook for 2018: Is Leasing Choppiness a Trend or Will it Pass?

 
Nov 9, 2017
by Josh Anderson

PHOENIX, AZ — Data Center REITs comprise about 10% of REIT indexes. The five largest data center REITs within the sector are CoreSite, Digital Realty, Equinix, CyrusOne, and QTS, which together account for roughly $75 billion USD in market value. According to a recent study, the data center REIT sector has been leading price appreciation the last two years at 26.4% in 2016 and 31.8% YTD in 2017. Some highlights of the latest earning call include choppy leasing. Digital Realty surprised investors by reporting negative rent growth on renewals in the third quarter and expressed that similar choppiness should be expected in upcoming quarters. So is this a developing trend or does it go with the territory?

At CapRE’s recent Southwest Data Center Summit in Phoenix, we checked in with Ian McClarty, President, phoenixNAP, who thinks it’s a developing trend. “We’re seeing with our customer base a lot of consolidation going on,” he shared. “Especially with the mid-market enterprise. And also a bigger move to cloud services. What we are seeing is cloud service providers becoming our new clients and tenants in a lot of ways. Client are going less direct and more cloud.”

We next touched base with Alan Kierman, SVP for Finance & Administration at IO. “At IO we expect to keep 95% of renewal revenue from existing customers,” he offered. “In addition, I think there is some favorable market trends as well with respect to legacy contracts. Obviously some of those initial contracts, people are buying capacity differently. True to end capacity, where we are now able to reconfigure space on an N+1. So we’re recapturing additional sellable capacity to be able to have more units to sell in a given data center, so we’re able to maintain positive growth even from legacy facilities.”

Next up, we heard from Sig Friedman, Senior Director at Chirisa Investments. “From my perspective, DigitalRealty has taken on a lot,” he said. “The purchase of Fabros Dupont is a lot to absorb for any one company. From an investment standpoint, you’ve got to be able to absorb that and deliver. So they may be feeling the pains of some of that, trying to manage that influx of real estate and try to make it work.”

Greg Davit, Vice President, Aligned Data Centers next added in one last remark regarding Digital Realty. “Well they’re older, let’s just be frank about that,” he said. “They’re got some of the oldest facilities in the world, so guess what happens? They stop working. I mean how old is your iPhone? You start thinking about data centers that are twenty years old, they just don’t do the same thing anymore.”

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