One of the hot topics in IT over the last year has been the growth and management of big data and the rise of cloud computing, fueled by an explosion in consumer smart phones and tablets, GPS navigation, social media, online gaming and e-commerce, among many other data-hungry sources.
But while the “cloud” term seems somewhat celestial and ethereal, the impact has been immediate and forceful on the wholesale and colocation data center industry as it strives to keep pace with the rapid spike in corporate demand, with the growth in total data usage and storage rising to nearly incomprehensible numbers.
In fact, the technological capacity to store information has roughly doubled about every three years since the 1980s, to the point that 90% of the data that exists on Earth has been created in the last two years alone, according to IBM.
Consider the case of Wal-Mart. By 2009, companies with 1,000 or more employees representing nearly every sector of the economy maintained an average of 200 terabytes of data storage — twice the data storage of the shopping behemoth in 1999, according to a study by McKinsey Global Institute. Today, Wal-Mart handles more than 1 million customer transactions every hour, logged in databases estimated to contain more than 2.5 petabytes – the equivalent of 167 times the information contained in all the books in the U.S. Library of Congress.
Data Drives Demand
According to Gartner Research, the global market for cloud services is expected to grow from just under $89.5 billion last year to nearly $129 billion in 2013. The vast storage requirements of the cloud combined with the move by many companies to move their IT functions offsite has caused a boom in data center demand over the last two years. Less than 20% of enterprises outsource their data center requirements today, a source of considerable growth potential for the wholesale data center industry, said Hossein Fateh, co-founder and CEO of DuPont Fabros Technology (NYSE: DFT), one of the sector’s largest players.
“We believe that cloud computing, gaming, data retention and processing will continue to grow significantly year over year,” Fateh told investors in a recent call. “This growth will also increase the need for data center space.”
A study of the North America market released last month by Digital Realty Trust, Inc. (NYSE: DLR), another of the largest REITs that develop and own data centers, found that 92% of senior decision makers on data center strategies at large corporations will definitely or most likely expand in 2012. That’s the highest percentage in the six years that Digital Realty has sponsored the survey and research conducted by Campos Research & Analysis.
Over the last two years, 70% of respondents to the Campos survey reported having built or acquired a data center project, forecasting rising demand for data center space in 2012 and 2013. Only 4% reported no expansion plans for 2012-13.
Michael F. Foust, CEO of Digital Realty, said the results are consistent with what the company’s customers are reporting across its portfolio.
“We see active demand from new data center space virtually across all of our markets. We’re certainly seeing an uptick, said Foust. Digital Realty was tracking over 2 million square feet of demand at the beginning of 2012, compared with 1.4 million square feet of requirements at year-end 2010, he said.
Requirements Rise Sky High
A number of factors are driving the increase in demand, Foust said, including the continued adoption of public, private and hybrid cloud computing solutions, pent-up demand from enterprise customers that had deferred expansion plans due to the shaky economy — and the proliferation of data.
Companies in many sectors now store a mean of one petabyte, equal to 1,000 terabytes, or 1,000 times the storage capacity of today’s newer home desktop computer hard drives. A growing amount of that data — in the form of Twitter and Facebook posts, YouTube and Netflix videos and online shopping through such retailers as Amazon, eBay and Wal-Mart — is accessed through Android phone, iPhones and iPads via cloud computing using web browsers and desktop and mobile apps. Data and business enterprise applications stored on earth-bound remote servers in data centers.
Cloud providers are continually absorbing greater amounts of data center space, as evidenced by recent leasing activity by Amazon and Texas-based Rackspace, confirmed Jim Kerrigan, principal and director of the data center group for Avison Young in Chicago. Rackspace leased 58,000 square feet late last year at Digital Realty’s 69-acre DataCenter Park in Dallas.
The rising requirements of the cloud are also luring non-traditional players into the space. Cousins Properties (NYSE: CUZ), a diversified REIT, is converting an unused 170,000 square feet of its 1 million square foot American Cancer Society Center at 250 Williams St. in downtown Atlanta into data center space.
In addition to the REIT providers and private developers of wholesale space such as Vantage Data Centers pushing to meet the server farm requirements of thousands of enterprises, demand for colocation facilities will outstrip supply starting in 2012 unless providers expand at a faster rate, according to a recent paper by Ted Ritter of Nemertes Research.
In dedicated wholesale data centers, a tenant typically leases a data center developed and dedicated for that purpose. Shared colocation providers lease out server racks, often to multiple customers, within a building.
Colocation providers include pure-play firms like Equinix and Telx as well as massive telecommunications companies such as AT&T, CenturyLink, Cogent and Verizon, and systems integrators such as HP and IBM. However, no provider controls more than 20% of the market and a significant share is comprised of smaller local firms servicing certain vertical markets or local customers.
A major wild card in the colocation footprint is the influence of Internet companies and cloud computing, Ritter said, adding that this business will rise from an estimated 25% of colocation footprint currently to 30% by within three years as enterprises adopt cloud computing platforms.
Because the colocation industry’s total footprint is not well understood, it’s critical for enterprises to enter into a contract with ideally, three years of expansion in mind, Ritter said.
In the overall data center industry, 38% of respondents to the Campos survey who said they are likely to expand will add facilities in three or more locations, while 54% plan to pursue projects of 15,000 square feet or more.
In one of the largest expansions of the first quarter, Digital Realty announced in February the $123 million acquisition of Convergence Business Park, an 819,000-square-foot data center and office campus on 168 acres in Lewisville, TX, a suburb of Dallas. The deal included 39 acres for future development.
