Lease Up of Development Pipelines Continues to Be a Question Mark For Providers In Some Markets
Major publicly traded data center developers and operators reported solid third-quarter results, with strong leasing of wholesale data center and colocation space reflecting the rapid growth of cloud computing, social networks and Internet shopping.
CoreSite Realty Corp. (NYSE:
COR) and Digital Realty Trust (NYSE:
DLR) reported strong new and renewal leasing activity, while DuPont Fabros Technology (NYSE:
DFT) qualified demand as "reasonable" in its core markets of Santa Clara, CA, Ashburn, VA, New Jersey and Chicago. None of the companies provided guidance for 2012 performance due to the turbulent economy and the difficulty in charting the level of fourth-quarter leasing velocity.
Securing tenants to fill rapidly growing development pipelines has been a major thrust of the companies -- and a source of uncertainty given the volatile economy and changes sweeping the IT industry, especially the move toward cloud computing.
Lease-up remains critical, given recent and soon-to-be-delivered developments at low occupancy levels, and 2012 could be a slow earnings growth year as lease-up will likely be back-end loaded and is contingent on macro improvement, Citi said in a research note by Michael Bilerman and Emmanuel Korchman.
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Digital Realty signed leases signed totaling over 186,000 square feet in the quarter, consisting of approximately 54,000 square feet of turnkey data space, 96,000 square feet of build-to-suit and 37,000 square feet of non-technical space.
"We have a good funnel of prospects under negotiation and expect to meet our projections for new leasing in 2011," noted Digital Realty CEO Michael F. Foust. "Customers are continuing to outsource their data center requirements and are looking for a number of flexible alternatives to meet their long-term needs. As a result, we have seen a significant increase in demand for our build-to-suit solution.
"I am worried a little bit about the macro world environment,” said Hossein Fateh, president and CEO DuPont Fabros. “Previously, that has not necessarily affected data centers because they continued to grow. But I'm worried about some of the decision-making based on what's happening in the world, so I want to be tempered.”
In the past, "our biggest competitors in the world of data centers are tenants doing it themselves," Fateh said. That said, “in a world that is uncertain, we also see many tenants decide to outsource rather than doing it themselves. So, I may be wrong and it may have a positive impact on us.”
DuPont Fabros also
faces competition from private-market players such as Vantage Data Centers in Santa Clara, where DFT slightly lowered rental assumptions amid slow lease-up of its 18-megawatt facility opened in October because “there are a couple of private players on the market that I felt had done deals that we wouldn't want to do.”
Mark L. Wetzel, chief financial officer of DuPont Fabros, said “we will not start another development until leasing catches up,” and the company may wait until early 2012 to raise a projected $75 million in the capital markets.
Customer activity across Coresite’s markets was strong with solid leasing at its 900 N. Alameda building in Los Angeles as well as in Chicago, Virginia and the Bay Area, said Tom Ray, CEO.
“With robust demand for our assets, we remain confident in our lease-up and pacing as we bring online in the coming quarters the 161,000 net rentable square feet of redevelopment and development space that we currently have under construction," Ray said.
“Importantly, these leases were accomplished in fewer square feet, reflecting a more efficient utilization of our space. Renewal activity was similarly strong, achieving a rent-retention ratio of 88.4% and rent growth of 13.9% on a cash basis.”