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Robust Market for Data Centers Healthy Now, But Investors Worry About Oversupply

While Facebook and Other Large Social and Business Networks Continue to Build and Grow, Wholesale Providers See Rising Supply of Turn-Key Space
April 24, 2013
The first 476,000-SF phase of Facebook's Altton, IA, facility will begin construction this summer.
The first 476,000-SF phase of Facebook's Altton, IA, facility will begin construction this summer.
If there was any doubt that data center development, leasing and sales activity remain on a tear in 2013, Facebook erased that doubt this week.

The giant social network announced Tuesday it will build a massive new data center in Altoona, IA, investing at least $299.5 million in what will be its fourth owned and operated data facility and its third in the U.S.

Facebook joins the likes of Microsoft, Google and Amazon, all of whome are scrambling to provide better server coverage while lowering energy use and operating costs with more efficient facilities.

In addition to direct construction activity by Facebook and others, wholesale operators like Digital Realty Trust (NYSE: DLR) are seeing significantly stronger year-to-date net absorption than last year, with many new tenants coming into the market, according to recent analysis by Avison Young.

"There has been an increase in activity of tenants in the market as well as wholesale leases signed compared to last year," according to Jim Kerrigan, principal and director with Avison Young's Data Center Group in Chicago. "In addition, much of this represents new tenant activity as opposed to existing tenants expanding within the same location,"

LinkedIn was Digital Realty’s largest transaction of the quarter, leasing 6 megawatts in Northern Virginia and 3 MW in Chicago. That said, operators other than DLR did not have a memorable first three months, Avison Young said.

Avison Young predicts an uptick in wholesale pricing in most markets, despite current low pricing, with the better Tier III wholesale facilities disappearing as the year continues.

However, the market is dealing with a significant oversupply of turn-key wholesale space, with 1.9 million square feet available across U.S. markets.

Despite Salesforce.com leasing 1 MW in Atlanta, Quality Technology Services (QTS) has the most turn-key space available for immediate occupancy, mostly due to major vacancies by some of their largest tenants.

The largest builders of owner-occupied data center continue to surge as cloud computing-based applications become more and more a part of everyday life for consumers.

Facebook maintains other facilities in Prineville, OR; Forest City, NC and Luleå, Sweden. When complete, the Altoona center will be among the most advanced and energy efficient facilities of its kind.

The company evaluated several other sites before choosing the Iowa location and plans to break ground on the facility this summer, expecting to begin serving user traffic from the facility in 2014.

The first phase includes a 476,000-square-foot data center built to LEED Gold standards that will be among the most advanced and energy efficient of its kind. The 194-acre site selected in Altoona could accommodate up to two additional data center buildings that may be constructed in future phases of the project.

The data center will feature an innovative outdoor-air cooling system and the latest in Open Compute Project server designs, and it will be built to.

Earlier Monday, the Iowa Economic Development Authority (IEDA) board approved $18 million in tax benefits through the High Quality Jobs program to Facebook to create at least 31 new jobs at a qualifying wage of $23.12 per hour.

The project will have a minimum capital investment of $299.5 million. Local incentives from the city of Altoona were also approved today.

"In the coming years, as our service continues to grow and people share and connect in more ways, we need to make sure that our technical infrastructure also continues to scale," said Jay Parikh, vice president of infrastructure engineering at Facebook.

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