Spending on Data Centers to Reach $99b in 2011
The data center market has heated up over the past two weeks, with the announcement of a pair of acquisitions. The deals come at a time when the demand for data storage continues to rise. According to a report released Thursday by technology research firm, Gartner, spending on data center servers, storage and networking equipment will rise 13% to $99b in 2011, above pre-recession levels.
In a deal announced on October 6th, global data center provider Digital Realty Trust (NYSE:DLR) acquired a data center located in Sacramento Country from Seattle-based Telecom Real Estate Services for $30m. The property is located at 11085 Sun Center Drive in Rancho Cordova, and measures 69,000 square feet. The center has a history of use by some large players in telecom—first MCI, then Verizon (NYSE:VZ). Both providers used the data center as a telecom switch.
With the acquisition, Digital Realty expands its California footprint, more than doubling its presence in the Sacramento market. The company owns and operates a 63,000 square foot property on Gold Camp Drive, also located in the city of Rancho Cordova. The purchase however is just a drop in the bucket compared to Digital Realty Trust’s overall portfolio. The data center giant owns 98 properties throughout Europe, North America, Singapore and Australia. Its real estate holdings combine to measure 17.3m square feet.
Based on the purchase price of $30m, Digital Realty paid approximately $435 per square foot in the deal. The property was particularly attractive based on the fact it is fully leased on a long term basis to SunGard Availability Systems Inc. By contrast, Digital Realty is still looking for co-location tenants in its Gold Camp Drive data center. As part of its acquisition strategy, Digital Realty seeks properties that have predictable, long-term cash flows (rents), making data centers with existing tenants locked in logical targets.
Scott Peterson, chief acquisitions officer at Digital Realty, commented on its recent purchase. “This acquisition adds a newly renovated, high quality, and fully leased operating asset to our portfolio at an attractive going in cap rate. The property is located near our 3065 Gold Camp data center facility, expanding our presence in the Sacramento market and contributing to our revenue stream with a long term, stabilized lease.”
In addition to being fully leased, the data center’s Sacramento location is increasingly attractive for companies to store their data thanks to cheaper electricity and relatively inexpensive real estate. Twitter, among other companies, has recently leased space in the Sacramento area.
On the heels of Digital Realty’s purchase, Denver-based Hosting.com announced that it had acquired Dallas-based managed services provider and data center operator, Neo Spire. Hosting.com offers cloud hosting and recovery services and is owned by private equity firm, Charlotte-based Pamlico Capital. While financial terms of the Neo Spire deal were not disclosed by the company, Golub Capital recently provided a $78m loan to Hosting.com in connection with the acquisition.
Neo Spire owns and operates data centers in both Dallas and Atlanta, located in close proximity to major fiber networks. The connection at its Atlanta-based facility, a 50,000 square foot property, sits upon on a main fiber backbone in the city. With its acquisition, Hosting.com’s total data center space now totals 131k square feet with a footprint in Dallas, Denver, Irvine, Louisville, Newark (DE) and San Francisco.
While the Digital Realty purchase was more of a straight forward data center deal, there is a large managed services piece to Hosting.com’s acquisition. Neo Spire offers a full range of hosting solutions: fully managed hosting, dedicated server hosting, private cloud hosting and colocation services. In addition, Neo Spire offers a compliance based approach to network and data security framed around the PCI Security Standards that helps companies navigate complex industry and government regulations.
Hosting.com has suggested that it will look to cross-sell its new Neo Spire clients with its own portfolio of cloud services, specifically its cloud replication solution that provides offsite data protection and disaster recovery. In late August, Hosting.com launched its new data loss prevention service that utilizes VMware to enable automated replication of a customer’s virtualized data from a Hosting.com data center, to a recovery site.
Looking back at the M&A in data centers this year to date, 121 properties measuring near 4.4m square feet have been dealt in selected transactions. While price tags were not disclosed on a number of the acquisitions, the priced deals have totaled near $5.5b. Based on these numbers, Gartner’s bullish outlook for the data center market is reinforced.