Targeting The Tie-Breaker: How Data Centers Are Standing Out From The Crowd

When it comes to data centers, the key to standing out from the crowd is innovation.

With many data centers similarly equipped to handle client needs, what helps tip the balance with customers is finding a way to differentiate. That differentiation often doesn't mean a chance to exact a premium, but rather to get the deal signed.

"We are very, very big believers that innovation is the key to all companies. But also I don't think anybody will pay one extra nickel for it — it's the tie-breaker," QTS Chief Revenue Officer Clint Heiden said.

Innovation was part of the "Leading the Curve" discussion on the state of the data center market at Bisnow's Data Center Investment Conference & Expo, West, held Nov. 29 at the San Jose Marriott. Other topics at the daylong conference included changing infrastructure needs, financing and investment, data center efficiency, site selection, the cloud and future technology.

QTS is developing an application in-house that allows clients to access information about where their data is being stored and give them more control of their data, something particularly attractive for those clients that may be giving up owned infrastructure to start leasing.

For startup firm Evocative Data Centers, ensuring future success comes from being a full-stack operator of which data centers are a part of the equation.

"You have to be a full-service shop. You can't just be a single-product-offering company," said Arman Khalili, founder and CEO of Evocative, his seventh startup.

Silicon Valley-based Evocative has grown through four acquisitions since it started about 18 months ago and has another in the works, he said. Those acquisitions have helped the company grow its customers and product lines in a way that would be much harder to do organically.

At the end of the day, clients don't care where their data sits, but it is the service provided that makes the difference.

"From a cost perspective, it needs to flow, it needs to be low latency and it needs to be fully secure," he said.

For high-end operators, it is important to be clear about what differentiates them, since high-end product has become more comparable, Infomart Data Centers founder and former President John Sheputis said.

ASB Real Estate Investments sold its Infomart data centers through transactions this year, noting that it was a prime time to sell.

That state of the market is strong for those looking for a buyer, panelists said.

Last year marked the industry's biggest deal to date: Digital Realty Trust's $7.6B merger with DuPont Fabros Technology.

Panelist Scott Peterson, co-founder and former chief investment officer for Digital Realty Trust, left the REIT at the end of May, though he continues to consult for the company.

"I'm a fan of going where the demand pipelines are big and demonstrated," Peterson said of investing in the current market. "That's where the competition is, too, but it's easier to get capital."

Location is a big factor when it comes to setting data centers apart from the competition. Many companies want data center storage in Hillsboro, Oregon, which is stealing clients from Seattle and San Francisco due to having the fastest low latency subsea cables. Heiden said he expects Portland and Hillsboro to become more important because of that. A similar thing is happening in Richmond, Virginia, which is pulling clients who want fast access to Europe away from New York City and Miami, he said.

Many data centers are facing the same challenges on the cost side, whether its increased materials costs, rising land prices in constrained markets or the cost of power.

Heiden said he can't make concrete dry faster or get better steel prices — and even if those advancements were made, everyone in the industry would benefit equally from that step forward. Companies in the space have honed their skills for building data centers while keeping costs down. So where are the savings? Often in the cost of land, the local taxes, the cost of power and other operational costs.

That was one reason an Atlanta site was appealing when QTS bought a 1M SF facility there years ago. The facility had a lower power cost grandfathered in for more savings. QTS just bought an adjacent 55 acres for $80M to expand that site.

Land costs in California are high, taxes are high, rules are more restrictive and labor is in short supply. And yet there is still growth as the area continues to attract companies that need data center services, the panelists said.

There was concern when Facebook moved its data operations to Oregon years ago that it would be a massive hit to Silicon Valley data centers, but instead demand from other startups in the area quickly stepped in to fill that void, H5 Data Centers Chief Operating Officer David Dunn said.

Even as demand has pushed out to other, less expensive markets, there has remained a significant amount of demand from companies that want to be in Silicon Valley, he said.

Startups often begin in the Bay Area and then move to Northern Virginia as they grow, but demand continues in the Bay Area, even though it is twice as expensive as Northern Virginia to build, own and operate data centers.

"We'll see what 2019 brings," Dunn said.

He anticipates that the housing shortage could create an increased focus on turning infill locations into apartments, instead of data centers, which could push up land prices and perhaps push some demand to other markets.

The outlook remains strong for data centers in the coming year, even as those in the industry anticipate a possible economic downturn.

"The data center [market] is not correlated to job growth or income or population growth. It's more or less a bet on automation and storage of digital [information]," Sheputis said. "Even if the economy should grow slower, we still think there will be growth here."

Peterson said the demand fundamentals are good, the availability of capital on the equity side has never been better and the debt markets have opened up. It is a good time to be in the industry, he said, particularly for those who stand out from the crowd in the right locations.

"Companies are still going to go where it makes sense for their business first," Peterson said. "They will always look to be more competitive from an execution standpoint ... You're going to have to add more services ... and you're going to have to come up with ways of delivering those as efficiently as everybody else and something that's a little extra becomes the tie-breaker."

View a slideshow from the event below: