More Data Centers Coming Online: Good or Bad News?

data center

In the past week or so:

Rahul Bakshi, vice president, managed services strategy and solution design at SunGard, said the company is on target for its annual growth plan and has a positive outlook on 2011.

“We are winning new business and growing with existing customers as well,” he said.

An IPO Worth Watching

Amid the growth spurt, CoreSite Reality Corp., which owns and manages data centers, last month launched its initial public offering. The company’s prospectus provides some insight into why companies are so keen to build or expand data centers.

“Concurrently with the increasing demand for outsourced data center space, we believe that the supply of new data center facilities has been constrained by industry consolidation, underinvestment and lack of sufficient capital to develop additional space,” states CoreSite’s prospectus.

The document, citing Tier1 Research, pegs new data center supply at 5 percent in 2010 with data center demand growing 12 percent this year. The outlook through 2013 is for multi-customer data center space demand to outrun new supply by about 250 percent, CoreSite notes, again citing Tier1.

CoreSite lists growth in Internet traffic, outsourcing and disaster recovery as factors propelling data center demand.

In addition, the company points to the adoption of cloud computing and hosted applications services.

“These applications have significant processing and storage requirements and need adequate and redundant network connectivity and reduced latency, which is increasingly difficult for in-house data center solutions to provide,” according to the prospectus.

Mixed Forecast?

But here’s the dark cloud to go with the silver lining: the prospectus’ risk factors section notes that oversupply or decreased demand in its markets could hurt CoreSite “to a greater extent than if we owned a real estate portfolio that was more diversified in terms of both geography and industry focus.” The company’s data centers operate in five California locations, two Washington, D.C. area locations, Boston, Chicago, Miami and New York.

The company also cites competition that could hinder its ability to lease vacant space or renew leases. CoreSite said its competitors include Digital Realty Trust Inc., Dupont Fabros Technology Inc., 365 Main Inc., Equinix Inc., Terremark Worldwide Inc., Savvis Inc. and Telx Group Inc.

If the demand develops as forecast, data center providers could be set for big gains. If not, they could be in for an equally large disappointment.

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