Data Center Trends: Insights From a Veteran

Vantage Data Centers Chief Commercial Officer Lee Kestler dives into the current state of the data center real estate market, from initial investor skepticism to the indisputable advantages of blockchain.
Lee Kestler, CCO, Vantage Data Centers
Lee Kestler, CCO, Vantage Data Centers

Data centers are rapidly growing out of their niche status as a real estate investment. A recent CBRE survey targeting 42 companies across the U.S. notes that 68 percent of investors and providers alike reported higher year-over-year occupancy in 2018. By the first half of this year, data center investment volume and net absorption were already close to surpassing the record-breaking 2017 numbers, according to another CBRE report. More than $7 billion in investment volume was reported, 47 percent of which was concentrated in asset transactions, as of June.

A growing number of investors are entering the sector or looking to diversify their holdings, as the value of data centers as real estate assets becomes more evident. Commercial Property Executive reached out to 26-year industry veteran Lee Kestler, chief commercial officer at Vantage Data Centers. He provided a thorough analysis of data center benefits, challenges and trends to keep an eye on. 

How do you assess a market/location before acquiring or building a new facility?

Kestler: Customers lead the way. We pay close attention to all the important factors that matter into where customers will actually buy multi-tenant data center services. We look for locations that meet baseline factors like utility power availability as well as the many nuances that determine if a site has a stable long-term business environment that is healthy.

For instance, we consider whether our target prospects/customers have already launched in that market—is this location relevant to growth for them? We also look at whether we can grow economically and scale. For example, if a market is difficult for employees to reach, if it’s difficult to move people in and out of, it could be an indicator that businesses will struggle to grow. Tax incentives are another factor we consider. About 30 states offer incentives for data centers and most companies expect some sort of incentive or rebate in their total cost of ownership equation.What role does sustainability play in the (re)development of data centers?

Kestler: We intentionally build our facilities to be long-lasting, which is the first standard of sustainability. This includes allowing for higher density hardware, which improves utilization of the floor-area ratio and continually assessing ways to make systems more efficient.

We also minimize our carbon footprint wherever it makes good business sense and some of the steps we take are more about doing the right thing than ROI. We consider all the little things we can do to save energy and reduce waste that may not have a huge payback, but add up over time into meaningful numbers for the environment.

For instance, Vantage is committed to using wind and solar-powered lights to power outside lighting in our Virginia campus. While these cost more than standard lighting, it’s both the right thing to do and it can generate more than 3,000 kilowatt hours per year off the grid. Our electronic vehicle charging stations can generate enough power to save our employees and guests more than 4,000 gallons of gasoline per year.

Do you expect blockchain technology to have a significant impact on the data center business?

Kestler: Absolutely. Blockchain requires tremendous compute power, which is great for data center growth, especially since we are in an environment where companies are expected to do more with less. Blockchain will also meet demands for both security and operational efficiency.

In building management, blockchain technology can make sure systems run predictably. For instance, in a scenario involving major network congestion, blockchain could kickoff failover processes before outages occur that can reduce the performance for end users who continue to rely on applications dependent on transmission of data. Clearly, this type of application could save money and time for data center operators and customers. It also enhances an operator’s ability to maintain service level agreements.

If we look to the future, blockchain could possibly eliminate data loss or corruption by sharing data over its distributed ledger so that loss of data in one block does not spread to other blocks. The potential applications are endless and many could result in less need for redundant infrastructure to deliver services—a measurable cost benefit for data centers and customers alike.

Please name a few challenges on the horizon for data center real estate.

Kestler: The data center business is a very regionalized sell. It has taken some time for the investment community to understand the data center market since we construct purpose-built facilities, which are typically a higher risk in real estate. However, investors have come to understand that we, data centers at large, are developing purpose-built premium real estate—with costs well above the typical commercial office building costs per square foot—and we are experiencing stable and healthy demand. The challenge will be to continue to execute and educate investors on the unique aspects and potential of this market.

Another major challenge is controlling growth and development costs so they are in line with demand. Naturally, building costs are always a focus for these types of facilities and demand can fluctuate on a regional basis. One key element to success is balancing the timing of when you deploy capital expenditure and understanding the multiple factors that drive the demand for data centers, including the cost of land, other providers already in the market, utility costs, etc.

How is your company preparing to tackle these challenges?

Kestler: The data center industry has spent a lot of time educating investors on how we operate. The fact is that the need for data centers is exploding, particularly as the amount of data and information continues to increase at exponential rates with really no end in sight. By now, the market has seen for itself that even older facilities are capable of delivering results because there is a wide array of apps that can continue to run in those lower density environments into the foreseeable future. Data centers constructed in the late 1990s are still in use today.

Vantage Data Centers has strategically controlled capital expenditure investment over time by investing in technologies that maximize available power and cooling options in each distinct region. In California, for instance, we built systems that minimize the use of water for cooling, because we know that water, particularly in California, is a very precious resource. By doing this early on, we adhered to commitments to preserving natural resources and kept cost low—a benefit that we ultimately pass to our clients as savings. 

Additionally, we are dedicated to adding more software-driven technology to our supply chain process to monitor and maintain our physical infrastructure with measurable precision. This will enable our team to keep our facilities running longer and more efficiently which is measurable in operating expenses.

What other trends should we look out for in this business in the year ahead?

Kestler: Higher density facilities have been a hotly contested subject in the data center world for years. But with annual global data consumption in the zettabytes and land costs rising in key market areas, the time is right to consider building up, not just out. Data centers are all about power and cooling and high density facilities allow you to maximize the use of both.

Data center power consumption is defined in terms of power draw per square foot or per rack. Historically, high density was defined about 10 years ago as 2-5 kilowatts per rack. Today, high density means 10 kilowatts per rack and higher. Higher densities are driven by the desire to maximize power and cooling costs more efficiently, so that they trend downward to a lower percentage of operating expense than the 80 percent they represent today. Higher densities are also driven by an interest in maximizing land usage and accommodating the adoption of virtualized machines and hyperscale cloud-dense environments, which deliver more compute power per square foot without a parallel increase in power and cooling needs.

The adoption of higher density in existing and new data centers has the potential to deliver much greater returns for operators and is an important trend for the commercial real estate sector to understand.

Image courtesy of Vantage Data Centers