High-Tech Data Centers Offer Bright Future

Data centers offer a digital-age wrinkle to the net lease industry. By most accounts, demand will grow steadily for the highly sophisticated facilities, which host mission-critical servers. Meanwhile, specialized technical elements and heavy capital investment create high hurdles to development. “Given the cost of adding new capacity—$1,200 to $1,800 per square foot—the lack of construction lending and an 18- to 24-month construction cycle, the data center sector will likely continue to enjoy high occupancy levels and rising rents during the next several years,” CapLease Inc. reported last month.Judging by their first-quarter activities, the two REITs specializing in data centers are riding that wave of demand. Digital Realty Trust Inc. reported that its first-quarter revenues hit $149 million, a 30 percent increase above the $114.5 million revenues it chalked up during the comparable period in 2008. During the first quarter, 450,000 square feet of leases took effect and tenants signed new deals for another 85,000. Late last month, Digital Realty said it had reached a deal with Neuberger Berman, the asset management firm, to develop a data center in a yet-to-be-named Northeast location.For its part, Dupont Fabros Technology Inc. pulled in $46.8 milllion, 14 percent more than its revenues in the first quarter last year. The outlook for the developers appears to reflect generally upbeat prospects. Dupont Fabros’ stabilized facilities now in operation are 100 percent leased, and the company inked a half dozen new leases during the first quarter. And a series of recent moves mean that the company faces no debt maturities until the third quarter of 2011.Yet the data center industry is also encountering its share of bumps. Only five months after announcing plans to build a $550 million data center in West Des Moines, Iowa, Microsoft Corp. said in January that it was putting the project on the back burner as part of a cost-cutting initiative that includes a $300 million reduction in spending on data centers this year, as well as 5,000 layoffs. Following a meeting with Microsoft executives in late March, Iowa Gov. Chet Culver reported that the company was committed to the project but has not released an updated schedule. It is also delaying the openings of data centers in suburban Chicago and in Dublin.Previously announced Dupont Fabros projects in New Jersey and Santa Clara, Calif., are also on hold while the company identifies tenants and seeks $255 million in additional financing required to finish construction of the facilities, president & CEO Hossein Fateh told analysts during a conference call on May 5.