Buy or lease?
The eternal economic question regarding homes and vehicles has come to corporate data centers. For many companies who need data centers for fast and reliable access for their technology infrastructure, the answer is skewing decidedly toward the more flexible option.
As is often the case with a business trend, there’s a disruptive technology behind it. With data centers, the emergence of cloud and its model of on-demand computing resources has enabled more companies to eschew the traditional ownership model and instead lease the space they need.
“Years ago a proprietary data center was a good thing to have, but as workloads have migrated to the cloud, they are slowly becoming obsolete,” said Bill Fenick, Vice President Enterprise at Interxion, a provider of co-location and data-center services. “So you might have this asset that’s not highly connected, sitting out in the middle of nowhere. It becomes a burden on the balance sheet.”
Last year, Intuit sold a data center in Quincy, Washington to H5 Data Centers, after moving much of its computing infrastructure to Amazon Web Services. The business and financial software concern reportedly booked a loss of as much as $80 million on the deal, and then leased back space in the 240,000-square-foot facility.
Large financial-services firms that have offloaded data centers in recent years include Bank of America, CME Group and Credit Suisse. “A proprietary data center is no longer strategic, nor is it a differentiator,” Fenick stated.
Many proprietary data centers, also known as enterprise data centers, were built when cloud was either not around or still in its infancy, and expanding workloads could only be managed with internal resources. So firms built their own data centers on the expectation that they would grow into them.
That didn’t happen. In the cloud, servers, storage and applications are managed remotely through the internet, which obviates the need for more space. More practically, cloud gives corporate CTOs options, just as sharing-economy stalwarts WeWork and Uber give their customers options to do what they need without tying up significant capital.
With Gartner projecting the cloud services industry to grow exponentially through 2022, proprietary data centers may not be white elephants quite yet, but their utility is way down. Fenick said infrastructure occupancy rates that were about 80% a decade ago are often more like 30-40% today.
Data centers need not be relics from the last century for proprietors to want to sell; some facilities have gone on the block just four or five years after being built. That’s according to Jim Kerrigan, Managing Principal of North American Data centers and a 20-year veteran of commercial real estate brokerage.
“The question is always whether to own or to lease,” Kerrigan told Markets Media. “Ten years ago we saw a lot of building of (proprietary) data centers, but we have not seen that recently.”
With regard to pricing, Kerrigan said that enterprise data centers have been selling for as little as $100 per square foot, partly depending on what terms the seller leases back space for. That’s a small fraction of the $2,000 to $2,500 per square foot it cost to build the data centers.
“The assets are not necessarily distressed, but they are no longer a core part of a company’s business,” Interxion’s Fenick said. “Companies are looking to migrate workloads to the cloud. They can put what they cannot migrate into a public cloud, into a private cloud, which means a highly connected data center with cloud presence and connectivity.”
‘Re-platforming’ to the cloud via co-locating in a data center enables firms to reclassify their data storage and utilization costs from capital expenditures to operating expenditures. Advantages of OpEx versus CapEx include cost transparency, streamlined business cash flow, and perhaps most important, the flexibility to easily switch to something else if the current solution ceases to be the best solution.
“Co-location offers a flexible platform that allows organizations to experiment with different options, without any large capital investments and at a fraction of the operational costs,” said Jan-Pieter Nentwig, Director Enterprise, Interxion. “As their cloud journey is underway, firms can shut down data-center assets where it makes sense.”
In addition to reduced capital requirements, quicker delivery and more flexibility, legacy corporate data centers are often not located in the markets where they need to be to provide low-latency solutions, Cushman & Wakefield Vice Chairman Randy Borron wrote in a 2018 blog post.
“More and more companies are shifting to cloud platforms instead of managing their own data centers,” Borron wrote. “Thus, cloud and colocation will continue to grow as more corporations deploy hybrid cloud IT solutions, and we expect to see fewer corporate owned and managed data centers.”