Why pay $600 or more a square foot at unglamorous addresses like Weehawken, Secaucus and Mahwah? The answer is still location, location, location — but of a very different sort.
Companies are paying top dollar to lease space there in buildings called data centers, the anonymous warrens where more and more of the world’s commerce is transacted, all of which has added up to a tremendous boon for the business of data centers themselves.
The centers provide huge banks of remote computer storage, and the enormous amounts of electrical power and ultrafast fiber optic links that they demand.
Prices are particularly steep in northern New Jersey because it is also where data centers house the digital guts of the New York Stock Exchange and other markets. Bankers and high-frequency traders are vying to have their computers, or servers, as close as possible to those markets. Shorter distances make for quicker trades, and microseconds can mean millions of dollars made or lost.
When the centers opened in the 1990s as quaintly termed “Internet hotels,” the tenants paid for space to plug in their servers with a proviso that electricity would be available. As computing power has soared, so has the need for power, turning that relationship on its head: electrical capacity is often the central element of lease agreements, and space is secondary.
A result, an examination shows, is that the industry has evolved from a purveyor of space to an energy broker — making tremendous profits by reselling access to electrical power, and in some cases raising questions of whether the industry has become a kind of wildcat power utility.
Even though a single data center can deliver enough electricity to power a medium-size town, regulators have granted the industry some of the financial benefits accorded the real estate business and imposed none of the restrictions placed on the profits of power companies.
Some of the biggest data center companies have won or are seeking Internal Revenue Service approval to organize themselves as real estate investment trusts, allowing them to eliminate most corporate taxes. At the same time, the companies have not drawn the scrutiny of utility regulators, who normally set prices for delivery of the power to residences and businesses.
While companies have widely different lease structures, with prices ranging from under $200 to more than $1,000 a square foot, the industry’s performance on Wall Street has been remarkable. Digital Realty Trust, the first major data center company to organize as a real estate trust, has delivered a return of more than 700 percent since its initial public offering in 2004, according to an analysis by Green Street Advisors.
The stock price of another leading company, Equinix, which owns one of the prime northern New Jersey complexes and is seeking to become a real estate trust, more than doubled last year to over $200.
“Their business has grown incredibly rapidly,” said John Stewart, a senior analyst at Green Street. “They arrived at the scene right as demand for data storage and growth of the Internet were exploding.”
While many businesses own their own data centers — from stacks of servers jammed into a back office to major stand-alone facilities — the growing sophistication, cost and power needs of the systems are driving companies into leased spaces at a breakneck pace.
The New York metro market now has the most rentable square footage in the nation, at 3.2 million square feet, according to a recent report by 451 Research, an industry consulting firm. It is followed by the Washington and Northern Virginia area, and then by San Francisco and Silicon Valley.
A major orthopedics practice in Atlanta illustrates how crucial these data centers have become.
Article source: http://www.nytimes.com/2013/05/14/technology/north-jersey-data-center-industry-blurs-utility-real-estate-boundaries.html?partner=rss&emc=rss