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Data Center Real Estate - By the KW or SF...???

 
By the Square Foot or By the Kilowatt

The Zen of Leasing Data Center Colocation Space

By Peter Tippen, Partner, Rackhouse

The Data Center ("DC") business is (1) relatively young and standards of measurement are somewhat undeveloped, (2) some of its complexities defy simplification and (3) users of DCs are a varied lot, some with ‘state-of-the-art' sophistication and others with less understanding who infrequently are presented the challenge of making critical facility decisions.  Combine these factors and confusion surrounding the financial comparison of one alternative to another is probable. 

Say What?

Often, information is provided in less than comprehensive form, complicating evaluation even more.  Imagine watching your favorite college football team on your big screen TV one Saturday afternoon and having the announcer describe your team's situation as "...from deep in their own end of the field, third down and 684 inches to gain a first down."  The information is accurate but requires interpretation.  It requires some work to covert to usable form.  This is often the user's dilemma upon first comparing one DC alternative to another. 

Typical Measurements of Colocation Cost

The range of colocation quotes includes the following:

  • 1. By the cage, cabinet, rack or unit ("U"). Often quoted as a total gross dollar amount per month, including electricity, the DC powered space.
  • 2. By the raised floor square foot ("RFSF") per month, either gross (including electricity) or net of electricity.
  • 3. By the kW of critical or IT load (the power available for servers) made available to the user. Usually quoted net of electricity.
  • 4. Everything in between.

The Colocation Operator's Strategy

Often the colocation owner/operator can achieve higher revenues and margins by marketing the DC in a manner that offers the user little insight into the financial proposition of the transaction.

Pricing in the office suite business is an interesting analogy to the colocation DC business.  An office suite provider leases or owns office space, spends capital to break it into usable parts (offices) and develops services to sell.  The customer leases by the office and pays a la carte for services.  DCs can accomplish the same process and maximize profits simply by repackaging the product and charging in units of cost that do not allow easy comparison or understanding. 

But I Need the Space...What's My Strategy?

One way to make the information as usable as possible for the User is to quote by the kW or give information / RFSF as well as by the kW. 

Consider the following in analysis of DC cost. 

  • 1. Equipment is the most costly component in the DC, not the bricks and mortar. Since different DCs are built to different specifications, with a wide range of cost, cost per kW of power capacity most easily compares between DCs. Given this, a user an investor with no information on critical power load per RFSF or cost of the asset has no way to understand the financial return performance of the asset if given the information in terms of SF.
  • 2. It makes unwise to pay by the SF with no eye toward power density or the specification or cost of the asset contracted for.
  • 3. Assuming that the DC is judged to be appropriate for the use from a space and specification standpoint, several pieces of information are required to properly evaluate the cost of a DC (the qualitative analysis), without which it is hard to know what you are paying for. The bare bones info is:
  • i) The total amount of critical load power,
  • ii) The amount of RFSF, and
  • iii) The cost or market value of the DC assets contracted for.

Conclusion - Get to the Bottom of IT - Do the Math!

It is not uncommon to see a quotation of DC economics with language similar to the following"

"... the Company commenced leases totaling approximately ___ square feet of space. This ..... space leased at an average annual GAAP rental rate of $_____ per square foot ................." 

When you see it remember the football announcer example, why would they not give information in familiar and easy to understand terms?  Real estate metrics confuse the analysis of non-real estate assets. 

Could it have to do with the ability to mask real information and cost comparisons by complicated analysis and fancy complications of, admittedly, an already complex investigation?  It certainly is not an exercise familiar to all especially if you happen to be the person only occasionally charged with finding a cabinet or cage for your organization.

 

Image by http://www.flickr.com/photos/timdorr/

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