Want to Adapt an Older Building into a Data Center? Nine Considerations

Summer 2013

Tim Huffman, executive vice president, national director, Technology Solutions Group at Colliers International, gets about a call a day from a developer-owner that has an older building with a good power supply and floors capable of supporting significant weight. The developer-owner has heard that the data center business is thriving and wants to convert his building.

Huffman’s response: The industrial owner should probably sell the building or execute a long-term lease, because the prospect of a traditional office/industrial developer successfully undertaking a data center project himself could be a costly mistake.

Here are nine takeaways on data centers from a recent interview with Huffman:

A couple of years ago when Huffman had conversations with chief information officers (CIOs) about the particulars of a new data center, they wanted “faster, better, cheaper.” Today, they want “faster, faster, faster,” indicating that speed has trumped costs.

Tim Huffman

Tim Huffman

CIOs, particularly after Superstorm Sandy, are concerned about how much of the data center should be real versus virtual. There is a strong trend toward putting data centers in the cloud (i.e. off site), and this trend will increase over the next five years.

On the construction side, a 10,000-square-foot data center (plus the additional 10,000 square feet needed to accommodate infrastructure and a small office footprint) will cost about $15 million, not counting land.

The data center gear becomes obsolete within 10 years. Corporations who built and occupied their own data centers between the 1990s and about 2010, would today, for the most part, elect to execute a sale/leaseback to free up cash and turn over the “headache” of upgrading servers and delivering on guaranteed service contracts to someone else.

Today, two types of businesses are successfully building data centers: the giants like Google and Apple; and data center REITs. They have the necessary expertise. These groups like to locate data centers in rural areas with cooler climates that feature utility providers with reliable but inexpensive power and governments that will offer strong tax incentives.

Data center REITs build so called “retail” and “wholesale” data centers. The retail data center is a large, mixed-tenancy structure in which an organization takes a slice.

The organization will lease anywhere from five to 200 racks of gear (a rack is 25 square feet of data center) — equating from about 125 to 5,000 square feet of data center. Retail data centers rent for about $600 per square foot, inclusive of power. Those companies leasing more than 5,000 square feet are considered wholesale rather than retail tenants, and pay about $300 per square foot inclusive of power. A data center REIT might create a 100,000-square-foot data center and carve it up into ten 10,000-square-foot pods, giving each company its own entrance and dedicated backup infrastructure such as a generator, chiller, etc. Each tenant occupies its own unique space and gets the benefit of all of the fiber that has been brought to the building.

A real benefit to owners of data centers is that it is difficult for tenants to leave the space. Once a company parks its data at a facility, it will likely stay there for at least 10 years.

The major challenge for corporations that build their own data centers is obsolescence. Even though they develop a 20-year building, the core infrastructure needs to be refreshed after 10 years, and the software and IT gear needs to be upgraded after just three years. Huffman said that if an owner-operator is generating high rents, he can use the money toward the necessary upgrades, and stay ahead of the obsolescence curve.

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