In nearly every industry and in every U.S. market—and recently Canada, too—it appears that enterprises are selling their data centers. Companies such as: AT&T, Bank of America, Capital One, Citi, Chevron, Chicago Mercantile Exchange, Coca-Cola, DXC, Ensono, Ericcson, GlaxoSmithKline, HealthCare Services, Intuit, NT&T PNC Bank, Progressive Insurance, and Verizon, if I can name just a few.
Why Now?
Many of these properties were built with significant growth projections—both for power and space—that never happened. Some were acquisitions of companies and the data centers were duplicitous. Most companies never anticipated moving some of their workload to a colocation facility or to the cloud. This is a great way to eliminate these 24/7 operating expenses and, more importantly, capital expenses with these aging properties. One of my clients was paying $65 per square foot annually in OPEX! Various business units using different workloads (production vs. storage) is very inefficient and costly, so utilizing different properties may be best. The aging IT workforce is making way for younger individuals who are much more receptive to doing things differently. Finally, companies are likely to achieve higher returns investing in their core business.
Creating Flexibility
Sale-leaseback and partial sale-leasebacks of data centers can be a great way to monetize the asset. In the last five years an entire leaseback has typically been short-term at two to five years. Partial sale-leasebacks are far more likely. In this scenario, the seller leases a portion of the data center space and a corresponding fraction of the power. The buyer is oftentimes an investor that might bring a colocation company in to lease the remaining space or a colocation company that will take on the seller as their initial customer and backfill the remaining data center space and power.
Valuation
Most of the properties built between 2000 -2015 cost between $2,000 per square foot and $3,000 per square foot. Two of the publicly traded REITs report that their construction costs are closer to $700 per square foot. So what will the market bear for a used property? The buildings are selling based on what the seller is willing to pay for rent as a tenant. Also, how much additional land is adjacent (whether owned by seller or easy to purchase) that they can build additional properties? I have seen trades less than $100 per square foot for older properties and $400 per square foot for newer properties. In one case the same property traded twice within 14 months and the price went from $207 per square foot to $381 per square foot as the investor has a colocation tenant master lease the entire building and sold it to a pension fund. Finally, I try to determine whether the highest and best use is a data center?
Purchasers vary by property, market, and term
In 1999, there really was only one buyer of data centers, Digital Realty Trust. Now there are numerous private equity, family offices, public and private REITs, colocation companies, and foreign investors. The colocation companies typically want to be in certain markets based on their customers’ needs. Most enterprise users want shorter term leases because of the uncertain nature of where they want their load geographically, as well as whether they want it to be in a cloud provider or colocation provider. As such, they might only want a five-year lease but may stay for 10 years. Ashburn, Virginia is one of the hottest data center market in the world and would command a premium, but in 2019, PNC Bank monetized properties in Pittsburgh, Cleveland, and Cincinnati. Finally, I may look at nearby businesses if I think it would be better offered as an office or warehouse.
Conclusion
There is a great opportunity for enterprise users to monetize assets that don’t make sense in their long-term data center strategy. Everyone can feel comfortable that the future owners have vast experience running a data center and the buyer will be as knowledgeable as the seller at running the property.
What do you think? Is your corporate data center worth more than the 10% you constructed it for?
