Plugged in to market's needs
N.J. continues to lead with robust data center inventory
New signs of development are taking hold in New Jersey's data center market, adding to a supply of inventory that industry experts and providers hope will be met by a rising demand for digital infrastructure.
The development is coming from both third-party data center operators and Garden State builders, who are bullish on a market that remains one of the most attractive in the country. And some of the interest is coming from third-party providers "that have been successful in other markets across the country," said Jonathan Meisel, markets director for Jones Lang LaSalle's New Jersey office and head of its data center practice.
"We're seeing several other providers migrate across the United States toward this area, because it's a large market that's already proven, and because there's large population within a one-day drive of this area," Meisel said. "You're going to see more names and more providers of third-party space pop up over the next 12 to 15 months."
Some firms already have made big splashes over the past year and a half. In July 2011, Phoenix-based IO Data Centers opened its 830,000-square-foot data center hub in Edison, which is large enough to house hundreds of modular or container-like data centers. The modules can be hosted at the site or physically delivered to individual customers — a business model brokers say is new to the market.
The modules are effectively built as needed, and the firm has allocated about 10 percent of its total capacity at the Edison site, IO CEO George Slessman said. And while the company has already signed new clients, its move to New Jersey was driven by demand from existing global customers that had new requirements on the East Coast.
"It was actually a very easy decision for us to come to this market," said Slessman, whose firm on March 20 announced its latest client, the Julliard School, the New York-based performing arts conservatory.
Another company, Virginia-based DuPont Fabros Technology, launched a 360,000-square-foot data center in Piscataway in late 2010, and has since leased about 34 percent, according to a recent earnings statement on its website.
Meanwhile, firms that have established operations in the Garden State also are expanding. Russo Development is preparing a 71-acre site in Franklin Township for its eighth data center project in New Jersey. And in Clifton, Mountain Development Corp. and New York-based Telx are building their second data center project together.
The new development activity comes amid rising demand for large IT and data storage requirements in New Jersey, according to brokers. The past two years have been marked by interest from end users, but fewer large transactions because of lingering economic concerns.
But that appears to be changing, according to brokers like Kevin Murphy, a principal in Newmark Knight Frank's New Jersey office who handles data center requirements.
"Twelve months ago, it seemed as though everybody was kind of scratching their heads, wondering why deals weren't getting done," Murphy said. But over the past year, "there have been a fair number of deals actually completed," and the number of tenants in the market is increasing.
Murphy, like others, said vacancy in the state's data center market is difficult to quantify, because of the range of different product types.
A lack of large deals last year slowed the market for what are known as wholesale providers, Meisel said. But the past 18 months has been a bright spot for retail or colocation providers like Equinix, Telx and Savvis, which serve multiple clients and meet requirements "as small as a server rack area," he said.
And while the state's data center market continues to be anchored by the financial services firms of Wall Street, "users now are taking all shapes and forms, anywhere from hospitals and health care centers to law firms or large retailers," Meisel said.
"The complexion has changed, and they're smaller deals, but there's a lot more of them," Meisel said. "And that's why the retailers are doing well and picking up a lot of these requirements."
But brokers also say the lines have blurred between wholesale and retail providers, thanks to the changing size of requirements and increased competition in New Jersey. That means wholesalers like Digital Realty Trust are starting to offer smaller capabilities at their sites, while retailers like Equinix, in Secaucus, are offering larger ones, said Sean Brady, co-founder of Cushman & Wakefield's advisory group on data centers.
"They're all kind of out there jumping into each other's business because of how competitive this area is," Brady said, noting that New Jersey is the largest third-party market in the country.
Still, major wholesale providers like Digital Realty Trust can likely count on rising demand from large users like financial institutions, said Mike Foust, the firm's CEO. The company, which operates about 1 million square feet of data center space in New Jersey, is optimistic for 2012 after seeing leasing growth in 2011.
"Coming out of the recession, I think companies were still determining what their requirements were going to be for the longer term," Foust said. "And I think we're starting to see that now, after companies have spent the last three years really looking and planning at what their long-term needs are."
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