Location, location, location, has long been the mantra for real estate buyers and tenants alike. Companies wishing to set up shop in prestigious high-rises on Fifth, Madison or Park Avenues have been prepared to dig deeply into their pockets for the privilege. It’s not uncommon for rents at these locations to approach $150 (£99) per square foot. On the face of it, why would companies be paying up to four times as much per square foot to lease space in data centres, which do not have any of the prestige of the well-known addresses.
The answer has to do with location of a much different kind. Businesses are paying $600 (£395), and more in some cases, to lease space at addresses in buildings known as data centres. These centres provide them with large banks of remote computer storage, as well as the huge amounts of fiber optic links and electrical power they require.
Prices are even higher for data centres in northern New Jersey because it is home to the New York Stock Exchange and other markets’ digital storage. Banks and high-volume traders want to have their servers in proximity to these markets. The shorter the distance, the quicker the trade can be completed. Microseconds can mean the difference between millions of dollars made or lost.
The centres have been operating since the 1990s and were referred to as “Internet hotels” at the time. Tenants paid for space to plug in their servers with the understanding that electricity would be available to them. As the need for more powerful computers has grown, so has the need for power. Electrical capacity is a main element of lease agreements, and space is often a secondary consideration.
The industry has evolved over several years from providing space to companies to becoming an energy broker. Landlords are now in the position of making huge profits from reselling access to electrical power.
Some of the of the largest data centre companies have either won or are seeking Internal Revenue Service approval to become real estate investment trusts (REITs). This designation would allow them to eliminate most corporate taxes. The companies have not drawn the attention of utility regulators, which normally set prices for delivery of power to business and residential customers.
Companies have different lease structures, and prices vary greatly. Digital Realty Trust was the first data centre company to organize as a real estate trust, and has delivered a return of over 700 per cent since its initial public offering (IPO) in 2004, according to an analysis by Green Street Advisors.
Data Realty Trust’s pricing model charges tenants for the actual amount of electricity consumed and adds a fee calculated on capacity or square footage. The data centre also provides protection from power surges and failures with backup generators. This is the reason companies are prepared to pay for the service, and what separates the data centres from being considered in the same category as utilities.
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