Issue 14, February/March
FOCUS NEW YORK
RBC, the range of lenders to both publically and privately owned data center providers includes almost all of the big banks. And the usual suspects, which typically used to form syndicates to lend into the space, are now increasingly in contest with each other. “There seems to be quite a bit of competition for good deals,” Webster says.
A loan to finance a speculative build to a company without a strong client base is not considered a good deal. however, even though market conditions would have one thinking otherwise. The purse for both debt and equity is largely shut to newcomers. The reasons, in Webster’s opinion, are memories of the dot- com bust and all-too-fresh bruises left by the latest recession.
WHEN THE BUBBLE BURST
Following the dot-com bust, lenders that had sunk money into data centers took a beating on two fronts. Many lenders had assumed that assets inside data centers – IT gear or infrastructure components – would serve as collateral in case of failure. “If it doesn’t work out I’ll sell that equipment and get my money back” was the common thinking, Webster recalls.
Things did not go exactly as planned in 2001. Following the bust both buildings and equipment went for “pennies on the dollar”, Webster says. A raised floor does not have much of a value without customers. “That memory is still there.”
Add to that memory overhang from the most recent crisis and you get the state of paranoia today’s banks rightfully find themselves in with regard to data centers. The reason reputable players are able to break through the fear is the sector’s performance over the recession’s course.
The amount of empty space on the market and fresh post-dot-com wounds made for a credit drought for data centers that lasted until about 2005, when things began to loosen up, DH Capital’s Golding recalls. Investment picked up substantially in 2007 and part of 2008 until the recession cut it off completely. “You couldn’t even get in the door,” Golding says about the two years prior to 2010. Banks have traditionally perceived data centers as commercial real estate and the overall commercial real estate market’s dismal performance throughout the recession tightened the knot.
majority of enterprise customers do not need high densities
Contrary to the commonly held belief among wholesalers, a
A DIFFERENT ASSET TYPE Last year lenders noticed that the data center was a different kind of animal. Throughout 2008 and 2009 data centers did much better than virtually any other kind of asset. They outperformed
the economy as a whole,
significantly. And while many lenders were waiting for the shoe to drop during the recession, they soon realized that it wouldn’t, as data centers were a different investment. But this still didn’t lead to a massive resurgence of data center lending.
Michael Pembroke, SVP at property firm Russo Development, says that while the overall environment from a rate perspective is favorable, the amount of money available is still a tiny fraction of what these sources were churning out before the recession. “Everyone is still a little gun shy,” he says. If loans given to wholesale providers over 2010 perform
well, this trend may change but that remains to be seen.
THE WHOLESALER’S MISTAKE
Ken Baudry, SVP at commercial real estate advisory Grubb & Ellis, says that while the wholesale market has enjoyed a boost in demand and capital, wholesale providers have a spotty understanding of the marketplace. Recent large wholesale deals featured Internet companies in need of high- density space.
Contrary to the commonly held belief among wholesalers, a majority of enterprise customers do not need high densities, Baudry says. In his opinion, by building to provide the highest density (and setting prices accordingly) developers are missing a large chunk of the market. Many enterprises will lease space but won’t pay for capacity they do not need. This is why Baudry says he thinks a number of wholesalers are cutting themselves off from the rest of the market.
The real consequences of this trend remain to be seen, however, and leading data center developers seem to have the banking community convinced they will continue to outperform the rest of the real-estate market.
For now there is a consensus that the level of investment in new data center space will at least remain at 2010, which is fine by Golding, who quotes the old fable of “slow and steady” which he says still rings true. The need for data centers will never abate, but patience could be required to get the gold.
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