IT faces shrinking, pricier colocation options

Microsoft’s decision to postpone construction of a huge new datacenter near Des Moines, Iowa, was scary enough because it demonstrated (yet again) how hard the recession has hit technology companies.

But it also shows a more worrying issue: Commercial colocation datacenter operators are also pulling back on their datacenter expansions.

[ See how “datacenters in a box” may help avoid the high cost of renting datacenter space. ]

That means if your company needs more datacenter space, or if you expect to renew existing leases, you’ll find that prices are going up as space in the available commercial datacenters get tighter and tighter.

Sure, that seems counterintuitive. Simple supply-and-demand economics should tell us that if business is off, demand for datacenter space should be off as well and thus prices should drop accordingly. But it’s not working that way.

Datacenter price hikes coming

The villain? It’s the credit crunch that’s hurting so many industries. The credit crunch has made it impossible for companies like Dupont Fabros, Equinix, and Switch and Data to obtain the kind of large-scale financing needed to build datacenters that can cost hundreds of millions of dollars, says analyst Jeff Paschke of Tier1 Research.

The recession actually increases demand for outsourced datacenters: Enterprises still need space that they can’t afford to build themselves, so they turn to the colocation market for relief.

“The global multitenant datacenter market has shown remarkable growth in the last 12 months,” Paschke and two colleagues wrote late last year. “Demand is up 14 percent on a global basis, while supply is up only 6 percent, exacerbating an already lopsided supply/demand curve.”

The Tier1 report was widely read by those involved in the datacenter market, but it received much less notice in broader IT circles.

Since then, the market has continued to tighten. Companies whose leases are up for renewal are being hit with price increases of 4 to 7 percent, says Rich Miller, editor of DatacenterKnowledge.com.

Dupont Fabros, for example, had planned to build and lease space in Silicon Valley, northern Virginia, and New Jersey. The company expected to raise the needed capital by borrowing against existing properties worth some $500 million, says Miller. But with credit all but frozen, Dupont Fabros could only raise about $100 million and had to postpone, if not cancel, the projects. Similarly, Advanced Data Centers was planning to expand in Sacramento, Calif., but it has put those plans on hold as well, notes Paschke.

The datacenter crunch will get really bad in 2010-11

Building and provisioning a major datacenter costs about $1,300 a square foot. Even when the credit crunch eases, it will take about 18 months before IT sees an increase in datacenter availability, since datacenters take about 18 months to build, say the Tier1 analysts.

So the real crunch will come next year and in 2011 when projects that should have gotten started in 2008 or 2009 don’t come on line.

At the moment, global datacenter utilization stands at about 65 percent. At 70 percent utilization, finding suitable space gets somewhat difficult and prices begin to creep up, Paschke wrote. At 80 percent utilization, they wrote, “pricing insanity is encountered. That’s not just a theoretical point. A sobering example is London, where prices have soared sixfold and are now the highest in the world.”

You have to wonder what effect this will have on cloud computing, which is being positioned as an alternative to expensive infrastructure. Ultimately, someone has to build the datacenters that house the cloud, and if they don’t get built … (There’s a metaphor here, but I can’t think of it. Help me out, readers.)

I welcome your comments, tips and suggestions. Reach me at bill.snyder@sbcglobal.net.