I've always been somewhat puzzled that the major colocation data center companies are lumped in with the commercial real estate market by investors, though the fact that many are set up as real estate investment trusts (REITs) obviously makes my perplexity moot.
At least in terms of the massive investment in support infrastructure (cooling, power delivery, power conditioning) needed for these facilities, they are in a commercial real estate class of their own.
And it is the need to maintain and re-invest in that infrastructure that is cited by analysts contacted by the Wall Street Journal to explain the lagging financial performance of large colo REITs like Digital Realty Trust and Dupont Fabros. (Story not paywalled; subscribe anyway.)
And I think the analysts certainly have a point, but perhaps haven't thought through it all the way through. Yes, data centers will need regular revamps, particularly for cooling equipment that is run around the clock at full load, compared to say commercial office buildings where chillers can have useful lives of ten or twelve years.
But to look a little further, data centers with cooling equipment are simply not state of the art anymore. The facilities being built by technology companies for their own operations rely on ventilation supplemented with direct evaporative cooling, and are likely 30% more energy efficient than the best colo. Revamping the fleet of colos to best-in-class standards will be expensive, and probably prohibitive for a significant number of sites.
And as the article notes, the tech companies aren't renting colo space anymore, even though many of them started there (like Facebook). They are simply more focused on efficiency and cost savings as a competitive advantage, and that means new centers in locations with low power rates, not legacy colos in traditional markets.
Analysts posit that the big tech firms may actually compete for colo customers by offering space in their centers in head-to-head competition. That seems unlikely to me - the way they compete is by offering managed services that allow customers to leapfrog from their own legacy data centers into the cloud without taking the intermediary step of moving to a colo.
For utilities, the opportunity to market energy efficiency programs to the colo market may be better than ever, though if their financial condition as an industry declines too far, it may be hard for the companies to finance upgrades.