You may have seen some articles recently talking about the rise of secondary markets in the data center colocation industry. Cities often mentioned on a list of secondary data center markets include: Cleveland, Jacksonville, Kansas City, Milwaukee, Minneapolis, Nashville, and Pittsburgh.
For those of us involved in the data center industry, whether as suppliers or buyers, it is important to consider secondary markets as part of our data center strategy. But, it is also important to remember that top markets are top markets for a reason. The top six US markets (Northern Virginia, New York / New Jersey, Bay Area / Silicon Valley, Dallas-Fort Worth, Chicago, Los Angeles) represent over 70% of US sales, and the US represents over 50% of the world’s data center sales.
In short, in the data center colocation industry – top markets matter.
Let’s take a look at a few key considerations regarding data center colocation markets.
The Fundamentals of the Colocation Market are Sound
The good news is that whether you are looking at top markets, secondary markets, or a combination of the two, the fundamentals of the data center colocation industry continue to be strong.
Businesses of all sizes are taking advantage of the “pay as you go” model offered by colocation, shifting their financials from up-front capital expenses to ongoing operational expenses. Enterprises looking to replace aging in-house data centers or support the growth of their business applications are increasingly looking to colocation. Cloud-based companies, both hosting and software applications, need a place for their systems to live. These cloud-based companies typically do not want to design, build, and operate their own data centers.
Economies of Scale Add Up
The data center colocation industry is vast, growing, and commoditizing all at the same time. This combination of attributes tends to drive economies of scale which can be more prevalent in top markets. The colocation providers that win in these market conditions have access to low-cost capital and then spread the infrastructure costs across a diverse and growing customer base. Scale economies are particularly strong in the wholesale colocation markets where multi-megawatt deployments are the norm.
Be Wary of Growth Rates
Most of the analysis of secondary markets talks about growth rates. As always, be wary of comparing growth rates across bases of different sizes. For example, the most recent report from 451 Research on data center supply in secondary markets lists Nashville as having 109,500 square feet of operational data center square footage. If the entire Nashville data center market grew by 50%, it would still not be as large as one of RagingWire’s data centers in the top market of Ashburn, Virginia.
“Competitive Mass” Helps Everyone
We’ve all heard of critical mass being required to get a market growing. The same concept can be applied to competition. Both buyers and suppliers benefit from having multiple providers of similar data center colocation offerings in the same market. Buyers benefit from having multiple options to compare, and the assurance of getting a fair price. Suppliers benefit from having access to the talent, technology, and potential customers that the market attracts.
In can be difficult to find “competitive mass” in secondary markets. For example, according to 451 Research, the top three providers in a secondary market typically have 50-70% of the operational space and these market leaders vary from city to city. In addition, secondary markets tend to have lower utilization rates and absorption per year when compared to top markets, leading to reduced market efficiencies. According to 451 Research, top markets achieved utilization rates over 80% while secondary markets had an average utilization rate of 68% in 2014.
The Drivers for Secondary Markets: Regulations, Network Optimization, Economic Development
As we have seen, there are a number of forces driving the top data center colocation markets. What’s driving the secondary markets? Regulations can require that data generated within a geography stay in data centers within the geography. For example, some hospitals build on-site data centers as part of their HIPAA regulations. Network optimization might drive you to have a data center in a secondary market as part of your global footprint. Finally, economic development incentives might attract data center companies to build a facility in a secondary market.
Conclusion: Top Markets Matter
Top data center markets are critical as part of your data center portfolio. Top markets offer dense fiber and robust telecommunications, reliable and cost effective utility power, experienced data center staff, and an economic environment that enables a data center ecosystem to thrive.
We expect that top markets will continue to drive the data center colocation industry while secondary data center markets will develop as spokes to the top market hubs, not as a replacement.