The roster of public colocation data center companies including DLR, DFT, EQIX, and COR expanded in 2013 with IPOs from CyrusOne (CONE, 1/13) and QTS Realty Services (QTS, 10/13), which we’ll refer to as the Big Six DCs. The 2013 fiscal year end for this exclusive club topped just over $4.68 billion in gross revenue.
It was a rocky year for the sector with a number of events weighing heavily on investor minds, including the questioning of DLR maintenance Cap Ex accounting in May at a popular investor conference, and the EQIX and IRM disclosures in June that the IRS was putting their REIT approvals on hold. Add to that soft third quarter earnings reports, and stock prices have been on a bit of a roller coaster since, reflecting concerned investor sentiment. The following chart shows the Big Six DCs compared to the DJIA, and you can see how the sector had some of its own momentum.
Year end 2013, however, ended on a reasonably positive note with the revenue growth average for the Big Six DCs coming in at 15% year over year. This is approximately a 25% drop in revenue growth, meaning that while 2013 revenue growth was 15%, 2012 revenue growth during that year was 20%.
Individual performances for the Big Six DCs stacked up as follows:
While CyrusOne and QTS posted the best year over year growth for 2013, their IPOs were both during the year and time is needed to stabilize regarding comparisons to the other players.
While most Big Six DC providers indicate stable pricing environments compared to the “race to the bottom” pricing in the last few years, evidence suggests there is still significant price pressure. While the market has stabilized significantly in the last two years, competitive and local market dynamics are still driving price competition.
Reports suggest renewal prices commonly include 2-3% price escalators, but there is evidence that providers are offering concessions on price for early renewal or longer renewal lease terms, as well as discounts for landing anchor or specific tenants.
EQIX standard reported cab rates remain exactly the same QoQ at $2262 for North American markets, a slight increase over the Q4 2012 rate of $2248.
To Be Watched
There are a variety of characteristics to be watched for various of the Big Six DC providers. High occupancy with low inventory, staffing of sales forces, entrances to new markets, and overall competitive market dynamics.
While the market is in a healthy state overall, modest growth is likely to be the norm in the foreseeable future. There is still significant investor interest in the sector, and while capital is available to market developers, the economic environment is still tepid and investment is opportunistic and typically well vetted.