Equinix, DuPont Fabros, and Colocation Market Direction

I’ve been really impressed with the coverage of Hurricane Sandy and how much more mature the reporting has become in comparison to Katrina. While here at 7×24 in Phoenix, I’ve had some great conversations with experts like Bill Beck of Credit Suisse who were at ground zero in the recent storm…CS performed flawlessly, settling trades throughout the week. The rumor mill is that firms like Morgan Stanley, Goldman, and even the UN have not been so lucky, with water intrusion still being a major problem. The issue is complicated by the fact that oil has contaminated the water, which means it can’t be simply pumped out to sea. With Sabey’s million-square-foot bet in the financial district, there’s no shortage of space nearby, but given the likelihood of a repeat in the future, our suspicion is that decision makers will look farther afield for long-term infrastructure, if not to New Jersey then certainly to sites like that of Iron Mountain, which performed flawlessly throughout the storm.

I frequently follow the results of the major retail and wholesale brands in order to accumulate data on where the market is trending. The recent earnings reports from Equinix and DuPont lead us to believe the market is in transition.

Specific to Equinix, the company has for some time now reduced its investment in US capacity and redirected its dollars to international markets. The reasons are quite clear with their latest results showing year-on-year cabinet growth and estimated new billing cabinets for 2012 of approximately 2500. For the three years 2009 through 2011, Equinix achieved 2050, 3100, and approximately 3100 new billing cabinets. In the same period, Equinix increased their sales staff by approximately 50 percent. In other words, with occupancy rates in the US declining, it’s taking Equinix more effort to produce results that are equivalent to 2009, when the US economy was in recession.

The bright spot in their results is of course the interconnection story, and we take Equinix at their word that they are looking to “optimize” their customer mix. The 11 percent increase in cross connects means their customer base is getting stickier, and it was also positive to see very little negative result from their multi-site divestiture in the quarter.

As for DuPont, their 18% price discount for their renewals is in our mind strong evidence of the massive investment that is making its way into the wholesale segment from traditional commercial real estate investors. We first advised our clients of this trend in 2010, when the NJ market was being first over supplied. Today, and with retail providers pursuing hybrid retail-wholesale strategies, we find nearly every market in the US well supplied for wholesales services.

And the investment is still coming. In 2010, ViaWest’s worst performing colo market was Oregon…yes, Oregon. And since then, Oregon has received massive colocation investment. I don’t think it’s a stretch that Oregon will attract wholesale tenants, given that a market often does grow with the availability of a trusted service provider, but it hard for us to find justification for the level of investment in colocation in what is traditionally a single-tenant market.

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