Cloud adoption drives hyperscale data centers

This change in data center landscape ultimately is a result of the mass emergence of the cloud in 2016.

By Garth Martin, Associate at 7 Mile Advisors August 3, 2018

Consolidation, consolidation, consolidation. Not in terms of just organizational consolidations, but also in terms of data centers. Several reports started to use the phrase "hyperscale" to describe the new outsourced data centers that are used by cloud providers. Gartner predicts "by 2025, 80% of enterprises will have shut down their traditional data center," versus only 10% today.(1) What does this mean?

Traditionally, as organizations scale a growing need for additional IT, infrastructure follows to provide proper data management capabilities and data storage capacity. As discussed in previous blogs such as "Managed Service Providers," "Dissecting the Custom Software Market" and "M&A within the Enterprise Performance Management Ecosystem," enterprises have adopted cloud usage and will continue to do so, changing the traditional data center model of having all IT infrastructure on-site. In fact, within the last several years the demand for cloud computing and overall cloud usage experienced exponential growth. Due to these advancements in technology, organizations can outsource their data center investments and infrastructure to remote data centers and cloud service providers.

This change in landscape, ultimately a result of the mass emergence of the cloud in 2016,(2) presents a huge growth market for real estate investors, or real estate investment trusts (REITs). REITs are investment instruments that function like mutual funds and are typically traded on a public exchange, but several started to focus on the data center space in the late ’90s and early 2000s during the dot-com bubble. The REITs in today’s data center space provide the physical locations where IT infrastructure is stored to support cloud providers. Cloud providers such as Amazon, Google, and Microsoft lease space to support their cloud. As of recently, the growth driver of REIT-owned data centers, or mass data centers referred to as hyperscale data centers, is the overall growth in connectable devices. Gartner, Inc. estimates worldwide that 20.4B "things" (i.e. devices) will be in use by 2020.(3) The rapid growth in connectable devices in turn presents the growing demand for remote storage options - the cloud, which allows users to store, share, upload and download content without physically being connected to an on-site server.

With general cloud acceptance and overall cloud market growth there is also an increasing opportunity for cloud providers and managed service providers to focus on the logistics and technical aspects of making hyperscale data centers work effectively and efficiently. The public cloud infrastructure market surpassed the $10B per quarter mark in Q3 of 2017 and $11B in Q1 of 2018.(4)

In Q4 2017 Amazon Web Services (AWS) secured cloud service agreements with GE, The Walt Disney Company, National Football League, Turner, Toyota, and FICO, demonstrating the gradual adoption of cloud usage.(5)

To recap, organizations previously housed small data centers and servers on-site. Whereas today REITs widely dominate large-scale data centers by providing the physical locations to house IT infrastructure. Organizations like AWS, Google CloudPlatform, Microsoft Azure, and many others lease storage space for their cloud users.

Key REITs in the data center space

Equinix Inc (NasdqGS: EQIX)

Equinix is the world’s largest IBX data center and colocation provider, offering a global platform for digital business that is both physically and virtually integrated around the world. Key partnerships include Microsoft, Google Cloud Platform, Trivago and Amazon Web Services.

Key Recent Transactions:

1. May 17 - Equinix completed a $3.6B deal to buy 29 data centers from Verizon in an effort increase its data center capacity and expand its geographical footprint into Latin America.

2. April 18 - Equinix closed two additional transactions by acquiring Metronode and Informart, both just under $800M in size.

Digital Realty Trust Inc. (NYSE: DLR)

Digital Realty is the world’s largest full scale data center provider, offering colocation, wholesale deployments, interconnection and cloud services. Key partnerships include Microsot Azre, AT&T, Oracle Cloud, and Amazon Web Services.

Key Recent Transactions:

1. September 17 - Dupont Fabros Technology was acquired by Digital Realty for $7.2B.

2. December 17 - Digital Realty Trust purchased a data center from Carter Validus Mission Critical REIT for $315M.

QTS Realty Trust Inc (NYSE:OTS)

QTS is a leading provider of data center solutions across a diverse footprint spanning more than 6 million square feet of owner mega scale data center space throughout North America. Key partnerships include Advocate, Dell EMC, VMWare, and CBRE.

Key Recent Transactions:

1. June 16 - QTS purchased a data center in Piscataway sold by Whale Interests LLC for $125M.

2. December 16 - QTS purchased a 53-acre mega data center campus in Texas sold by Health Care Service Corporation for $50M.

CyrusOne Inc. (NasdaqGS:CONE)

CyrusOne is the third largest data center provider in the U.S. serving 185 of Fortune 1000 customers worldwide. Key partnerships include Google Cloud Platform, Amazon Web Services, Microsoft Azure, and the MLB Network.

Key Recent Transactions:

1. December 17 (Announced) - CyrusOne Inc. announced its acquisition of Zenium Technology Partners for $442M.

CoreSite Realty Corp. (NYSE:COR)

CoreSite is a carrier-neutral data center provider with colocation and peering services, with location all across the U.S.Key partnerships include, Amazon Web Services, Alibaba Cloud, and Cisco.

Ariail Siggins, content creator, 7 Mile Advisors, a CFE Media content partner. This article originally appeared on 7 Mile Advisors’ blog.

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