Strong Markets Get Stronger
Analyst: 'Big Four' seen as safe play in turbulent environment

March 23, 2001 -- It's hardly news that the market for data center and colocation space has slowed dramatically in recent months, and that a consolidation is underway.
But how is the slowdown affecting the "big picture" development of America's Internet infrastructure?
The downturn is concentrating the limited development and leasing activity in the nation's strongest markets, according to Jon Forsyth, Principal at StratSoft Inc., a Boston-area consultancy that specializes in research on Internet data centers.
"The bottom line with supply and demand is that 50 percent of the square footage is concentrated in four markets - Silicon Valley, New York, Boston and Washington, D.C.," said Forsyth, who presented his findings on data center supply and demand at the recent Colocation Summit in San Francisco, sponsored by The Phillips Group.
"In the short-term, the concentration in these cities will continue," said Forsyth. "It's sort of a self-fulfilling cycle. It's an easy decision to build an Internet data center in Fairfax, Va. It's a much harder decision to build one in Des Moines or Little Rock."
That doesn't mean everything is rosy in those top-tier markets, Forsyth added.
"Even in these (major) markets, there are some pricing pressures," he said. "We have heard from numerous people that demand is slowing signfiicantly in major markets. A number of large internet data centers that were going to come online have been repurposed."
The downturn in the telecom sector is putting the brakes on a huge surge in development of carrier hotels, data centers and colocation facilities.
"If you look at what everyone said they were going to build in the last 18 months, and they actually built those projects in the next 18 months, the total square feet of data center space in the United States would more than double," said Forsyth.
"We would expect that not everything can or will be built," he added. "People's exuberance over building Internet data centers as a way to print money has cooled a bit."
The current capital crunch has squeezed many players in mid-expansion. While that will definitely lead to consolidation as stronger companies buy out stalled projects and cash-starved competitors, Forsyth said, it hasn't altered the long-term attractiveness of the data center sector.
"Long term, the picture is still rosy," he said. "But short-term there could be some difficulties. We're definitely not in a period where you build it and they will come.
"But (the resurgence of demand) is almost inevitable. As Michael Armstrong af AT&T said, these things are the central offices of the future. It may not be the meteoric growth we've seen, but the growth will resume."