Investment Banker Paints Rosy Picture of Colocation Market in 2018 

28 March, 2018
Greg Jones
Schneider Electric

We’ve all been hearing about how robust the market for data center space is, but a presentation by an investment banker who has his finger on the pulse on the market day in and day out gave me a new appreciation for how great the opportunity really is.

Colocation Market Growth

Herb May is a partner and managing director with DH Capital, an investment bank founded 15 years ago in New York that is focused on the Internet infrastructure space. His company has been involved in close to 100 deals, representing almost $20 billion in value. Most of DH Capital’s work is as a mergers and acquisitions advisor, but raising capital is a growing percentage of its business. The point is, the company understands the financials behind data centers and colocation companies inside and out.

That’s why colocation providers would do well to take notice of what May had to say during his presentation at the recent International Colo Club event hosted by Schneider Electric in London. Spoiler alert: it’s almost entirely good news.

Promising Colocation Market with Growth of Cloud Adoption

Cloud adoption is, in a word, exploding, driven by Internet of Things (IoT) technology, with dramatic growth from 2009 to 2017 – and no sign of stopping.

“We expect in the next 3 years a two-fold increase in storage demand,” May said. “Clearly IOT and [artificial intelligence] is really going to drive so much of the data that’s generated, and will dwarf the global IP traffic by multiples.” A slide citing statistics from the Cisco Global Cloud Index showed IoT has the potential to generate 275 times more data than IP traffic by 2020: 600ZB for IoT vs. 2.3ZB for global IP traffic.

I’m not sure I quite process those numbers above, but I can understand huge growth such as Microsoft’s and Amazon’s cloud businesses. Microsoft’s cloud revenue nearly doubled in 4 quarters, and was up 90% year-over-year in Q3 2017. Amazon added nearly $10 billion in revenue in six quarters and was up 45% in Q3 2017 vs. the prior year.

“We haven’t really seen in U.S. capital markets the ability to grow on top of these incredibly large numbers,” May said. “We expect those numbers to continue to drive activity in the marketplace.”

Key Colocation Provider Market Trends to Watch

The only bit of cautionary news in his presentation was that the cloud is not lifting all boats equally. Legacy Infrastructure-as-a-Service (IaaS), simple managed services, legacy IT outsourcing and traditional value added reseller (VAR) services are all on a downward slope as other cloud services grow rapidly. The big winners include wholesale colocation, connectivity-centric colocation, highly automated infrastructure, and complex managed/hybrid cloud.

On the other hand, while stocks were up across the board in 2017, real estate investment trusts (REITs) focused on data centers benefited disproportionately. CoreSite saw gains of nearly 60% in 2017 (as of November), Interxion was up more than 50% and CyrusOne was up 45%, for example. “No industry group has benefitted probably more than the REIT and the colo players,” May said. “The multiples at which they’re trading and the value of their currency is at a level that’s hard to imagine.”

May doesn’t see any slowdown in 2018. “We think M&A activity is going to remain brisk into 2018,” he said. “Strong fundamentals and increasing scarcity value will support the strong valuations.”

Providers with highly automated infrastructure will continue to flourish alongside giant public cloud players. “Cloud and IP traffic growth creates this almost can’t-miss scenario for the data center providers with highly networked and/or scaled campuses,” he said.

Make Your Colocation Accommodating to the Future

That highlights the need for tools that can help deliver automation, such as Schneider Electric’s cloud-based EcoStruxureIT platform. EcoStruxure collects data from all sorts of data center and building devices and infrastructure then applies analytics to help drive increased data center efficiency, reliability and more (the subject of this previous blog on leveraging data analytics).

Finally, May mentioned the topic of edge data centers frequently comes up in conversations he has with various stakeholders. “We’re going to be so bold as to call 2018 the Year of the Edge,” he said. That likewise ties to Schneider Electric offerings such as our Micro Data Centers and SmartShelter prefabricated, modular containers.

At the end of May’s presentation, I asked how long we can expect this kind of growth to continue. “The market can’t go up forever. And valuations can’t go much higher,” he said. But that doesn’t mean we’re in for a big downturn by any stretch.

The scarcity of data center space will continue to ensure we won’t see huge sell-offs. Potentially, index funds that have thus far missed out may rebalance and invest more in data center-focused REITs, which will spur more investment and “continued strong multiples going forward,” May said.

Access Presentation on Colocation Industry Trends

Be sure to check out May’s presentation. It’s guaranteed to get you fired up for 2018, or at the very least put you in a good mood.

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