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Demand is growing for data centres which at their simplest are offices designed to house computers rather than people. Here is an interior of a data centre run by Digital Realty Trust Inc. (Digital Realty Trust Inc.)
Demand is growing for data centres which at their simplest are offices designed to house computers rather than people. Here is an interior of a data centre run by Digital Realty Trust Inc. (Digital Realty Trust Inc.)

Server farms

Should data centres have a Canadian address? Add to ...

Data centres, which at their simplest are offices designed to house computers rather than people, don’t get the attention given to other real estate asset classes, such as retail or industrial. But that could soon change.

Demand for this relatively new asset class is growing rapidly, driven by the vast amount of data that companies must track. With its relatively cold climate, Canada, and the Greater Toronto Area in particular, is gaining a reputation as a safe and affordable place for these specialized buildings that house heat-generating equipment. After coming north to set up a data centre in Mississauga, one San Francisco-based developer is even adding another in Markham.

“We’re getting a lot of attention right now from U.S. and European investors looking at the Canadian market for a number of reasons,” says Randy Borron, a senior vice-president at commercial real estate brokerage Cushman & Wakefield Ltd. “There is an awful lot of money flowing into the data centre investment market right now because the returns are better than any other class of real estate. And the Canadian market is undersupplied.”

Data centres are designed to keep data up and running 24 hours a day, seven days a week. That’s no small task. “They are focused on the prevention of hazards and risks of all kinds, and they’re meant to operate even in the event of a power outage or other interruption of basic utility systems,” Mr. Borron says. “They’ve got backup systems on top of backup systems.”

But these fortified or robust buildings are not foolproof. At least not yet. Cushman publishes an annual Data Centre Risk Index that surveys the globe for the safest countries to house these buildings. Cushman’s ranking puts Canada in fifth place. (The United States topped the list, followed by Britain, Sweden and Germany.)

“Data centre downtime can potentially cost millions in lost revenue and compensation; it can even threaten the livelihood of a business by causing irreparable damage to its reputation,” this year’s report says. Last year in the United States, it notes, Hurricane Sandy knocked out power for more than a week in large parts of the East Coast, leaving many data centres in the area completely offline after their support infrastructure also became damaged.

Natural disasters and weather aren’t the only factors that go into deciding where to house a data centre. The cost of energy is a big one, as is connectivity and the water supply.

“Whether it’s the government, or tax or price risk or tornadoes or ice storms or flood hazards, there are an awful lot of risk factors that drive data centre locations,” Mr. Borron says. “The functions that the equipment in them is performing are considered mission critical to business, and when they go down that function of that business will go down. When you talk to large organizations, they mention downtime in the millions of dollars per minute, so when you look at costs and liabilities that are that high, you can understand how it makes sense to build very redundant data centres to make sure the operation continues.”

It’s rare to have a business that prizes redundancy, but when it comes to data centres that’s what it’s all about. Everything has a duplicate.

“If you want to build one of these things, you need very robust physical infrastructure,” says Canadian Imperial Bank of Commerce real estate analyst Alex Avery. “Think three-foot-thick concrete floors, 12- to 14-foot-high ceilings, massive HVAC [heating, ventilation, and air conditioning], redundant power such as a massive diesel generator with a huge diesel tank. If you were to build an office tower in Toronto, you might end up paying something like $500 a square foot. If you were to build a data centre, assuming you can get the proper site, it might cost you closer to $1,200 or even $1,500 a square foot.”

But the payoffs are also high, with rent significantly above those of even Bay Street skyscrapers. While Canada has slipped in the Data Centre Risk Index ranks when it comes to international bandwidth, it should improve again once a new submarine broadband cable, focused on enhancing links to the global commercial markets, is constructed next year, Cushman & Wakefield says.

“Canada continues to see increasing investment by operators and occupiers attracted to its core qualities and relatively cold climate,” it adds in the report. Whirring computer systems throw off a lot of heat, and keeping them cool is costly.

“There is a real focus on energy efficiency and cost containment, so the design of these centres has changed quite a bit and they’re trying as much as possible to use the cool Canadian climate to cool these data centres rather than using 100-per-cent mechanical air-conditioned cooling,” Mr. Borron says. The climate allows data centre firms to reduce the amount of energy the servers use in relation to the amount of energy required to cool the servers, a key metric.

Allied Properties Real Estate Investment Trust, which focuses on office properties, dabbles in the data centre business as a way of offering its tenants in smaller office buildings something extra.

“Our buildings serve people really well, but they’re not as good for equipment,” says Allied chief executive officer Michael Emory. “If you want a backup diesel generator in this building, it’s almost impossible to provide,” he says, gesturing to the company’s own head office.

The company bought 151 Front St. in Toronto’s core in 2009 for about $192-million. The property, which Mr. Emory notes is “like a data centre on steroids,” is appraised at closer to $400-million today.

Mr. Emory is now well-versed in fuel farms, deep-water cooling, fibre-optic connections, and even “mantraps” (when someone walks into the building the door behind them closes and locks while the door in front of them remains locked until they pass security). Allied has since created a new data centre at 905 King St. W., and is now renting space in the CBC building at 250 Front St. W. for further data centre expansion.

“It’s a fascinating area, the growth is explosive,” Mr. Emory says.

Expanding to Canada

San Francisco-based data centre behemoth Digital Realty Trust Inc. recently bought a 120,000-square-foot property in Markham, Ont., on which to build data centres. The company, which specializes in data centres and is one of the 20 largest publicly-traded REITs in the United States with a market value of about $8-billion (U.S.), already has one such centre in Mississauga, Ont.

Chris Adams, Digital Realty’s asset manager for Toronto, is based in Boston but has been spending about a week a month in the Toronto area since the company bought the property in March. Digital Realty has about 120 properties in 32 markets across Europe, North America, Asia and Australia, and “Toronto is a new speculative market,” Mr. Adams says. “It’s a market that we’ve been toying with becoming more involved with for a while now.”

“There are a ton of metrics we look at,” he adds. “It comes down to stuff as detailed as how close the location is to a fault line, what’s the flood zone, what’s the natural disaster risk profile. [Despite a record one-day rainfall in Toronto on July 8 that flooded roads and cut power] Toronto has a relatively low disaster risk profile compared to Miami and hurricanes, or California and earthquakes, or Boston and New York with flooding from hurricanes.”

Digital Realty will turn its new property into five data centres, each with about 10,000 square feet. Of demand in Canada, Mr. Adams says “there’s more than enough to go around to support the likes of our continued investment and development, as well as those of other data centre operators out there.”

Digital Realty surveyed large corporations in North America and found that 98 per cent planned to expand their data centres in 2013 or 2014, the highest percentage in seven years. Many companies are implementing internal “cloud” networks, another driver of demand for data centres.

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