451 Research continues to provide excellent commentary and analysis for our collective entry into 2013.
The article below, developed by analysts Jeff Paschke, Kelly Morgan, Jim Grogan, Stefanie Beaubien, and Rick Kurtzbein, is a great overview of our own space, known as the MTDC (multi-tenant datacenter) market.
Bottom line: positive outlook for firms like AIS based on the fundamentals of strong underlying demand, data center supply imbalance, increasing virtualization of IT infrastructure, geographic diversity, and key compliance certifications.
Emphasis in red added by me.
Brian Wood, VP Marketing
2013 preview – Multi-tenant datacenters
The global multi-tenant datacenter (MTDC) market remains as dynamic as ever, with continued M&A activity, and continued expansion in response to strong demand and customers pushing providers to expand into new geographies. Much of the expansion continues to be from the larger players that have more ready access to capital in this highly capital-intensive business, with approximately one-third of new builds and expansions coming from the top 30 global providers.
Increased MTDC demand in 2013
There will be a boost in datacenter services demand in 2013 as companies make decisions on projects they have put off due to uncertainties around the US election, the situation in Europe, the fiscal cliff, etc.
Financial services and healthcare will be two large verticals that will continue to move into outsourced facilities and contribute to increased demand for MTDC facilities. Financial services firms will see regulatory changes that are likely to make outsourced facilities even more appealing, particularly because they will be required to store and track ever-larger amounts of data.
Also, financial services firms have been putting off hardware-refresh cycles due to economic uncertainties and lack of capital (particularly in Europe), but they cannot put this off forever. Many will now need to change out hardware and expand their virtualization programs, which often impacts their datacenter strategy as well. Hospitals are realizing that all of their space should be revenue-generating, and other healthcare firms are seeing that running datacenters is not part of their core competency.
There will be more speculative datacenter builds than there have been in the recent past, but mostly by well-known providers with funding that can take educated risks. There continues to be plenty of funding available for larger providers, allowing them to take more risk. However, even speculative builds are likely to remain fairly controlled, requiring anchor tenants and/or being done in small chunks in line with perceived demand.
Concerns of MTDC oversupply will continue
Since the beginning of 2012, some have worried that certain key markets (examples being Silicon Valley, northern New Jersey and northern Virginia) are facing oversupply, as new builds have opened and pricing has come under pressure in some cases. These concerns are expected to continue in 2013.
Are we in danger of spilling over into ‘oversupply’ territory in 2013? After touring more than 100 multi-tenant datacenters in 2012, plainly put: the answer is no. Providers have consistently indicated to us that pipelines of new business look stronger now than a year ago. We continue to see a supply/demand gap in general across the top markets, and expect this to continue over the next few years. This is not a repeat of 2003. In 2003, builds were speculative and few (if any) were pre-leased. Aggregate/total demand was much lower than available supply, and it was a true oversupply situation then. This was the heyday of tech and telecom, when capital for speculative projects was far easier to come by, and the third-party outsourcing market was still mostly speculative.
Now, however, the situation is dramatically different. Demand is real, there is an unstoppable move to the cloud and outsourced services (while there’s no hard number on this, we estimate it be between 5% and 15% outsourced IT market and growing); MTDC providers can alleviate capital costs for enterprises; consumers are becoming more mobile and demanding in terms of taking their digital lives with them wherever they go; and the datacenters that are built are coming to market with extremely high pre-lease levels (as high as 50% pre-leased in many cases). Contrast this with the 2003 time frame, and it’s easy to see that it is a completely different situation. We project that growth in datacenter demand will continue to outpace datacenter supply in 2013 and continue over the next few years.
While there may be some ‘buyers market’ effects in some geographies, particularly for wholesale, the fact is that the fundamentals of the MTDC industry are expected to remain strong in 2013. Businesses and consumers are becoming more demanding in their end-user experiences, and there continues to be demand for a hybrid of offerings of wholesale datacenters, pure-play colocation, managed services/hosting, cloud services (which also drive colocation), etc. Enterprises continue to see the economic benefits of leaving datacenter services to those providers for which it is their core business, while they focus on theirs.
M&A activity continues in a fragmented market
The MTDC sector remains fragmented, with more than 650 companies providing MTDC services globally, and the top 30 global MTDC providers estimated to have less than 50% market share. In 2013, we expect mergers and acquisitions will continue, as private equity investors continue to roll up smaller firms, larger providers look to fill strategic holes with acquisitions that bring either new services or new geographic reach, and enterprises start seriously considering sale/leaseback options of their datacenters since there are so many investors now looking to buy such assets.
The higher-multiple deals (10-12x LQA EBITDA) will continue to be for existing providers with tenants, recurring revenue and operating cash flow, plus some expansion ability. Also, firms with some element of managed services are likely to see higher multiples than pure MTDC services thanks to the potential for producing more revenue from the same amount of real estate (although with higher costs).
Fastest growth in emerging MTDC markets
The Asia-Pacific (APAC) and Latin American regions of the world continue to offer the greatest growth potential for MTDCs over the next 10 years. The APAC region includes much of East Asia, Southeast Asia, Australasia and Oceania, as well as South Asia, including India and its neighbors. APAC also includes the two largest emerging market countries – China and India – as well as numerous smaller emerging markets. The Latin American region includes Brazil and several other emerging market economies experiencing rapid growth including Mexico, Chile and Colombia. 451 Research projects that both the APAC and Latin America regions will see the fastest MTDC revenue growth in 2013, exceeding 20% in both regions.
There will continue to be increasing attention on major emerging datacenter markets globally as investors and providers look beyond the top 18 global markets to areas with supply-demand imbalances where they can add value and face fewer competitors.
MTDC and the cloud
The cloud is not just for test and development, and 2013 will see more customers selecting cloud solutions for production workloads. MTDC providers point to increased numbers of customers utilizing cloud technologies in their hosted services. We have seen a growing number of colocation providers offering cloud solutions as an additional offering beyond pure MTDC services, and we expect this will continue in 2013. The business economics for cloud services are better understood by IT decision makers, and customers are recognizing that early concerns about securing the cloud can be addressed with no greater risk than seen across IT deployments in general.
MTDC providers have begun to offer solutions in the healthcare vertical in particular, where the value-added features such as assisting with HIPAA compliance become attractive options; healthcare has typically seen a high instance of automation that is only loosely centralized, with multiple departmental systems deployed within a given institution. Federal initiatives to promote electronic medical records (EMR) continue to stimulate both conversations and adoption of cloud solutions, which can help care-delivery organizations demonstrate meaningful use of ERM technology.
MTDC and business continuity
Business continuity continues in 2013 as a focal point for MTDC providers and their customers. We are seeing increased interest and attention paid to assessments of the risk profile of mission-critical applications, and the associated investments to architect resilient configurations. We estimate that MTDC vendors are seeing 30-40% of their customers today expressing interest or implementing solutions leveraging multiple facilities.
The prevalence of natural disasters continues at a high level, with 2012 showing higher-than-forecast numbers of tropical storms, and global statistics on seismic events show high levels of activity as well. Year-to-date in 2012, 57 earthquakes classified as ‘significant’ have been tracked by the US Geological Survey, which equates to a significant event somewhere in the world every six days. In the midst of such increases in natural events, which can cause technology disruptions, application dependency has increased in every business segment, such that we estimate every business has at least one mission-critical application that calls for a recovery time objective (RTO) of four hours or less. Balancing these risks with appropriate mitigation efforts will result in increased investments in building, and verifying the resilient capability of systems supported by MTDC providers.
Increased focus on audits and certifications
We have seen increasing activity surrounding audits and certifications in the MTDC sector, and we expect this to continue in 2013. More customers are demanding and requiring specific compliances, especially those in the financial and healthcare industries. The increasingly strict regulations for the storage and access of sensitive personal information are making it more difficult for enterprises and organizations to manage data effectively and efficiently. A compliant facility is imperative for providers to continue seeing customer wins from these verticals.
We are seeing more US datacenters seeking compliance with the SSAE 16, SOC 2 and SOC 3 standards as established by the American Institute of Certified Public Accountants, and Canadian providers opting for its counterpart CSAE 3416, with the International version ISAE 3402. This standard offers the broadest compliance, creating a foundation for those facilities seeking additional compliances such as HIPAA for healthcare and PCI DSS for credit-card processors. We are also aware of UK-based providers completing the SSAE 16 audit to better serve American customers requiring the compliance, as well as additional internationally located providers looking into the audit process.
Other options for MTDC providers vary depending on several factors including location. For example, providers in Germany can turn to the Star audit, and international providers may look to ISO 9000 or 27000 series or ITIL to meet various regulations. Additionally, we are seeing more providers globally pursuing Tier certification from the Uptime Institute (an independent division of the 451 Group) as well as new entrants into the MTDC standards arena, including the Management and Operations (M&O) stamp from the Uptime Institute. We would not be surprised to see additional changes in standards as others attempt to develop more encompassing standards designed specifically for datacenters.
Increased competition for qualified datacenter staff
As more companies enter the MTDC sector, and other providers execute strategic expansion plans, the demand for C-level executives continues to grow throughout the sector. We see significant competition between companies as the demand for qualified executives with relevant experience continues to increase. We believe that finding qualified and experienced personnel in the industry will become increasingly challenging in 2013 and the coming years. This shortage, we believe, will result in companies cannibalizing one another for talented C-level leadership.
We also believe this shortage of qualified staff goes beyond the C-level suite. MTDC providers are facing challenges hiring qualified datacenter engineers, as well as datacenter technicians. Some providers are seeking ex-military candidates like Naval Nukes to find qualified candidates, while others will likely poach qualified candidates from competitors and enterprises. The industry faces a challenge hiring qualified applicants largely because of the lack of formal educational programs that train qualified staff. With heightened activity and continued growth in the MTDC sector and related businesses, we expect the competition for C-level executives and top qualified operational specialists to become even more intense in the future.
The 451 Take
For 2013, we expect to see the healthy growth in the MTDC sector continue as additional datacenter capacity comes online, alleviating some capacity constraints and providing sellable inventory to providers. We also expect aggregate demand to increase in 2013 and remain higher than the expected supply additions in 2013, as the shift to IT outsourcing by enterprises continues and comfort with using MTDC services increases. All in all, MTDC sector fundamentals are expected to remain strong through the year.