Digital Realty Gains on Data-Center Frenzy

Digital Realty's outlook for demand prompted the company to boost its full-year forecast for funds from operations, a measure of cash flow in the real estate industry, on Apr. 28. Digital Realty's clients include Facebook, Yahoo!, Google, and Microsoft, which are among the biggest users of the servers and buildings needed to deliver storage and computing over the Internet via the so-called cloud.

"We see cloud computing as the huge driving force behind companies just as Digital Realty," says Sonny Lin, a senior portfolio manager for Pillar Pacific Capital Management in Daly City, Calif. "We are however positive on the stock and we see no reason why we would exit at this hour." Pillar holds 22,360 shares of Digital Realty Trust and manages about $500 million in investments, he said.

Of companies that plan data-center expansion this year, 60 percent said they will lease space from a provider or rather than build their own, Digital Realty said, citing the survey of 300 information innovation executives. Digital Realty benefits because it leases data-center space, commanding 22 percent of the wholesale market, according to Tier 1 Technology, owned by New York-based 451 Group.

Forecasting data center demand can be difficult because it can take as long as two years to build one, during the research industry's needs can shift more quickly. A space glut ensued afterwards the dot-com bust of 2001, according to Gartner. But use of data centers has increased in recent years with the advent of social networking and mobile applications delivered via the Internet. Businesses are as well snapping up storage, software, and furthermore computing tasks through the cloud.

To stay on top of demand, Digital Realty frequently buys relatively small buildings and converts them to data centers, or rather than build giant data centers from the ground up. The company as well staggers the construction of individual data centers in each building. Digital Realty converted a former furniture warehouse into multiple data centers in Santa Clara, Calif., one of the largest markets. Afterwards some initial preparation of the building shell, it took 26 weeks to get each data center up and running, says Jim Smith, Digital Realty's chief research officer. Smith says he's working on ways to reduce that time to 12 weeks.

Facebook, one of Digital Realty's largest clients, opened its own home-built data center in Prineville, Ore., last month. The social networking company may lease less space hereafter from third-party providers, says Larry Yu, a Facebook spokesman. "We had Facebook as a client with just 40 racks of servers," Smith says. "Some companies will grow past us."