Google Agitates Data Center Activity in Manhattan

| About: Alphabet Inc. (GOOG)

At the end of 2010, Google (NASDAQ:GOOG) signed a deal to purchase 111 Eighth Avenue, one of the most important peering hubs in Manhattan, thus securing about 2.9 million square feet of data center and office space, at a cost of about $2 billion.

Originally built as the Port Authority Commerce Building in 1932, the place was redeveloped by Taconic Investment Partners in part into a Carrier hotel around 1998, soon becoming one of the most important places to exchange Internet traffic downtown Manhattan. It is interesting to notice that the building's structure, with unusually large floors (that meant that a lot of space was far from the windows), was considered a negative for Manhattan, as most New York tenants required window offices. Converting the place into a data center represented also a smart solution to the problem.

As Bob Cooks noticed, however, this structure may now be seen as a positive by Google:

Those big floor plates … greater than 200,000 square feet … make the building perfect for Google. The bigger the floor, the more room there is for scootering around, literally. The big floors allow Google to recreate the office environment and culture it has in California.

In his first conference call as CEO, Larry Page pointed out that Google was already a large user of the building, and minimized any impact to the existing tenants:

Larry Page

I think our primary reason for purchasing the building there was not the Internet infrastructure there but rather the office space that we really enjoy using. The Internet tenants are great, well-paying tenants. We appreciate having them there, but that's not the primary reason why we purchased the building.

In spite of his words, the Internet community started speculating about what Google's move might mean in relationship with existing users of the facility, and the Telecom community in a larger sense.

Dave Ohara, at Green Data Center Blog, immediately suggested that Google might have used the building as a bargaining chip in negotiations with Telecoms:

Google now owns a premium networking access point in NYC, the biggest concentration of money in the USA with the financials, stock exchanges, and other businesses.

As Google negotiates carrier access in various markets, it can offer a presence in 111 Eighth Ave. This can change price points, and guarantees of service and access.

If an Emerging Market Telecom sets up a relationship with Google, and agrees to a presence in 111 Eighth Ave, then the more the Emerging Market Telecom needs the location due to a variety of economic and technical reasons, the value works for Google.

Some recent comments from Michael Mandel at Data Center Practice seem to suggest that Google's strategy is now unfolding. According to his blog post Data Center Activity Heats Up In Manhattan, it looks like Google will use any available space in the building for its own needs:

Since Google’s acquisition of 111 Eighth Ave., all available space in the building has been taken off the market. The most recent data center transaction in the building was Digital Realty Trust’s sublease of 53,000 square-feet to Telx shortly before the building’s sale.

DatacenterDynamics has more color about Google's decision:

Michael Mandel, real estate advisor at Grubb & Ellis’s national data center practice, said the move will have an impact on the Manhattan data center market as data center space there is short supply. While there was no developed data center space left at the building that was not already leased out, there was a lot of office space that could be converted.

“There was space left there before they bought the building,” Mandel said. “All of the space … that was on the market they’ve taken off. People looking for data center space are not going to be able to get new space in 111 8th.”

“Existing data center tenants in that building are going to (have to) think about what their options are moving forward,” Mandel said. “It’s unclear, as of right now, what Google is willing to do with data center tenants: whether they’re going to allow them to renew, or force them out.”

Most data center contracts last for several years, with renewal options attached. We doubt 111 8th Avenue tenants will be soon required to leave the building, especially as it may not even be in Google's interest to “devaluate” the place to a “Google only” building. As Rob Powell commented today at Telecom Ramblings:

They (Google) could simply be planning to convert a big chunk of that office space into a giant, centrally located Google datacenter facility alongside its valuable existing tenants. That would obviously also mean any space already on the market would be pulled in favor of the new project. I mean, we knew Google didn’t buy the place just to be the landlord. They want to put a whole lot of servers in there alongside the existing tenants and they want to do it their way.

Google's decision will definitely have an impact on future data center activity in Manhattan. Companies currently leasing space at 111 8th Ave, like Internap (NASDAQ:INAP), that has a 75,000 sq.ft. facility, or Equinix (NASDAQ:EQIX), which has both a 56,000 sq.ft. data center (NY9) inherited from the Switch and Data acquisition and a legacy point of presence (NY3) for its New Jersey locations peering needs, will have to draw a strategy going forward.

Staying with the two data center providers we mentioned, Internap also boasts a sister downtown New York City data center located at 75 Broad Street, while Equinix's main New York metro data centers are all in near by New Jersey, where the company is already planning its future expansion, that will add a total capacity of approximately 380,000 gross square feet of space and about 7,100 cabinet equivalents.

After all, the impact of Google's decision might be relatively minimal to those providers who have already secured a second or third option in the area – and which could see an increased interest, in the short term, for space at 111 8th Avenue, as long as there's some left in their facilities.

Disclosure: I am long EQIX.