Robust Demand for Data Center Space Results in Significant Construction

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1 GLOSSARY OF TERMS DC Abbreviation for data center RFSF Abbreviation for raised floor square footage Powered Shells Purpose built or hardened shell; Power and Fiber to site; No equipment included Carrier Hotels Single buildings with multiple fiber providers and generally support retail colocation providers Wholesale Colocation Building shell & infrastructure to PDU providing space, power & cooling; Generally in demised suites above 250 kw Retail Colocation Building shell and infrastructure in shared environment, space generally divided by racks or cages; May include IT hardware as well as a menu of services Enterprise Centers Hardened data center; Houses mission critical operations of individual companies Robust Demand for Data Center Space Results in Significant Construction Robust demand for data center space in 2014 was observed across wholesale colocation and enterprise data center markets, and providers met this demand with significant construction deliveries totaling 183 MW of new critical power across the seven primary markets. Demand growth and construction deliveries facilitated leasing volume and velocity, with 2014 wholesale leasing volume surpassing 2013 levels. Continued construction in 2015 will satisfy demand across most primary markets while supply constrained markets like Chicago and Phoenix are expected to see increased activity as a result of low current inventory. Vacancy rates compressed across all primary markets except Northern Virginia, which saw an increase in vacancy attributable to 27 MW of new inventory in Q During 2014, pricing stabilized despite low vacancy rates in primary markets, lease rates in 2015 are expected to remain relatively consistent as additional supply is delivered to the markets. Technology, Financial Services, Healthcare and Social Media drove demand in 2014 and are projected to continue this trend in Technology, Financial Services, Healthcare and Social Media drove demand in 2014 and are projected to continue this trend in These users continue to seek hybrid solutions for their data center strategy, allowing them to realize the benefits of enterprise and colocation models while adapting to changing business environments. Rapid technological advances are also pushing companies to source flexible IT solutions - impacting the space with shorter lease terms as companies evaluate cloud computing and virtualization options. With many leases approaching expiry, resets in pricing and contract terms are playing a pivotal role in end users decisions to remain with their current provider or to seek more favorable alternatives. Furthering this re-evaluation of space and strategy is the approach industry experts are taking: instead of quantifying data center needs by traditional space or power metrics, a company s IT needs are assessed and then integrated with the appropriate data center to accommodate their overall IT strategy. Greenfield Sites Areas/Sites identified to build to suit data centers; Typically close to power/fiber

2 Q Net Absorption as a share of ption as market a Share inventory of Market Inventory (MW) (MW) Net Absoption as a Share of Market Inventory (MW) 9.0% 4.3% 9.0% Northern Virginia 4.3% 32.2% Northern Virginia 32.2% 8.0% Phoenix 8.0% Phoenix Atlanta Atlanta 10.7% 10.7% Silicon Silicon Valley Valley 21.0% 21.0% Chicago Chicago New New York York Tri-State 14.9% 14.9% Dallas/Fort Dallas/Fort Worth Worth Source: CBRE Data Center Solutions Group, Q ption as Q4 a 2014 Share Net of Market Absorption Inventory (MW) (MW) Q Net Absorption (MW) 9.0% 32.2% % Northern Virginia 8.9 Northern Virginia 8.0% Phoenix Phoenix Atlanta Atlanta 10.7% Silicon Silicon Valley Valley 2.3 Chicago Chicago New New York York Tri-State 21.0% 14.9% Dallas/Fort Worth 3.0 Dallas/Fort Worth 4.2 Source: CBRE Data Center Solutions Group, Q Q Primary Wholesale Colocation Market Snapshot Market Inventory Vacancy Absorption Rental Rates (kw/mo)* Northern Virginia 402 MW ( 12.7 MW) 27 MW / 6.7% ( 13.0%) 8.9 MW ( 9.1 MW) $135-$150 Phoenix 213 MW (nil) 4.1 MW / 1.9% ( 35.4%) 2.3 MW ( 1.7 MW) $145-$165 Atlanta 127 MW (nil) 26.2 MW / 20.7% ( 8.7%) 2.5 MW ( 0.7 MW) $120-$150 Silicon Valley 116 MW (nil) 15.9 MW / 13.7% ( 16.1%) 3.0 MW ( 8.1 MW) $145-$150 NYC/NJ 122 MW ( 3.5 MW) 20.4 MW / 16.7% ( 14.5%) 6.3 MW ( 2.1 MW) $145-$160** Chicago 115 MW ( 2.5 MW) 3.6 MW / 3.2% ( 33.5%) 3.4 MW ( 1.9 MW) $145-$165 Dallas/Fort Worth 113 MW ( 5.1 MW) 12.1 MW / 10.7% ( 27.4%) 8.9 MW ( 3.3 MW) $140-$150 *Rental rates are quoted asking rates from providers. CBRE experiences that actual contract rates fall below these numbers. Source: CBRE Data Center Solutions Group, Q **Quoted rates are outside of NYC proper. NYC (Manhattan) wholesale rates average $225 $300/kW/mo. Arrows reflect quarter over quarter changes. As a result of growth and investor confidence in the data center industry, many providers saw their market capitalization increase significantly in 2014, with the major providers averaging a 28.3% growth rate for Momentum from lease renewals, new transactions and growing demand funnel we believe will continue to drive growth in Cisco s Global Cloud Index: Forecast and Methodology, released November 4, 2014 estimates that global data center traffic will increase 23% annually until 2018 supporting projections of continued industry growth. Q DATA CENTER CONSTRUCTION PIPELINE Q DATA CENTER CONSTRUCTION PIPELINE Q DATA CENTER CONSTRUCTION PIPELINE Silicon Valley 4.8 Silicon Valley 4.8 MW Chicago 13.8 Chicago 13.8 MW Phoenix 16 Phoenix 16 MW New York Tri-State 19.6 New York Tri-State 19.6 MW Atlanta 21.2 Atlanta 21.2 MW Northern Virginia 22.1 Northern Virginia 22.1MW Dallas/Fort Worth 24.3 Dallas/Fort Worth 24.3 MW Construction 15 Volume 20 in MW Source: CBRE Data Center Solutions Group, Q Construction Volume in MW Source: CBRE Data Center Solutions Group, Q4 2014

3 Q U.S. CAP RATE AVERAGES Q U.S. CAP RATE AVERAGES 9.0% 8.2% 8.0% 7.7% 6.8% 7.0% 7.0% 6.7% 6.1% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0% Multifamily Retail Office Industrial Data Center Hotel Source: Real Capital Analytics & CBRE Data Center Solutions Group, Q INDUSTRY GROWTH Company Ticker Price* Market Cap($)** 2014 Return* CyrusOne CONE $ B 23.4% CoreSite Realty Corp. COR $ M 21.3% Digital Realty Trust Inc. DLR $ B 35.0% DuPont Fabros Technology Inc. DFT $ B 34.5% Equinix Inc. EQIX $ B 27.8% QTS Realty Trust QTS $ B 36.6% Rackspace Hosting Inc. RAX $ B 19.6% Data Center Average 28.3% *Price and 2014 Return are based on Morningstar closing share prices for 12/31/2014. ** Markert Cap based on Morningstar data from 1/13/2015. In Q we saw a slight uptick in cap rates from our previous mid-year 2014 Market Update. In Q we saw a slight uptick in cap rates from our previous mid-year 2014 Market Update. Credit rating, market, tenant profile, term and lease up capability are critical variables in lease and sale-leaseback transactions. Data center cap rates averaged 7.7% during Q for fully leased facilities with a term of seven years or more remaining. Assets of varying quality with lease terms under seven years and/or tenants with sub-investment grade credit traded at cap rates at or above 9.0%. Enterprises continue the trend of evaluating sale-leaseback or sale partialleasebacks of their legacy data center assets. This is primarily the result of changing data center needs, impending capital expenditures and IT strategies resulting in the client need for flexible and alternative data center site needs often times outside of their existing portfolio of assets.

4 State of the Market Primary Market Phoenix It s heating up again in Phoenix. One of Inc. Magazine s Top 20 Cities for Tech Startups and CNN Money s 10 Fastest Growing Cities in 2014, Phoenix has broadened its economic drivers well beyond tourism and construction since the end of the Great Recession and recovered from the mire of foreclosures and a precipitous pullback that affected virtually every industry. Phoenix, AZ...the metro Phoenix data center market was relatively quiet in Q after strong second and third quarters. While the recent recession s impact to housing prices and wages hurt local residents, investors were drawn to opportunity in the nation s sixth largest city. Following the credit and housing crisis, companies from across the country seized the chance to place back shop operations in Phoenix due to its combination of high quality of life and low cost of living. Such companies include Freeport MacMoran, Intel, Wells Fargo, American Express, EBay, PayPal, Yelp and hosts of other marquee companies listed among the state s top employers. Recognizing the virtuous cycle created by the combination of IT and operational support within the same geography, the Arizona State Legislature passed incentives in 2013 designed to stimulate the growth of the economic ecosystems tied to the Valley s data center operations. However, nuances in the law s language have proved somewhat problematic for companies with stand-alone data centers in the state in that companies have found challenges in reaping the benefits of said incentives. The legislation has been far more kind to the Valley s multi-tenant data center operators than to enterprise owners. The financial impact of this law to a 1 MW tenant s bottom line could be as much as $6- to $7 million dollars in tax savings over a ten year period. Though its effects were not immediate, the incentive legislation has begun to bear fruit by drawing a broad base of tenants from around the globe throughout In keeping pace with historical trends of heavy leasing activity followed by a brief cooling off period, the metro Phoenix data center market was relatively quiet in Q after strong second and third quarters. Leasing activity in the second half of 2014 was driven by West coast technology giants planting flags in new data centers and expanding their borders within their incumbent landlords. This activity depleted immediately available inventory to levels that were unable to accommodate some of the mega-deals that landed in other primary North American markets in the final quarter of the year. As of January 2015, a handful of the of the Valley s landlords have contiguous space to accommodate 1 MW of immediate IT load for a single user; however, users with 2.5 MW of day one load would find their needs met by creative capacity solutions as the volume of contiguous inventory is not sitting vacant in metro Phoenix. Internal shifts in leadership and changing business models within some of the Valley s largest landlords have contributed to a lull in new construction - leaving CyrusOne as the only wholesale colocation landlord embarking on a major expansion in Q

5 State of the Market Primary Market Phoenix, CONT. Capital markets activity surrounding Phoenix s data centers have been equally strong. Investors in triple net assets have been aggressive in their pursuit of single tenant data center assets in Arizona. From telecom switches to core enterprise data centers, cap rate compression has pushed per square foot pricing higher with each of the year s trades. There is no reason to believe this trend will reverse in Phoenix, AZ The tight balance of supply in the face of swelling demand is not a new phenomenon in Arizona s multi-tenant data center market. PHOENIX WHOLESALE COLOCATION MARKET GROWTH % 3.2 PHOENIX WHOLESALE COLOCATION MARKET GROWTH 5.0% 4.0% The tight balance of supply in the face of swelling demand is not a new phenomenon in Arizona s multi-tenant data center market. As the West coast s primary destination data center market, the Phoenix area has a long history of a few large tenants swallowing up virtually the market s entire available inventory with large, long term leases. From aerospace to e-commerce, it seems the biggest companies in their respective industries take turns doing the big data center deals in Arizona. These transactions temporarily compress vacancy rates while the Valley s landlords endeavor to replenish their inventory. If historical trends are helpful in predicting the behavior of Phoenix s operators, it is reasonable to expect construction activity to commence in early 2015 so that wholesale landlords are positioned to capitalize on Arizona s consistent attention from tenants seeking places to deploy large IT installations. Notable Market Activity Managed services and retail colocation giant CenturyLink partnered with local provider IO Data Centers for their entry into the market. With close to 9 MW of capacity, CenturyLink is making a notable commitment in Phoenix. Bitcoin mining operations were voracious in their demand of Phoenix data center capacity. CyrusOne commissioned 3.5 MW just 107 days after breaking ground on the second building in their Chandler campus. Digital Realty edged ever closer to 100% occupancy at 2121 S Price Road leaving the market wondering about potential expansion plans for Critical Power (MW) % 2.6% % 3.0% % 3.0% 2.0% % 0 Q Q Q Q Q Q Q Total Market Inventory (MW) Total Net Absorption (MW) Market Vacancy Rate (%) Source: CBRE Data Center Solutions Group, Q %

6 State of the Market Emerging Market Washington/Seattle Seattle, WA...the second half of 2014 Seattle s economy grew faster than any of its western peer cities in the U.S. Seattle s economy grew faster than any of its western peer cities in the U.S. in the second half of 2014, according to Economy.com, with strong gains in all sectors including aviation, software, and technology. Led by the growth of internet retail, the Seattle-Tacoma region is up over 44,600 jobs in the past year. Notably, Amazon has dramatically impacted Seattle with almost 4 million sq. ft. of currently occupied office space and another 4.5 million sq. ft. either under construction or planned. In 2014, BMW selected Moses Lake, Washington, in a global search for a large scale expansion of a carbon fiber production plant. Not surprisingly, the technology industry s growth is fueling the Northwest economy and data center demand. Further, with the State of Washington legislature reinstituting the tax exemption for rural data center landlords and tenants in 2012, data center activity in 2014 increased significantly, and the momentum is expected to continue into Central Washington Central Washington boasts some of the least expensive power in the nation ranging from 2 to 3.75 cents per kwh. The power is green with the majority of the fuel mix coming from hydroelectric dams on the Columbia River. These utilities produce excess power and also sell to Western Washington utilities and the open market. In addition to no business and occupation taxes, many data center projects in Central Washington qualify for the Washington State rural sales tax exemption on all data center construction costs and personal property taxes (including equipment refreshment) through April Not surprisingly, internet service providers and software developers including, Microsoft, T Mobile, Dell, Intuit, Yahoo, as well as major enterprise users, have developed large server farms in the area. Because of its lowrisk geography, low-cost power, excellent connectivity and established data center environment, Central Washington is also experiencing rapidly increasing demand from cloud service providers as well as users seeking Tier III colocation environments. Notably, a few major data center developers are working to expand their footprints in Central Washington. Puget Sound The Puget Sound area has historically been a colocation and telecom market. The last three years have seen increasing growth among the larger enterprise-grade retail colocation providers, including the arrival of TELX to the area. Retail pricing varies steeply by provider, infrastructure quality and service level. Notwithstanding, there has been uneven and relatively slow demand for wholesale colocation product over the last few years, as many of the larger users who do not need urban access to their servers have chosen to locate outside of the Puget Sound region to take advantage of central Washington s reduced power rates and geographic diversity. Notwithstanding, the Northwest s large corporate users with last minute requirements often end up in the Seattle area as retail colocation clients when they would typically prefer to operate their own data centers. Although Amazon, for example, has located its large server farms outside of the Western Washington, they do colocate in both retail and wholesale smaller locations within the Puget Sound area. As the wholesale market has almost 30 MW of existing supply (with varying levels of redundancy) pricing is highly competitive and has remained flat.

7 State of the Market Emerging Market Washington/Seattle, CONT. Seattle, WA With growing global awareness of the benefits of Central Washington with its low-cost power, tax incentives and low-risk environment, we expect to see increased demand both locally and nationally. The outlook for Washington State data centers is positive with the Northwest experiencing an increasingly strong economy and growth. In the Puget Sound area, the current wholesale availability varies in quality and redundancy, with a significant portion (approximately 50%) of the product currently on the market being low-powered third generation space. Correspondingly, the enterprise-grade product will lease first and at the highest return. Notably, a few of the major retail colocation providers are working to identify long-term growth options for first quality product to serve their growing clients. In Central Washington, vacancy rates for available wholesale (or retail product) are low and pricing remains steady with only two options currently available. With growing global awareness of the benefits of Central Washington with its low-cost power, tax incentives and low-risk environment, we expect to see increased demand both locally and nationally. Wholesale pricing for Tier III product in Washington State varies by location and provider running from $120 to 160 per kw. Notable Market Activity Central Washington Sabey Data Centers is actively planning construction of its second of three data center buildings at their Intergate Quincy campus located in Quincy, Washington with foundation work on the 140,000 SF building to expected to commence Q The design will incorporate modular elements to bring the product to market more quickly and cost effectively. Bitcoin mining companies flocked to Central Washington in 2014 for data center, as well as simple warehouse properties, with the goal of securing massive amounts of the region s abundant low-cost power to support their high-density hardware needs. Titan Data Center (Server Farm Realty) leased the former ask.com space Vantage Data Centers completed build of additional 4.5 MW for existing user in Building One on its Quincy, WA data center campus. Puget Sound Clise Properties and Digital Realty Trust have announced joint venture plans to construct X3, a new 12 MW, 11 story 190,000 SF data center in Downtown Seattle with completion forecasted for X3 will complement their other Seattle holdings, the Westin Building Exchange (X1), and 2020 Fifth (X2). The Westin Building Exchange team will be pioneering a novel energy savings technology whereby excess heat generated by the data center will be sent across the street to heat Amazon.com s neighboring 3 million RSF hi-rise campus (under-construction). The heat provided to Amazon s new office buildings will provide significant cost and energy savings. Bytegrid expanded its footprint to the West Coast in 2014 with the purchase of the former NetRiver data center (45,000 SF) in Lynnwood

8 Patrick Lynch Managing Director th Street, Suite 2950 Denver, CO T pat.lynch@cbre.com Jeremy Meyers Business Development Analyst th Street, Suite 2950 Denver, CO jeremy.meyers@cbre.com ABOUT THE CBRE has the world s only fully integrated data center real estate team, offering strategy, acquisition and disposition representation, project management and facilities management from a single provider. Our Data Center Solutions has experience in primary, secondary and tertiary mission critical markets across the globe. We have the tools and knowledge to make your project successful regardless of location. With over 100 data center acquisition/ disposition specialists, 4,200 engineers, and over 300 project managers in over 75 global markets, CBRE has the global reach, resources, expertise and relationships to provide our clients with end-to-end market analysis, planning, construction, operations, maintenance, and execution capabilities. The DCS completed over 180 MW of transactions globally in 2013, has managed over 2.5 MSF of projects over the last five years, and has over 450 Tier I to Tier IV data centers under management. CBRE Global Research and Consulting Jessica Ostermick Director, Research and Analysis 8390 East Crescent Parkway, Suite 300 Greenwood Village, CO T jessica.ostermick@cbre.com