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Disruptive 'cloud' hanging over data center space is growing, observer says

Cloud-basedsoftware solutions are disrupting traditional leasing dynamics of the data centerbusiness and forcing landlords to diversify their offerings, according to an industryobserver.

"Thecloud is definitely having an impact, and [is] potentially even a threat to theway you see real estate leased and utilized inside of data centers right now,"Bryan Loewen, executive managing director with Newmark Grubb Knight Frank, saidon a July 13 call sponsored by BB&T Capital Markets.

Loewenpointed to the rapid flux in the types of tenants leasing third-party data centerspace, and in the declining amount of space they individually are taking, generally,as evidence of new fault lines in the business. Increasingly, smaller enterprisetenants, who before would lease one or two racks retail, are moving to third-partycloud solutions.

Advancesin the software business are also driving change. Software-as-a-service applicationsthat previously required rack space inside a data center, such as offerings fromMicrosoft, Adobe and Oracle, no longer do.

The changes,on balance, will present hurdles for those offering only one- and two-rack solutions,Loewen said.

Ultimately,Loewen expects data center demand to continue to grow steadily in the coming years,but those landlords offering a full suite of services, he said, will fare best.

"Ifyou are deemed as the one-stop shop for IT solutions, I think you're going to havebetter long-term success, than those that say, 'We're only going to provide onearea of expertise.' I think those [landlords] are the ones that have potentiallysome outside risk," he said.

Loewendescribed the North American data center market as in a state of balance, with supplyand demand roughly in line. The REITs' cautious stance on speculative new developmentand their adoption of a "just-in-time" development philosophy have steadiedthe market.

New York/NewJersey presents the only exception, in Loewen's view. There, landlords are havingto offer discounts and other incentives to attract and retain tenants.