As it comes out on the other end of the financial crisis, the New York metro data center market finds itself with a fairly even balance between supply and demand on both sides of the Hudson River.

Customer dynamics have changed over the past several years but wholesale and retail data center providers, as well as analysts, are generally optimistic about the market’s current state and its near future.

Enterprise customers increasingly choose New Jersey over Manhattan, moving across the river where power is cheaper, data centers are newer and room for expansion is available. But the space they vacate is quickly filled by other customers newer to the market.

Supply in New Jersey, compared to demand, is also tight. Mike Levy, senior analyst at 451 Research, said providers are very careful about deploying capacity there, expanding little by little.

“Any cries of oversupply are definitely false,” he said, pointing to a couple of new entrants as examples. Both CoreSite and Internap have recently launched data centers in Secaucus, New Jersey. Both buildings are massive but neither provider has chosen to deploy more than 20,000 sq ft in the initial phase.

Manhattan’s dynamics are similar. After Seattle’s Sabey Data Centers bought the 32-story Verizon building in 2011, some analysts rang alarm bells, saying the developer would flood the market. The first chunk of space that came online at 375 Pearl Street, however, was 20,000 sq ft, Levy said.

There are about 100 data centers in the market, operated by about 50 data center providers. As of the end of 2013 they had about 3.2m sq ft of operational capacity, according to 451’s figures. About 80% of all live data center space in the metro is currently taken. “We expect by year-end 2014 to see a 12% growth in demand and 11% growth in supply,” Levy said. Utilization will go up by about 1% and will remain at that level until the end of 2015. Anything within a 50-mile radius from the metro’s center is considered part of the New York market by the research firm.

Jersey prices hit bottom
The big news in New Jersey is that multitenant data center prices have stabilized after a few years of a steady decline. The state’s northern part has been one of the most price-competitive markets in the world over the course of those few years. “It’s a very vicious market in Northern New Jersey,” Levy said. And it hasn’t been vicious because of a lack of demand. It has been vicious because of the number of sophisticated providers competing for the same business.

Providers have been competing on price and on service portfolios. Companies such as CenturyLink (formerly Savvis), Equinix, Telx and now also CoreSite have been differentiating by fostering network interconnection ecosystems inside their facilities. Some providers, such as Cervalis and SunGard, have emphasized business continuity and disaster recovery services, and others, such as Internap and QTS, as well as CenturyLink and SunGard, have been competing in the managed services space.

Wholesale rates went down more than colocation rates but now seem to be stabilizing. “Providers generally agree that they’ve weathered the storm of pricing pressure,” Levy said. The storm’s roots grew out of the 2008 financial crisis, when lots of large enterprise data center deals that had been discussed suddenly disappeared from the map. “Now you’re starting to see the deals that were lost after the financial crisis come back in full force,” he said.

There had been some skepticism in the market about wholesaler DuPont Fabros Technology’s ability to sell space at its massive data center in Piscataway, New Jersey, the first phase of which was delivered in October 2010. But as of mid-February this year Dupont Fabros had eight tenants taking 9MW of the building’s power capacity. Three of them were banking firms that signed leases in 2013, Levy said.

DuPont Fabros spokesman Christopher Warnke agrees that prices in New Jersey have stabilized. With half of the facility’s capacity occupied, the company plans to continue pursuing tenants for the rest of the building, even though the deals in New Jersey are smaller than it is used to in its Northern Virginia data center empire and take much longer to close. “It’s just taking a little time to get those deals across the finish line,” Warnke said. The last deal the provider signed in Piscataway took 39 months from the time the customer approached them and the time the lease was signed. “We can sign a deal in Northern Virginia probably in two months. That’s just sort of the environment people [in New Jersey] are dealing with right now.”

Majority of Dupont Fabros’ current Jersey tenants are enterprises, including financial services companies, a healthcare company, a colocation and managed services provider and an online marketing firm. Warnkey said there is a healthy supply-demand balance and more enterprise customers will eventually move in.

A virtuous cycle
Tom Ray, president and CEO of CoreSite, a New Jersey newcomer that has had a long-time presence in Manhattan, said demand in New Jersey seems to be picking up, but that perception is based on tons of provider activity and the volume of prospects as opposed to signed leases. He said he is more optimistic about demand than he was a few years ago, but there is still a year-and-a-half’s worth of supply in the market (451’s estimates do not include non-live space in data center buildings).

Rates have stabilized but it just means they are not going any lower than where they have slid to. Still, demand in New Jersey is growing, Ray says. Enterprise migration from Manhattan across the Hudson is a meaningful trend. “The migration of increasing portion of demand to New Jersey continues to accelerate,” he said. This has created a virtuous cycle. As more companies move to Jersey, the ecosystem grows bigger, becoming more and more attractive to even more players.

CoreSite chose to build in New Jersey for the same reasons customers are going to New Jersey: lower rates. There is also more opportunity to build a sustainable facility and fewer chances of being affected by natural disasters, Ray said.

The latency caused by being away from Manhattan is satisfactory for 90% of workloads, he adds. “You get everything you want at a much lower price, and it’s safer.”

Lower cost does not mean a provider which chooses Jersey over Manhattan also has to accept a lower margin.

Data center services cost less in Jersey but the cost to operate is much lower as well. A big chunk of the margin in Manhattan goes to the landlords, and Ray does not see much of a difference between the two locations margin-wise.

As of the end of 2013 CoreSite had sold about 40% of its 20,000 sq ft in Piscataway and had 13 carriers in the facility and counting. It is a fairly standard mix of customers, Ray said, including network providers, cloud providers and enterprises.

As of today, the company has no plans to expand in Manhattan.

Manhattan’s tight market
Much of Manhattan’s outgoing demand has been replaced by newcomer customers, many of them being media content providers, 451’s Levy said.

Downtown data center operators are seeing a lot of foreign content providers, for instance – coming from Europe and Asia – that want to deliver content to expats from their countries living in the US. A Pakistani TV station, for example, can put a network PoP (Point of Presence) in a downtown facility and broadcast to Pakistani immigrants.

There are also numerous smaller web-based businesses using retail colocation services in Manhattan.

One downtown colocation provider, Peer1, has been operating its data center at well over 90% capacity for at least seven years. Michael Mazzei, Peer1’s New York data center manager, says most of these customers are web companies.

Tightness of supply in Manhattan has been seen since Google bought the massive carrier hotel at 111 8th Avenue in 2010. Industry sources claim the internet company has not been letting data center operators in the building renew leases, forcing them to move out.

Wholesale space is in short supply on the island too. Only two providers have wholesale-size chunks of space available: Sabey and DataGryd. Sabey commissioned the first phase of its gigantic building by the Brooklyn bridge in October 2013 and has already signed five tenants. The New York Genome Center, B&H Photo, Datagram and AMS-IX (Amsterdam Internet Exchange) have taken space on the sixth floor, and Windstream is building out a data center on the 13th floor.

Daniel Meltzer, VP of sales and leasing at Sabey, said he expects to have three more deals signed by the end of first quarter. He expects to continue seeing demand from financial services and healthcare companies, but also from what he called “the startup community”. Once a startup grows beyond the point of being able to run completely in the Cloud, they will start shopping for data center space, he said.

DataGryd, the other provider with wholesale space to sell in Manhattan, recently signed a lease with Telx. Once the tenant moves in – it is expected to take possession of its 90,000 sq ft data center in May – it may ease the supply-demand tightness on the retail side of things. Peter Feldman, DataGryd CEO, said there is another 12MW of power available right away on top of Telx’s requirement. The company has upgraded electrical infrastructure on the floors it occupies at 60 Hudson Street, one of New York’s most important carrier hotels, and plans to install a natural gas-fueled cogeneration plant there.

Despite man-made and natural disasters, New York continues to be the place everybody wants to be. Its business, network and cultural hub status remains unshaken, and its data center market is as tight and expensive as its notorious housing market.

You can read more on the New York market in FOCUS 34, out now. Read the digital edition here or download the iPad edition at DCDFocus. More on the New York data center industry will be discussed today at DatacenterDynamics New York City, at the Marriott Marquis.