after having already invested $55
million in capital improvements
to the property. That development left the partners to mull the
future of their enterprise.
“We thought we could manage our properties better than our
tenants could,” Fateh says. “We
also believed that this was essentially a real estate business. We
decided we could either get out of
the sector or double-down.”
Fateh and du Pont began to
jettison any assets that they did
not both own and manage. They
started buying up distressed data
center properties around the
country. They also started securing deals with major companies
like Microsoft to house their
computer servers and processing
hardware.
In 2007, Fateh and du Pont
opted to consolidate their assets
and create a new public company. Financing was becoming
increasingly difficult to come by
as a private company, according to Fateh, one of the reasons
prompting the transition.
A Foreign Language
DuPont Fabros tends to be
lumped into the REIT industry’s
“industrial” subsector along with
companies that own, operate
and develop distribution and
warehousing facilities. However,
Fateh is quick to point out that
his company is quite different
from the typical industrial REIT.
“The space we operate in is certainly a new real estate asset class,”
Fateh says. “It’s here to stay.”
As such, discussing the company’s business model requires
speaking a language far different
from the typical real estate company. One of DuPont Fabros’
main metrics is “critical load,”
a facility’s total power capacity
available to tenants to run
their computer servers. For in-
stance, one of DuPont Fabros’
facilities in Ashburn provides
tenants with as much as 36. 4
megawatts of electricity, which
is the property’s critical load.
Likewise, DuPont deals in
“raised square footage,” the
amount of space companies
require to operate their servers.
The “raised” part refers to the
fact that floors in the company’s
facilities must be lifted to accommodate the buildings’ infrastructure and cooling systems.
Even though DuPont Fabros
may be in a unique business
for a REIT, that doesn’t mean
the company isn’t subject to
the same hurdles as the rest of
the industry. The rocky credit
environment has provided the
greatest challenge for DuPont
Fabros at the moment, and the
lending slowdown has forced
the company to temporarily
suspend work on its development projects. Like many other
businesses, the lack of available
financing due to the credit crisis has added to the company’s
challenges.
DuPont Fabros’ niche in the
REIT world also creates some
hurdles for lenders, according
to Fateh. He says some banks
are on a learning curve with
data center REITs, because they
focus on metrics such as rent
and cost per square foot, as opposed to available power.
A New Deal
When he surveys the industrial
landscape, Fateh sees plenty
of opportunities for U.S. busi-
ness interests to improve their
competitiveness through the en-
hancement of information tech-
nology. For example, he points
to statistics showing that 80 per-
cent of the South Korean popu-
lation has access to high-speed
Internet service, approximately
twice the level in the U.S.
“Imagine what else could be
developed if 80 percent of the
United States had high-speed
Internet access,” Fateh says.
In that sense, he says he is
in favor of a modern-day New
Deal-like program to improve
the country’s technology infrastructure, which has been
advocated by President Barack
Obama.
“Just like the government
once helped with the highway
system, now it needs to help
with the Internet infrastructure,” said Fateh. “We’re an
information society, but our
Internet infrastructure is very
much lagging behind.”
Of course, DuPont Fabros
could stand to gain from an
increase in government spending in areas such as telecommunications, technology and
the modernization of health
care records management. More
computer processing means more
demand for data centers, after all.
Whether the government decides
to fund additional development
of the U.S. information superhighway, the growing demand
for data centers should hold up,
according to Fateh. He notes
that DuPont Fabros’ services are
“mission-critical” to its tenants,
meaning they are vital to the tenants’ ability to conduct their businesses. That’s a strong statement
about DuPont’s future, he says.
“We’re a real estate company,
but we’re growing at the speed
of the Internet,” Fateh says.
“Every year there are new applications for the Internet that give
rise to more demand for high
quality data center space. That
sounds like a good long-term
business story to me.” F
Allen Kenney is Portfolio’s Staff
Writer.
