Digital Realty: We'll Deliver on Our Power Commitments in Northern Virginia

Digital Realty says it expects to deliver on its existing customer commitments for up to 80 megawatts of power in Northern Virginia and is working with local utility Dominion Energy to assess prospects for future projects in a power-constrained section of Loudoun County.

In his first earnings call as CEO, Digital Realty's Andrew Power said customers continue to seek space in Northern Virginia, and he expects demand will soon exceed supply in the region, leading to higher prices for data center capacity.

The Digital Realty team also said they expect that the buzz around artificial intelligence will soon translate into customer demand for more high-density data center space. On the strategy front, the company said it will soon introduce more services to help customers implement hybrid IT deployments, including security offerings and bare metal servers.

On the financial front, the company reported for funds from operation (FFO) of $1.654 per share, shy of Wall Street consensus projections of $1.68. Shares of Digital Realty were off nearly 4 percent in early trading Friday on the New York Stock Exchange.      

Short-Term Outlook for Ashburn

Power was named CEO in December, succeeding long-time CEO William Stein. Digital Realty is the largest player in Northern Virginia, which has become the most important location for deploying cloud computing infrastructure. In July, Dominion Power began telling data center companies that power delivery for new buildings will be delayed, perhaps until the utility expands its transmission infrastructure in 2026. 

"We have continued to work constructively with the power provider in the (Northern Virginia) market and we are now pleased to be in a position to say that we fully expect to be able to deliver on the commitments that we have made to our customers within our development pipeline," said Power. "So while conditions are far from' business as usual' in this market, we are encouraged by the progress made over the last 90 days and remain hopeful that we will continue to be able to work with the local utility provider to support the growing needs of our mutual customers."

Power  acknowledged that power delivery in Ashburn "is going to be restrained greatly for several years" but said Digital Realty is now confident it can deliver on about 80 megawatts of pending capacity. "

"We are good to go. We will be able to deliver for those customers, and there is no concerns about the power being available," said Power. "What comes next is still to be determined. But given our experience in region, our critical and strategic landholdings, our breadth of infrastructure and our relationships, we will be able to be creative in terms of bringing on some incremental power deliveries in this bottleneck period."

Pricing Power Ahead

Although power for new construction is uncertain, that doesn't mean Digital Realty will be out of capacity in Loudoun County. "A large portion of our expected churn happens to be in Ashburn, which is a blessing given the ability to remarket that space at higher and better uses," said Power. "It is greatly improving the pricing dynamic to a much more healthier environment for Digital and other providers in the market."

He added  that the power constraints near Ashburn have not slowed customer interest. "Folks are still clamoring for available," said Power. "We have not seen a shift on this market.

"Demand is remaining quite firm across the board for both enterprise and hyperscale business," he added. "It's outpacing supply and I think that disconnect in many markets is going to continue for some time. You have power shortages, municipalities and permitting, environmental impact ... There is a whole host of reasons why it’s a lot harder today to bring on capacity efficiently and effectively."

More Services for Colocation Customers

Much of the pricing improvement in recent quarters has been in the colocation segment, in which Digital Realty sells space in racks and cages. It also offers wholesale space, in which larger customers purchase capacity by the data hall or building. 

The colocation business is a growing strategic priority for Digital Realty, which has boosted its interconnection offerings with Service Fabric, a platform to enable virtual connections between customers.     

"ServiceFabric is something that we have talked about for some time now," said Chris Sharp, Chief Technology Officer. "It facilitates an easier process of deployment for our customers."

Sharp also highlighted Wednesday's news that  announcement that Digital Realty now offers the AWS Direct Connect service on its Ashburn campuses. Digital Realty and AWS both have huge campuses in Ashburn, but Sharp the new service provides a more streamlined cloud connectivity offering.

"That’s one of the largest cloud operators aligning to one of the largest markets for Digital Realty today," said Sharp. "That’s 25 data centers with 500-plus megawatts. We are investing in our customers."

Sharp hinted at more to come. "You will see a further set of press releases coming out with bare metal and security. It’s the full culmination of what enterprises are looking to do on that hybrid IT enablement, which is core to a broad swath of customers."

Generative AI Will Boost Demand

Power also indicated that the excitement around new AI capabilities like ChatGPT - which is now being built into the Microsoft Bing search engine and Azure Cloud - will be a significant trend for the company.

 "We may now be on the precipice of the next wave of demand that will drive our sector for the next decade." said Power. "The launch of ChatGPT 3.0 is a seemingly important milestone. Microsoft’s incorporation of ChatGPT into Bing last week, Google is coming with the launch of Bard, and there's also Baidu’s Ernie Bot. All suggest that we are on the forefront of the broader introduction of AI, which could spawn a wave of adoption and a proliferation of use cases and ultimately drive demand for compute infrastructure at scale."