The data center marketplace remains a dynamic place, with lots of resources being poured into the infrastructure that powers today’s internet and cloud applications. One provider that has been on the rise lately is Element Critical, which bought Skybox in Houston last year and is expanding rapidly in Texas, Virginia, Chicago, and California. With us today to talk about Element Critical’s plans in Texas and beyond is COO Shane Menking. Shane joined Element Critical last year, moving over from Data Foundry after its sale to Switch. We actually had Shane here for a spotlight way back in 2010.
TR: What are the origins of Element Critical, and how did you get involved?
SM: Ken Parent, our CEO and co-founder, has a long history first in commercial real estate and ultimately in data center sector working with Safanad and Industry Capital. They started Element Critical out in the Sunnyvale area with the general initial thesis of looking to take older, legacy data centers and upgrading them by modernizing the electrical and mechanical infrastructure. That’s definitely a harder approach within the broader data center sector, but the company used it to acquire operations in Virginia and in Chicago and to expand their retail colocation data center operations and increase their customer base. After advancing their reputation, another capital partner came in play, enabling the company to expand its capital base and move into Texas. And what Element Critical is doing in Texas is more aligned with the direction the company is heading toward. They bought a large existing operation from Skybox — a 130,000 square foot data center after finishing two new data halls – which is a much more modern, purpose-built facility. Then they acquired the site here in Austin from vXchnge, which was more of an older school data center, but at the same time had already been upgraded
Shane notes that he was introduced to Element Critical during the sale of Texas based Data Foundry. As the President and CFO of Data Foundry at the time, Element Critical was one of the top candidates to pursue the purchase of Data Foundry. I got to know Ken and the group here and joined Element Critical in November of 2021.
TR: What opportunity drew you to Element Critical?
SM: I saw how they were trying to find and develop purpose-built, modern, 100k+ square foot buildings that were focused on servicing the enterprise segment. And I believe at this time in the industry, the race to build hyperscale facilities has reduced customizable service to this customer segment – at the same time that many businesses are beginning to outsource in-house data centers and distribute their IT stack. Element Critical is not a hyper-scale-focused organization. It is an enterprise-class data center, carrier-neutral, with a customer-first focus to deliver deployment flexibility, collaborative solutioning and customizable space for customers. Customers need space to grow and on-ramps to the cloud. They need more on-site support in terms of smart hands. They need more integration with partners and other solutions. And Element Critical has the capital partners to go execute on that. The bigger focus for our industry is to go after the hyperscale solution, and I believe that leaves an opening for the enterprise-level data center. Our focus is building out our team and then expanding further.
TR: What does Element Critical’s infrastructure look like today?
SM: We have a site in Virginia which is built for data suites. We have two data centers in Chicago, both of which are former SunGard facilities of about 50,000+ square feet. They are traditional types of facilities with a big data hall built out to service a mix of retail with a few small wholesale customers. And we have our original site in Sunnyvale, which is a 130,000 square foot facility that has pretty much been sold out. We are in the process of building out a large expansion in Sunnyvale. In Houston, the site we have had four data halls fully built out, and we are completing data halls 5 and 6 – each about 12,000 square feet. In Austin, we have 2 data halls fully populated, and a third data hall with 10,000-15,000 square feet of space including the galleries, and a fourth data hall where we plan to expand. And we are actively looking at sites throughout the US for future expansion.
TR: Will those expansion projects be via acquisition, refit of existing structures, or greenfield construction?
SM: All of the above. To the extent that we can find a good operating platform that allows us to establish a presence and gain operating scale, that can be a very ideal way to move in. But my background and that of my team is much more oriented toward the ground up sort of approach, whether we do that through land acquisition, through powered-shell opportunities where we can go in with a purpose-built approach. We will follow parallel paths.
TR: Are there any international markets that might be of interest to you?
SM: That’s further down the road for us, we’re pretty US-focused right now. However, we have definitely peeked into Canada, such as Montreal and Toronto.
TR: What is the M&A environment like right now for the kinds of assets you are looking at?
SM: Highly competitive, but that cuts both ways. While prices are high, that brings a lot of assets to the market. I think what helps us out is that when it is this competitive, you have a lot of big capital that doesn’t necessarily have a platform. While they can do massive recapitalizations and take over whole platforms, it’s somewhat harder for them to be capable of buying smaller things. So, you end up with smaller groups who are capable, experienced operators. The quality of the assets that are available is much greater than they were even 3-4 years ago, because high-quality assets can see the level of return. For us, it still works out again because we’ve got a bigger play here. We want to be able to establish and grow a platform. We have new capital ready to be deployed, whereas a lot of these assets are kind of at the end of the capital that was previously deployed. They need to restart that capital and are sitting on a big built-in gain. And there’s a reason why valuations are high. We have long-term, stable customers and predictable, steady rental rates. There are not a lot of real estate-centric, technology-centric platforms that have that kind of financials. People are still gobbling up data center space almost as fast as you can build it.
TR: What types of enterprise verticals are you seeing the most traction with? Where are you focusing your efforts?
SM: That’s the beauty of the enterprise. Whether it’s a museum or a big Fortune 500 company, everybody’s running the same stuff at the IT side. If you walk into a deployment and see 20 cabinets, you can’t tell the difference between a brick-and-mortar company and a technology-focused company. And the hybrid need is definitely there. Enterprises want to run certain workflows in the cloud and storage needs are on the rise. But they still want to control certain aspects or applications of their business in reliable and accessible facilities. I think, for us, it’s about the solution. We can handle 1-, 20-, and 50-cabinet deployments, and we can handle 2-megawatt deployments. Their needs go up and down, and they need to have a data center able to accommodate that. The need of the customer is really independent of the industry they are in. Certainly, there’s always a good mix of technology companies in tenancy because they’re just going to have a more consistent data center need. But we do not focus on any very specific sector by any means.
TR: Beyond the expansion projects you are already working on, what do you have planned for the future? What projects are on the drawing board today?
SM: We need to plan the Houston 2 data center, which will actually be a ground-up project. We have land right now that is contiguous with the current facility already. In Austin, we’ve got a data hall that’s ready to go, but we’re planning data hall 4 now. Beyond that, our goal is to have at least a couple of acquisitions done by the end of the year.
TR: How does Element Critical approach the supply of power to its footprint?
SM: We have established a partnership with NextEra Energy. We are leveraging them on all types of fronts here in Texas. In Houston, we were able to do a large 10-megawatt PPA with them for a wind platform they were developing. That has allowed us to get a full carbon offset for any power utilization that we’re doing here in Texas at least at the grid level, and we’re able to offer that profile to any customer. We were able to do it in such a way that our customers won’t pay more for green energy. It’s the same power you’re buying, just now with a much better carbon footprint. We are looking to do solar projects here in Austin as well as in Sunnyvale. In California, the power prices are quite a lot more than they are in Texas, so they’re actually working with a partner to look at some alternative energy solutions. We might even do a little bit of a combined heating and power solution. While that’s not moving to 100% green, along with the solar piece it would allow us to achieve a lower carbon footprint and reduce our power profile. As we’re doing new deployments, we’re very much focused on the carbon aspect. We’re looking to take advantage of other programs through the federal side that are helping subsidize those pieces.
TR: What is driving the evolution of the power ecosystem for data centers?
SM: One of the most misunderstood things about large data centers is that everybody just thinks we’re the power problem because we talk in terms of large amounts of power. But the fact of the matter is that technology requires processing and processing requires power. You can either do this in a whole bunch of small data centers that are all highly inefficient in handling corporate loads, or you can aggregate it and do it more efficiently.
Alternative energy solutions like solar and wind are getting cheaper, and so the financial incentive is there for us to invest in it. And concurrently, more and more of our customers are requiring it as part of their ESG requirements under their corporate directives. And if everyone is working well together, we’re going to find out how to be efficient and lower our costs for the benefit of our customers. To the extent that we can leverage 100% green solutions, that’s the long-term path. The further we’re ahead of it, the better.
TR: What’s potential hurdles do you see ahead for Element Critical’s expansion plans?
SM: Hiring and the supply chain. In order to continue to grow and scale the business, we’re going to have be able to attract the right people. There’s so much going on in our sector, and it is competitive going after the free agents that do hit the market. We hope we’re nearing the end of COVID, but the problems of the supply chain are for real. What used to take 20 weeks now takes 50. That’s true even for basic equipment that used to be very predictable and easy to find. We need to be able to hit timelines to be able to continue to do this investment, and we are not alone. I don’t think this is an issue that’s going to solve itself for a while.
TR: Thank you for talking with Telecom Ramblings!
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