My partner and I recently worked with a client who wanted to downsize and relocate their offices to a location more conducive to recruiting. Their current office lease expired in 18 months. Unfortunately, they were forced to extend their existing lease (on too much space) for two additional years because 18 months was not sufficient lead time for them to resolve the “cloud question” – should they move to cloud computing and if so, when? – a question that seems to be front of mind for many of our clients these days.
While the cloud question focuses on how to approach information technology use and storage, it has real estate implications as well. Because I am admittedly an “end user”, I asked my friend David Powell, Vice President of Managed Services at Logic Monitor, to enlighten me on the subject.
Powell explained that the “cloud” refers to the delivery of hosted services over the internet, enabling companies to consume computer resources (such as storage) like a utility, rather than having to build and maintain server infrastructure in house.
Traditionally, most companies and service firms have housed their own data and applications on servers within their office spaces. These server rooms can take up substantial and (in some markets) high rent office space. And, because these systems generate a lot of heat and run 24/7/365, additional HVAC units are typically added to server rooms and the business pays the added electricity costs associated with the extra hours and capacity.
If the business’ operations are mission critical such that no power outages can be tolerated, the business must purchase a generator for backup power to the servers and, as their business and computing requirements grow, additional capacity in the form of new servers is added. When computer rooms are expanded, more HVAC is added and the capital investments continue.
Cloud computing is much simpler from a real estate perspective. The only infrastructure required is a switch, a firewall and a wireless controller. Depending on the size of the business, usually these components will fit into a wall mounted cabinet in a telecommunications closet. This means the business saves the rent associated with a server room, the server costs, and the operating costs of additional HVAC and electrical power.
With cloud computing, if the business moves, there are no servers to shut down, relocate and re-install. The business simply moves its switch or, to ensure absolutely no service interruption during the move, purchases a new switch for the new location and repurposes the old switch elsewhere.
What is the draw of the cloud? According to Powell, cost savings in general are not usually the motivator because on a dollar for dollar basis, cloud storage is equal to or more expensive than owning and operating servers. Real estate savings are a benefit but they are not usually of a magnitude to be the catalyst for moving to the cloud. Rather, the cloud ensures reliability of service. For instance, if there is a power outage at the office, the business’ employees are able to work anywhere they can find internet service. Also, the cloud offers just in time access to additional storage and computing capacity as the business grows. Finally, for some businesses, the cloud is attractive because a capital expense becomes an operating expense.
Given these benefits, why does it take businesses so long to decide if and when to move to the cloud? First, many businesses are reluctant to essentially “throw away” the money they have invested in servers. Second, privacy and security are big concerns, especially to businesses in the healthcare and legal industries where there are strict regulations and serious liability burdens for data breaches. These industries are still working out guidelines for cloud storage.
A third major hurdle for businesses contemplating going to the cloud is that the cloud is a consumption model. Powell says that this means that businesses pay for the storage they use, so businesses that do not have guidelines for storage capacity can end up paying a premium for extra capacity to house the emails of the law partner who hasn’t deleted an email in ten years or the iTunes library of an employee who insists on backing his/her entire music collection to the cloud. Many businesses realize there are going to be cultural hurdles to clear in adopting protocols for file storage and file deletion.
As real estate advisors, it is important for us to have a continuing dialogue with our clients throughout their lease terms so that we can help them understand the real estate effect of their business decisions. This includes helping them understand the effect of moving to the cloud and the timeline required to do so as it relates to moving an office.
