Turnkey vs. Powered Shell Leasing Strategy
The evolution of data center leasing strategies has significantly influenced the dynamics between operators and tenants, ultimately driving industry growth. Historically, the powered shell leasing structure was the dominant model, resembling a triple-net (“NNN”) industrial lease. However, the industry has increasingly shifted toward turnkey leasing structures, redefining operational responsibilities, capital expenditures, and tenant relationships. Understanding the differences between these two strategies is crucial for stakeholders navigating the evolving data center landscape.
Comparing Turnkey and Powered Shell Leasing Strategies
In this article, we will analyze the two primary data center leasing strategies: Turnkey Leasing Strategy, where the operator owns, constructs, and maintains the data center infrastructure, and Powered Shell Leasing Strategy, which shifts operational responsibilities to tenants, offering a more hands-off approach for operators.
Both leasing models play a significant role in the data center industry, with each catering to different business needs. Several key factors influence the choice between them:
- Cost and Investment Considerations
Turnkey data centers require a higher upfront investment from operators. As a result, they provide tenants with a ready-to-use infrastructure, simplifying deployment. Powered Shell data centers offer lower initial costs for operators and require tenants to invest in critical infrastructure, giving them greater control over buildout of the space.
- Operational Control and Expertise
The cost and expertise required to build and operate turnkey data centers create significant barriers to entry. Unlike their powered shell counterparts, which primarily require real estate investment, turnkey facilities require substantial infrastructure investments and specialized operational capabilities, both made by the lessor. Operators with a proven track record in managing sophisticated data centers command a premium in the market.
- Scalability and Expansion
Turnkey leasing benefits tenants without the in-house capabilities to design and build out data center infrastructure and server space. Large tenants can partner with operators to provide ready-to-use space, complementing their own efforts. This allows them to scale quickly using pre-built infrastructure. This model is particularly beneficial for companies looking to expand quickly. Powered shell leasing, while requiring more time for setup, provides greater flexibility for organizations with unique operational requirements.
- Risk and Responsibility Allocation
Turnkey leasing shifts operational risks to the operator, ensuring that power and cooling redundancies are managed according to service-level agreements. Powered shell leasing places these responsibilities on the tenant, allowing them to optimize risk management strategies according to their specific needs. Typically, the added cost and liability taken on by the operator under a turnkey lease structure are appropriately risk-adjusted in the form of a higher rental rate that yields a higher return.
- Market Demand and Tenant Preferences
Both leasing models continue to attract different types of tenants. Companies prioritizing convenience and reliability often opt for turnkey solutions, while those seeking more control and long-term cost efficiencies may prefer powered shell spaces.