One of the hottest businesses in Israel right now is building and operating server farms – giant installations located deep underground to store and process data securely and at low temperatures. Hundreds of thousands of square meters of them are being developed and the segment has attracted a host of new entrants.
Some of them come from the world of computers and telecommunications, such as MedOne, Binat and Global Data Centers. Others come from the real estate industry, since data centers are a kind of income-generating real estate asset. Thus, Azrieli Group has entered the market as have Adgar and Melisron, with plans to develop a Haifa facility and part of an international network of data centers.
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The latest contender in the crowded field comes from Serverfarm, a U.S. company led by Israeli Avner Papouchado, scion of the family that started Red Sea Hotels in Israel in the 1970s and later expanded to hotels and real estate in the U.S. and Europe. Today, PPHE Hotel Group is traded on the London Stock Exchange and operates 37 hotels and resorts in operation of approximately 8,800 rooms.
In August, Serverfarm launched a 50-50 joint venture with the Israel Infrastructure Fund called SFRDC to develop data centers, the first two of which will be built at a cost of 800 million shekels (about $250 million) each of 12,000 square meters. Building them will take about 20 months.
Papouchado knows he is entering a crowded field but is confident that it will turn out to be less crowded than it appears to be. A lot of the facilities that are being promised won’t come to fruition, for example, the Shonfeld Data Services Center facility being developed by Yossi Shonfeld in Modi’in. It has Microsoft as a major customer and was supposed to be up and running a long time ago but its startup date keeps getting postponed.
Papouchado already has an established on-time track record. “I was late for a customer once, and that was in April because of the coronavirus, but to my good fortune he was even later,” he said.
The industry is especially challenging for the players because the biggest potential customers for the facilities are the world’s technology giants, the likes of Amazon, Google and Microsoft. Each has strict standards for its data centers, but each company’s standard is different from the others.
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“Building a data center is like building a warehouse, and we’ve already learned a lot. Data centers are about efficiency and nuance. I find that it resembles aviation a lot,” said Papouchado, who has a pilot’s license. “Aviation is a business where you engage in critical operations with high risk and factors like wind speed and crowded airports, but safety and efficiency are incredible. Once airplanes flying over oceans has four engineers; today, you can do it with two and a low risk of failure. The Israeli data center industry, probably because of its military background, is still ‘flying’ with four engines, or even eight.”
Papouchado hadn’t set out to be in either real estate or data, but his family’s business pushed him in that direction.
“When I was young I worked at the hotels during vacations. I cleaned kitchens, did night shifts at reception, like everyone in the family. But I was always playing guitar, and that’s what I really wanted to do,” he recalled.
Music led him to the New School in New York. “But, at the same time I took a few courses at New York University in economics and discovered that I had a facility with numbers,” he said “I love playing, but loved less playing in pubs. I discovered that I have the ability to identify business opportunities.”
Joins the business
He joined the business world just as his family was expanding to the United States in 1992. They made a lot of money buying apartments during the 1992 real estate crisis, using the profits from selling them five years later to develop hotels in Europe. Papouchado himself decided to stay in New York and continue to work in residential and commercial real estate.
He got into server farms after he was approached by what he then regarded as a strange kind of tenant for one of his office buildings.
“He set up what was then still called a ‘communications center’ and I looked at it with quite a bit of interest. I said, ‘This could be something big, this thing, internet.’ We took another building nearby and developed our first data center. I was lucky because we rented the site to AT&T. Then we rented more buildings to AT&T around the U.S.,” he said.
Those were the days before the dot.com bubble burst, and everything that was redolent of the internet sold at insane prices. “I remember a time when we had a property in Dallas that was renting for $100 a square meter,” he said. “Suddenly, this Wall Street company comes and was willing to pay $200 to use it as a data center and I said to myself the world’s gone nuts.”
As the digital economy expanded, however, locating masses of servers in the basement of a building was no longer sufficient. Companies began developing data centers in commercial space or building their own facilities. Only around 2007 did it first become obvious to them they should be renting floor space in dedicated facilities.
“Real estate companies were coming and saying, ‘We’ll build the envelope – we’ll take commercial structures and put in cooling systems, electricity and security or other needs and we’ll call them data centers,” said Papouchado. “Customers loved it because it saved them capital investments in favor of operating costs. But the truth was it’s hard to explain this to people outside of high-tech and it’s even harder to finance it. Bank Hapoalim agreed to finance us because of our reputation.”
He spun off Serverfarm into a separate company in 2008. Today it has seven centers – five in the U.S., one in Canada and one in Europe. “We’re now in advanced negotiations to buy two facilities in North America and erect two more in Israel,” he said. “This is an infant of the real estate industry, in contrast to offices, malls or hotels. Data centers are still in the development stage,” he said
Papouchado lives in California, and has four daughters. “Three of them are doing music better than I ever did,” he said. “My advice to them was to go into something creative, because if you don’t, a computer will someday replace you.”
He comes to Israel usually twice a year. “It depends on business Now, I’ll be coming a lot more often.”