Los Angeles Suburbs Are Data Center Developers' Newest Frontier
Southern California has largely remained on the sidelines during the explosion of data centers across the country in the last few years despite a favorable location and demographics. Aside from the 2016 expansion of storage capability at downtown Los Angeles’ One Wilshire data center, it is a niche sector of CRE that hasn’t made many inroads in the area.
That is changing as data center operators take on a “grow at all costs” mentality that makes the challenges to development in California more worthwhile. One Wilshire is LA’s poster child for data centers, but smaller surrounding cities are poised to pull up a seat at the table.
“We're seeing a lot of cities being more open to data centers when they traditionally weren't because they were focused on office or industrial,” JLL Managing Director Darren Eades said. “As the dynamics change, these cities need to be more open to data center development because it may be the highest and best use at the time, and also the biggest value creation for the city.”
Cities like Vernon, Monterey Park and El Segundo are among those with projects under development now or with interest in future projects.
Demand for data centers across the globe is growing as artificial intelligence becomes integrated into more applications and cloud storage use grows. Southern California, with its huge population and connectivity to Asia via undersea fiber optic cables, seems like an obvious choice for data center construction. But its infill market, pricey power and expensive land costs have long made it challenging to find sites for data centers.
In the first half of this year, data center vacancy in the Los Angeles market was just over 4%, according to a JLL report on the sector.
Perhaps the biggest challenge for data center development is finding enough power, which can take up to five years to build out if it isn’t already in place. Newly upgraded electric facilities in Monterey Park helped draw data center developers.
One data center coming to 1977 Saturn St. in Monterey Park is a 218K SF, 33-megawatt facility on a nearly 16-acre site previously occupied by an office building and its surrounding parking lot, city records show.
The Saturn site is five minutes from the Mesa substation, which Southern California Edison upgraded within the last few years to roughly double its capacity, and it is served by another similarly close substation, according to an environmental analysis.
The office property at the Saturn site was demolished to clear the way for the data center. Property records indicate the last recorded sale of the property was to Revantage, a Blackstone portfolio company. Blackstone has invested heavily in data centers around the world, calling the infrastructure “a generational investment opportunity.”
The official project applicant for the data center is Strategic Capital, an alternative investment manager that works heavily in data center real estate.
Dallas-based Prime Data Centers targeted Vernon for a similar reason when it sought a location for a 243K SF data center. The new facility opened in November.
Vernon Public Utilities’ ability to confirm power availability early in the site selection process, as well as the development of an on-site substation to serve the facility, played a large part in the site’s attractiveness, Prime Data Centers Senior Vice President of Marketing Mark Jobson told Bisnow.
The three-story center is 100% leased by two AI companies and will deliver 33 megawatts when operating at full capacity, according to a release from Prime. The market’s reaction to the project was swift.
“They leased that up before it was out of the ground,” Eades said.
A representative from the city of Vernon said discussions are being held with other operators for additional projects in the city. In September, data center developer CoreSite bought a 7-acre site in Vernon for $61.5M.
Vernon’s government is “data center-friendly,” Jobson said in an email, an increasingly important characteristic as localities across the country start to think twice about data centers as neighbors.
Data centers’ energy and water use have played a role in that pushback, and in Southern California, where water is increasingly scarce, its use receives extra scrutiny. Developers are implementing solutions to allow them to build in a state with stringent environmental regulations.
Prime said its new Vernon center uses a “closed-loop” cooling system that does “not require as much water volume as a data center with a more traditional cooling approach,” according to a representative. The system translates into nearly zero-water-use efficiency, meaning negligible water is used in the cooling process.
Generally speaking, Eades is seeing more cities that had previously been wary of data centers easing up. Sometimes, those cities are ones that had been big on office or industrial or other property types that are seeing shifting demand, and cities seem to be adjusting out of necessity, he said.
El Segundo is another smaller city finding itself on the radar of data centers. With its proximity to the underground fiber that connects the West Coast to the undersea cable linking to Asia, the location has been in the sights of many data center operators and is already home to three colocation facilities from top names in the industry, including Equinix and Digital Realty.
The data centers going up in Southern California aren't the 800-plus-acre projects that usually raise community red flags in hot spots like Northern Virginia. That helps the projects be more palatable to residents and local governments.
“If we had a data center that was, you know, mining crypto — that's intensely noisy from coolant systems — that may be an issue,” El Segundo Mayor Pro Tem Chris Pimentel said.
That would be very different from the data centers that are in the city now. These users are also lower-profile than some of the industries such as aerospace that have flourished over the years in El Segundo, with lower traffic and fewer everyday impacts on residents.
“When you have 50,000 people working on airplanes, that's a lot different than 15 people running a data center,” Pimentel said.
There are a few spots in town, like outdated industrial spaces or vacant dirt, that Pimentel said would probably make great data center locations, but he didn't know of any applications pending with the city.
Finding sites that tick all the boxes continues to be a challenge for brokers and developers alike, but they are motivated.
A KPMG study released this month indicates tech tenants are in such dire need of data centers that they and developers of these facilities are willing to pay higher prices for power if it means getting the electricity they need to operate.
The demand is so great and the lack of top-notch product is so pronounced that Eades said he envisions a long-term imbalance in which data centers can’t get built fast enough for years to come in LA.
“I don't think we’ll ever be able to catch up,” he said. “There's so much pent-up demand in the marketplace.”