Denver Has Struggled To Draw Big Data Center Campuses, But Signs Indicate That May Be Changing

Hyperscale data center developers have steered clear of Colorado, but there is emerging evidence that a wave of large-scale data center development lies ahead.  

On paper, Denver and submarkets like Colorado Springs and Fort Collins seem like places data center developers should be flocking to, but the hyperscale builders that lease to big tech companies have stayed away. While the past two years have seen cities like Atlanta, Phoenix and even nearby Salt Lake City emerge as digital infrastructure hubs led by massive hyperscale campuses, Colorado has remained a relative backwater.

Yet industry insiders, speaking at Bisnow’s DICE Denver event at the Gaylord Rockies Resort and Convention Center, say that shifting market dynamics have developers and investors giving the region a closer look.

Blackstone-backed QTS Realty Trust earlier this year hinted at plans for a major new data center campus in the Denver area. And this month, the power crisis in Northern Virginia's industry-leading data center market has led developers to begin exploring other markets, and insiders say several hyperscale builders have been calling around about Denver. 

“I see more development happening,” said Regis Malloy, chief sales officer at colocation provider Element Critical, speaking at the event. “Developers look for certain attributes in markets, and we should be well-positioned in that regard. And now that we see activity from hyperscalers, it’s very encouraging and I’m optimistic it will continue to grow.”

That Denver and its submarkets have not already emerged as primary digital infrastructure hubs as many had predicted is a source of disappointment for industry stakeholders in the region.

The area checks almost all the boxes for developers when it comes to data center site selection. Buildable land and power are cheap and readily available at a time when primary markets like Northern Virginia and Silicon Valley are experiencing unprecedented constraints on both. Denver sits at the intersection of major transnational telecommunications cable routes, giving it excellent connectivity. Large swaths of Colorado have little natural disaster risk, plus they have growing professional populations and are home to industries like high-tech manufacturing and aerospace that have significant IT infrastructure needs. 

While Colorado’s data center ecosystem has experienced growth, new capacity has been almost entirely smaller multitenant build-outs. The area has not seen the kind of single-tenant campuses — almost always occupied by tech giants like Amazon Web Services, Microsoft and Google — that have brought hundreds of megawatts of capacity at a time to emerging markets as close as neighboring Utah. 

Denver’s 86.3 megawatts of total capacity put it in the middle of the secondary market pack, with less than a third of the inventory available in an emerging market like Phoenix, according to figures released this month by CBRE. And the market is falling farther behind: Denver currently has just 10 megawatts of data center space under construction, while Phoenix and Atlanta have a combined 266 megawatts underway. 

“It frustrates me sometimes,” Mallow said. “You look at the activity in Phoenix and how well it has done, and Salt Lake City now has a very vibrant data center industry. We share a lot of the same characteristics of those markets, but we're also lacking others.” 

So why aren’t hyperscalers coming to Colorado? Panelists at DICE Denver pointed first to a lack of state-level tax incentives. Most U.S. states now offer some kind of tax break to encourage data center development, generally in the form of reduced sales or personal property taxes or rapid depreciation schedules on servers and other data center equipment. What little hyperscale development is planned for Colorado, experts say, is happening in the city of Aurora, which partnered with a local utility to offer discounted power costs to developers.  

“Incentives are important, and this should be an area of focus,” said Thomas Bailey, senior director for corporate economic development at Colorado utility Xcel Energy. “This is one decision by the state of Colorado that would make Denver a Tier 1 market probably within the next two years.”

Other panelists pointed to the fact that tech giants and other as-a-service providers like to be clustered together to reduce latency and the costs associated with connecting to each other — providing a disincentive to being the first to make a large-scale deployment in a new geographic market.

Additionally, in a sector where speed to market is everything, developers are hesitant to launch hyperscale projects in locations where the municipality and local utility are inexperienced with build-outs on that scale. They want to be certain that local approval and permitting processes or the local utility’s ability to deliver power won’t create delays and that local government and power providers truly understand the unique needs and complexity of data center builds. 

These factors are compounded by the fact that some of the biggest investors in the data center sector — sovereign wealth and pension funds and insurance companies — are among the most risk-averse, with little interest in pushing beyond predictable markets in search of higher returns. Getting capital for hyperscale developments in markets like Denver requires making the most risk-averse investors comfortable with pushing into new territory in what is already one of the most complicated asset classes within commercial real estate, Kenai Capital Advisors founder and principal Jules Sherwood said.

“People are trying to get smart in this space, which is very tricky — it's very technical, the dollars are so much bigger for replacement costs and new construction than other asset classes and people don't understand who the tenant actually is and what they do,” Sherwood said. “We're trying to understand the speed market, and who the ultimate user and owner is going to be from a sponsor and equity perspective.”

But industry insiders also point to signs that hyperscale momentum in Denver is starting to build.

In May, data center provider QTS’ website began promoting a “Denver Data Center Campus” in Aurora, which it says will offer 177 megawatts of capacity across 67 acres. Although the project has not been officially announced, experts say the successful execution of that kind of massive hyperscale campus could make other developers more comfortable with the area. 

“Now that you got hyperscale, I think we're just at the beginning of where Colorado definitely matters on the map of data centers,” Flexential Chief Innovation Officer Jason Carolan said. “I think the dynamics mean Colorado is really on the edge of being super, super important.” 

External forces may also end up pushing hyperscalers toward Colorado, experts said. Last month’s announcement that Dominion Energy would not be able to fulfill some of its power commitments in parts of data center hub Loudoun County, Virginia, has both developers and tenants looking for alternative markets for major deployments. Xcel’s Bailey said that with shortages in Loudoun and constraints in other major markets like Silicon Valley and throughout Texas, Denver is at least flashing on the industry’s radar. 

“The day after the [Dominion] announcement, we received about six phone calls from hyperscale data center builders asking if we could get them to market in the next 12 months,” he said of the Denver market. “So now we're looking at supply chain, getting the queue and investing capital maybe a little sooner than we previously planned.”

Kenai’s Sherwood sees shifts in the capital markets spurring hyperscale investment in Colorado, as rising interest rates push the cost of capital above the cap rates of recent primary market transactions. This has the largest data center investors considering hyperscale projects in less mature markets like Denver.

“On a global level, there's a boatload of money looking for a home, and through our conversations with these bigger equity groups we see that people are warming up to the fact that Colorado is a desirable place to be for the digital infrastructure world,” Sherwood said. “We do have a cost of power and a cost of land and a cost of construction advantage here over places like Silicon Valley, and equity does like that component of things. They’re just very risk-averse.”