Could Denver Be The Next Data Center Boomtown? 'Excessive Growth' May Be On The Horizon

Denver may be poised to become a hot spot for data center development.

Over the past 24 months, the Denver area has seen a spike in demand for server space and widespread transformation of its data center marketplace. Although analysts were using terms like “in a holding pattern” and “stagnant” as recently as 2019 when discussing digital development in the Mile High City — there were no facilities under construction and a mere 40 megawatts of development in the pipeline heading into 2020, according to CBRE — that outlook is changing dramatically.

With strong fiber connectivity, a well-developed IT ecosystem and the possibility of new government incentives ahead, industry insiders said at Bisnow's DICE Denver data center conference this month that the city could be on the verge of a data center development boom.    

“The state of Colorado, and specifically Denver, have far exceeded the pipeline of 40 megawatts,” Xcel Energy Senior Director of Corporate Economic Development Tom Bailey said on a panel. “We’re going to see excessive growth over the next 10 years.”

As data storage and processing in the U.S. continues to trend toward a more decentralized model, Denver checks a lot of the boxes required to become a significant regional data center hub. The city is well-located from a fiber perspective, sitting at the intersection of major trans-continental optical fiber cables. A national hub for telecommunications lines dating back to the Bell system, Denver’s extensive legacy base infrastructure makes the installation of new optical fiber relatively cheap and easy, experts said.

Colorado also has power priced below the national average and, thanks to being a hub for the telecom industry, has a skilled workforce appropriate for data center operations — a precious commodity in an industry experiencing a labor shortage. 

These fundamentals have made Denver a solid second-tier data center market for colocation, analysts say — albeit one with little growth and almost no large-scale investment from hyperscalers like Amazon, Google and Microsoft. 

Now, industry leaders say they are seeing a surge in demand, led by large cloud providers building out edge infrastructure to meet low latency computing demands from large enterprises in Denver and throughout the region. These include AWS’ so-called Local Zone for Denver, rolled out earlier this year. 

“This isn’t a hyperscale compute market, but it has become a very, very strong hyperscale edge market,” said Ryan Mallory, chief operating officer of colocation provider Flexential. “The Denver marketplace is one of the fastest-growing in the U.S. when you look at the non-hyperscale compute marketplace.”

Demand from cloud providers, in turn, has spawned an ecosystem as software-as-a-service providers hosting their data storage and processing in Denver to serve those same clients, panelists at the event said, driven by the continued growth of life sciences, advanced manufacturing and aerospace.  

“It’s not just as a service, but you also have streaming companies coming here, gaming companies coming here, and a lot of that is because of the ecosystem that is already being built up with edge solutions,” said Jhoan Checo, the chief strategy officer at Digital Fortress, which entered the Denver market at the beginning of the year. “We’ve seen some really good trends here, and we do see the inventory that we have not [been seeing] around for too long.”

Industry leaders in Denver say they are already having to scale up. Flexential is expanding capacity in Colorado at a rate of 3 megawatts per month, Mallory said, a trend he does not see slowing down. 

“For 2020, we pre-sold and deployed over 10 megawatts of capacity, and none of that was speculatively built,” he said. “I have another 2.5 megawatts of customer demand right now that we’re building.”

As for attracting new players to the Denver area, there is hope that new incentives offered through the state and power utilities will help move the needle. Recent state legislation created economic development energy pricing for large-scale power customers through which data centers are able to buy power at a discounted rate for 10 years, then receive an additional 30% discount if they add more than 3 megawatts of capacity.

But becoming the next data center boomtown like Phoenix or Atlanta will require convincing hyperscalers to build out large-scale facilities in Colorado. And industry leaders at DICE Denver say that means passing state-level tax incentives specifically targeting data centers — something Colorado doesn't currently have. 

With more than 25 states offering reduced sales tax, property tax or accelerated depreciation schedules on data center computing equipment, these programs have effectively become a prerequisite for hyperscale data center development. For hyperscalers who replace all their servers every few years, these programs can be worth billions. 

“I can almost guarantee that if there was a sales tax incentive program in the state of Colorado, you would see immediately at least 100 megawatts of new demand in the Denver market,” Xcel Energy's Bailey said. “That is millions and millions of dollars of investment that would be a boom to everybody in the ecosystem.”