New Markets Roll Out The Perks For Data Center Dominance

Though almost all of the global data center power under development can be found in a handful of markets led by Northern Virginia and Silicon Valley, that dominance is likely to change in coming years, experts say. 

Land costs, government incentives and a push for renewable energy all play a role in what could turn into a more diffuse industry landscape — but so does an explosion of demand for computing power. Behemoth cloud providers Amazon, Microsoft and Google along with other hyperscalers like Facebook, lead that push, as does the continued growth of the Internet of Things and the promise of self-driving cars.

Both latter factors, in particular, potentially bode well for myriad secondary and tertiary markets like Denver and Salt Lake City, says Loudoun County Economic Development Executive Director Buddy Rizer, otherwise known as Northern Virginia's "Godfather of Data Center Alley."

“We’re seeing a demand that just can’t be kept up with," Rizer said. "The way we are using information and how it’s driving every aspect of our life, from our finances to education, means the demand for storage and processing has never been bigger."

That demand has meant rapid growth for most of the sector and a rising tide that could start lifting established markets and emerging ones alike. In 2019, data center REITs saw total returns reach 44.2%, behind only industrial REITs and well above the sector-wide return of 28.7%, according to real estate analysis site Millionacres. 

That capped a decade that saw over $100B invested in the data center industry, found a first-of-its-kind Global Data Center Market Comparison report published this month by Cushman & Wakefield.  Research company Gartner expects worldwide cloud platform revenue, which fuels much of the investment in data centers, to grow 17% to $266.4B this year, eclipsing $300B in 2021.

The overall surge isn't expected to dislodge leading global markets like Northern Virginia, Silicon Valley or Dallas anytime soon, but it should lead to the growth of many second-tier markets, Cushman & Wakefield Data Center Advisory Group Director of Research Kevin Imboden said. 

“We talk about IoT and edge and all these buzzwords, and all this stuff requires greater infrastructure," sayd Imboden, an author of C&W's report. "The main markets will still be the main markets. But we’re going to see the growth of a lot of smaller, mid-tier markets because of the need for this compute closer to the user."

Many smaller markets also have a variety of factors making them appealing alternatives to the biggest three, including cheaper land, tempting tax incentives and enhanced fiber connectivity via a proliferation of sub-sea cables. Aside from Northern Virginia's data center hub of Loudoun County, the state has several other markets rising in prominence, from Prince William County (now the East Coast's second-largest data center market) to Henrico County, a connection point for key new submarine cables MAREA and BRUSA. 

"We offer an affordable alternative to Loudoun County because our land is a tenth of the cost per acre," Henrico County Economic Development Authority Business Attraction Manager Twyla Powell said. "We have also lowered our business personal property taxes significantly so that we make the value proposition for companies more attractive."

Henrico's inducements drew Facebook to the county's White Oak Technology Park, where the social network is in the midst of a two-phase, $1.5B build-out of about 2.5M SF of data center space. 

Elsewhere, state governments looking to lure data center investment away from established markets have begun offering large incentive packages. As part of Google's agreement to build a $600M data center near Las Vegas, the state of Nevada gave it a package of tax breaks worth $25.2M.

Phoenix, Arizona, has gone even further, with tax incentives of up to $50M, Cushman & Wakefield said in its report, which counts exactly half of U.S. states as offering data center-specific incentive packages. 

“We’re really seeing a lot of markets pop up all across the country," Rizer said.

"[Local governments] are being really proactive and creating the right tax environment.”

Aligned Energy, a wholesale data center provider with multiple U.S. locations, has availed itself of rewards for development in established markets like Ashburn, Virginia, and tax-favored, emerging ones like Phoenix, where Aligned Energy Global Head of Design and Delivery Mike Coleman says it is underway on an expansion of its existing data campus. 

“When it’s a really good market, we start to see things like sales and personal property-tax abatements on the IT equipment inside the building," Coleman said.

Some markets in states without such tax favors are on the rise, like Salt Lake City, which enjoys a number of draws from relatively cheap land to a sub-10% vacancy rate to affordable power, according to Cushman & Wakefield.

“I would say Salt Lake is an emerging market," Coleman said of another market Aligned Energy is expanding in. "We’re one of very few that have large amounts of available capacity.”

Nonetheless, for the three deep-pocketed infrastructure-as-a-service providers that make up about two-thirds of their market, renewable energies — which aren't abundantly available in certain markets like Salt Lake City — are quickly growing in importance, giving an advantage to up-and-coming cities like Montreal. 

Amazon, Microsoft and Google are each subject to self-imposed emissions goals or intense pressure to drastically cut their emissions levels. Amazon has pledged to use exclusively renewable energy by 2030, while Microsoft has committed to being carbon negative by that same year. Google, meanwhile, is under pressure from many of its employees to draft a similar plan. 

Among North American markets, the push for renewables puts those like Las Vegas and Montreal, run in its provincial entirety by hydroelectric power, in good standing. 

"Renewables, I think, will become more and more important in the site-selection process," Digital Realty Energy Supply Chain Director Jeff Hanson told Bisnow. "Going forward and talking with some of our customers, I'm starting to see more of an emphasis now on the energy picture for a region."

San Francisco-based Digital Realty, one of the largest data center REITs, recently signed two purchase power agreements to source solar and wind power for data centers in the Portland and Northern Virginia areas. That pair of deals brought its total solar and wind power under contract to 338 megawatts, according to Digital Realty.

Usually, affordability goes hand in hand with renewable energy, with most of the cost related to a data center over the life of the asset being power, Imboden said. Powered by Hydro-Québec, Montreal, for instance, enjoys the lowest average power cost in North America, Cushman & Wakefield found.

Even in less renewables-centric but more established markets, like Silicon Valley and Dallas, low power costs still play a major role. For Santa Clara, the data center capital of Silicon Valley, having its own municipal utility instead of PG&E, the troubled utility company that services the region's other cities, plays a huge role in the region's market dominance, Aligned Energy's Coleman said. 

Silicon Valley Power, Santa Clara' energy company, averages rates 25% to 40% lower than PG&E's for nearby towns, according to Data Center Frontier. 

"[Power cost is] almost entirely the reason why Santa Clara has the predominant population of data centers in that area," said Coleman, who once led data center operations for Silicon Valley companies Google and Yahoo.

Other advantages for Silicon Valley, like an established market and talent pool, also work in favor of fellow market-leading areas Northern Virginia and Dallas, and they likely mean none of the three will cede their leadership in the near future, several experts Bisnow spoke with said.

“Workforce, and being able to find talent to operate the facilities, is becoming a really key consideration for where you put a data center," Ernst & Young Managing Director Allen Freeman said. "A lot of the operators in certain markets are struggling to find the talent, and that’s where a more urban location like a Santa Clara is important.”

Like others, Rizer sees this decade's growth, unlike last, being far from limited to only a handful of markets.

"I don’t see it as an us-or-them situation at all," he said. "I think there’s plenty of growth for everybody out there."