Phoenix Data Centers Will Be At The Cutting Edge Of The Coming Digital Disruption

Data centers have it good these days, since businesses and consumers use more data than ever before, and that usage keeps growing. The data center market in Phoenix is strong as well, according to the speakers at Bisnow's Phoenix Data Centers event.

As a data center market, Phoenix has some advantages, including low-cost power and a business-friendly state government. The race is on to buy and build more data centers here.

One Degree World Systems Chief Operating Officer and Chief Information Officer Rebecca Wanta, who gave the keynote, said digital transformation is the future.

"Businesses have to digitally transform, or they will be out of business," she said.

Wanta has transformed information technology operations at MGM Resorts, Best Buy, PepsiCo, Southwest Airlines, Wells Fargo and the Money Store.

"For many industries, IT is between a necessary evil and something you scrape off your shoe," Wanta said.

“By the time I’m recruited into a company, it's about ready to jettison its IT organization because leadership believes it isn't adding value — it’s just costing money,” she said. “Hard to believe, isn't it? It's exciting to me to transform their thinking about IT.”

Some businesses are more prone to disruption than others, Wanta said, but disruption is going to occur across the business spectrum. 

For instance, the financial sector tends to be disrupted more than most industries because it is an industry that understands that technology can offer competitive advantages. Other industries, such as healthcare or transportation, have a smaller number of disruptions.

Data centers have an essential role to play in disruption, especially as continuous delivery provides users with the latest features of an industry's products as fast as possible, she said. Data centers will facilitate continuous delivery.

"Either you get on board with the disruptions and be part of the movement, or you are going to be disrupted," Wanta said.

Speakers on the state of the data center market started by noting that now is a tumultuous time in the data center industry — but then again, it usually is.

The data center market is awash with mergers, acquisitions, consolidation and other realignments, and a great number of new players with deep pockets are entering the space. 

One recent example is Mapletree Investments, which bought a portfolio of 14 properties for $750M late last year from Carter Validus Mission Critical REIT. That was the Singapore-based investor's first move into data centers outside of its home country. 

That deal was just a taste of things to come, the speakers said. Many more investors like Mapletree are out there, looking for places to put their money in data centers. In part, that is testament to the acceptance of data centers as an asset class. 

As far as Phoenix is concerned, product is relatively available in the market, and additional capacity is on the way, with around 25 megawatts coming online over the next year. The additional supply might push pricing down a bit, but not enough to cause an overbuilt situation.

Phoenix is the sixth-largest data center market, and as a major regional market, it is fully competitive with the likes of Las Vegas or Dallas.

In the coming years, the speakers said, large data center markets are going to get larger as they take more market share from smaller markets, and Phoenix is poised to do well.

Winning data center markets tend to be those with relatively low cost of power and availability of networks, and Phoenix is strong in those two fundamentals, the speakers said. 

Phoenix has the extra advantage of generous incentives at the state level. Arizona as a whole, but especially Phoenix, is receiving some of the "data center flight" out of California, which is an expensive place to develop or operate data centers.

Data centers represent the only CRE asset class that is experiencing double-digit growth, the speakers said, but they cautioned that some new investors do not quite know what they are getting into. 

At some point, a certain amount of unsophisticated money will flow into the market, both nationally and locally, and that might result in overvaluations, at least temporarily.

Even so, Phoenix will continue to be a solid market, the speakers said. As more data centers come to the market, more tenants will be attracted to them. 

Total cost of ownership, which is about 5 or 6 cents a kilowatt hour, is a key factor in the development of more product here. That compares very favorably to California, where costs are perhaps 16 cents a kWh, at the least. 

That makes Phoenix incredibly attractive, the speakers said. LA data centers tend to be small, antiquated and expensive by comparison.

The risk of overbuilding here is small, because the demand drivers are large, the speakers said. For instance, 5G is going to represent an important step on the road to a ubiquitous internet — and vastly greater volumes of data.

Changes in the healthcare industry will impact the data center industry positively. Healthcare over the internet, which seems to be more acceptable to millennials than their parents, represents another promise of more data moving in higher volumes, which data centers facilitate. 

Other advancing technologies will probably be good for the data center industry as well, such as the Internet of Things, blockchain and autonomous vehicles, though those are still on the horizon. 

It is possible that the data center industry will be disrupted by vast improvements in data storage and transmission, such as quantum computing or DNA for data storage. None of that has come to the stage of practical application, or even looks close, the speakers said.