NoVa Data Center Builders Battle For Tenants In World's Largest Market

Northern Virginia has cemented its place as the world's largest data center market with a continued boom of new development, but the increasingly heated competition among data center builders has made it harder to make a profit on the projects. 

"It's as competitive as any market for any service could possibly be," Sabey Data Centers President Robert Rockwood said of the Northern Virginia market. "There are pluses and minuses to that. The minus is that it puts a lot of pressure on price, which puts pressure on yields."

The benefit of being involved in the competitive Northern Virginia market, Rockwood added, is the ability to build relationships with the largest occupiers of data center space in the country. Seattle-based Sabey Data Centers entered the Northern Virginia market in 2012 with the acquisition of a 38-acre Ashburn site, where it broke ground in 2016 on the first of three planned data center buildings. 

"We went into Northern Virginia because we believe, as the largest data center market in the world, we need to bring our value proposition there to meet and capture new customers who will ultimately find the best value in our low-cost power campuses across the country," said Rockwood, who will speak May 29 at Bisnow's Data Center Investment Conference & Expo East in Sterling. 

Northern Virginia hit a milestone last month when it became the first data center market to surpass 1 gigawatt of overall data center capacity, according to CBRE. The second-largest market, London, is roughly half the size with 559 megawatts of inventory.

Northern Virginia is not slowing its growth, with 251 MW of data center space under construction and another 316 MW in the planning stages, according to CBRE. 

"There certainly is increased competition," CBRE Vice President of Data Center Solutions Jamie Jelinek said. "We've seen a few new providers enter the market in the past 12 months. Providers are starting to build more spec capacity than they've historically been comfortable with, but that is just to meet the demand."

One of those new entrants to the market is Vantage Data Centers. The Santa Clara, California-based company broke ground in March 2018 on the first data center building at its 42-acre campus near the intersection of Route 28 and Waxpool Road in Sterling. 

Vantage is hosting a ribbon-cutting ceremony Thursday for the first facility at the Sterling campus, a 6 MW data center, marking the opening of the company's first data center on the East Coast. The developer had originally planned to build 108 MW at the campus, but Vantage Chief Commercial Officer Lee Kestler said it has since increased its total planned capacity to 142 MW. 

"We're very optimistic about the market, and we're also sensitive that it is a large market with a lot of opportunities, and customers have choices," Kestler said. "It's a difficult and lumpy business and it runs in waves. There was a large wave last year that was very good, and I think there's a healthy wave again building."

The highly competitive market has led one data center developer to shy away from Northern Virginia, despite its familiarity with the area.

EdgeConnex is based in Herndon but does not have any data center properties in Northern Virginia. Its Edge Data Center concept is better suited for secondary markets, EdgeConnex Chief Marketing Officer Phillip Marangella said, and it doesn't see a viable path to succeed in today's Northern Virginia market.

"There are a ton of data center providers here, the competition is fierce," Marangella said. "We've chosen to be cautious about entering the Northern Virginia market because of that competition."

He said the intense competition has forced data center developers to bring down prices and made it harder for deals to make financial sense.

"There is plenty of capacity, so it becomes a race to the bottom in terms of pricing," Marangella said. "Some of these guys are pricing to win the deal with the hope they'll make it back over the long term. We're trying to be financially prudent. Maybe it'll work out or maybe it won't, but that's a big bet when you can go to a Portland or an Atlanta and do really well."

JLL Managing Director Allen Tucker, who specializes in representing data center tenants, said Northern Virginia has become a tenant-favored market, with developers forced to compete on price to bring in users.

"Given the amount of demand in the market, there is becoming a commoditization of product," Tucker said. 

As data center developers continue to build at a rapid pace, land in the central "Data Center Alley" hub has become scarce, causing the market to expand geographically and forcing developers to use space more efficiently.

QTS Realty Trust last year completed the market's first three-level data center. The 180K SF facility, which can support 32 MW of data center capacity, will host Bisnow's DICE East event. 

QTS Chief Revenue Officer Clint Heiden said the developer signed a deal with a tenant for a large portion of the first floor shortly after breaking ground speculatively. He said he is seeing strong activity from large technology companies that traditionally gobble up data center space, and also from sectors like healthcare and insurance that are growing their data center footprints. 

"What we're finding is that enterprises are starting to buy in significant quantities of capacity," Heiden said. 

QTS has another parcel next to the new three-level facility that could support 16 MW of data center capacity, plus a nearby Ashburn site that could support 100 MW. It has also expanded to areas outside of the core Data Center Alley including Manassas and Richmond. Heiden said it doesn't make sense for such a large portion of the world's data to pass through a single, concentrated hub.

"You should not continue to send 70% of all internet traffic through Ashburn," Heiden said. "That's just not a good architecture for any industry."

He expects Ashburn will continue to be the dominant data center market for the long term, but he thinks secondary markets will slowly begin to capture market share. 

"I believe over time Ashburn will grow slower, but will continue to grow, as some other newer markets will grow faster but at such a small percentage that you're not going to see a chipping away at that 70% happen overnight," Heiden said.

Rockwood, Kestler, Marangella, Tucker and QTS Chairman Chad Williams will join a large roster of data center experts May 29 at Bisnow's Data Center Investment Conference & Expo East, hosted at QTS' property at 22271 Broderick Drive in Sterling.