Data Centers Double Down on Size

by Taylor Williams

Demand for data center space stems from a variety of sources. The vast majority of companies across most industries have some sort of web presence, and their customer and employee records and information are stored electronically. At the same time on the consumer side, smartphones and tablet devices are all but ubiquitous, their owners constantly upping their usage of apps and social media platforms.

Nonprofit communications firm CTIA tracks aggregate wireless data usage across the country on an annual basis. The Washington, D.C.-based company found that in 2013, Americans used approximately 3.2 trillion megabytes of data. By 2015, a year in which there were about 228 million smartphones and 41 million tablet devices in circulation, that figure had increased threefold to 9.6 trillion megabytes.

By 2016, a year in which there were more than 261 million smartphones in circulation, wireless data usage had exceeded 13.7 trillion megabytes. That total represents more than 35 times the volume of data traffic recorded in 2010, according to CTIA’s website.

Web presences, records storage and electronic communications — not to mention the ever-expanding role of e-commerce in retail today — each contribute marginally to the growing demand for data center space. However, when combined with the emerging trend of cloud storage, which is spearheaded by hyperscale tech firms like Apple, Google, Facebook and Microsoft, the net effect is heightened demand for bigger data center facilities.

The data center market in Texas stands to benefit from this move toward larger footprints. In addition to having ample land for new development, Texas offers cheap electricity — arguably the top item in the budgets of data center operators.

According to the U.S. Energy Information Administration, one kilowatt of power costs about 8.7 cents in Texas, the ninth-lowest total among the 50 states. Texas has its own power grid and an abundance of natural gas, a fuel source for electric power currently trading at cheap rates. In addition, Texas’ dry climate and development-friendly policies make it an appealing location for new data center projects.

Data Centers 101

The sizes of data center projects are frequently measured in megawatts as opposed to square footage. However, much of the power that flows into a data center complex goes toward cooling the equipment. The remaining portion, known as critical megawatts, goes to the actual processing of the data. As such, the magnitude of a data center facility is often interpreted in terms of critical megawatts.

This image shows a chiller room in a data center facility. Cooling of servers and other equipment represents a major operating cost for data center developers.

This image shows a chiller room in a data center facility. Cooling of servers and other equipment represents a major operating cost for data center developers.

“The loose translation is about 150 watts per square foot, so a 10,000-square-foot project will yield about 1.5 watts of critical power,” says Aaron Wangenheim, chief operating officer of San Francisco-based developer T5 Data Centers. “When data center REITs report figures or draw up leases, they’re evaluating costs along those lines.”

T5 Data Centers is co-developing a 324-acre data center campus within AllianceTexas, the 18,000-acre master-planned community in northern Fort Worth. At full build-out, the project, which will be marketed primarily to hyperscale tech firms, will be capable of delivering more than 400 megawatts of critical power.

“Because of the amount of land and power out there, there’s a great opportunity to entice the next big user to come to the Dallas area,” says Wangenheim. “We could have the Alliance campus up and running within a year. There’s nowhere else in the U.S. that can offer that speed to market, and for the hyperscale guys, that speed is a critical factor.”

Hyperscale firms are commanding more — and consequently, larger  — tracts of data center space because they’re servicing third-party consumers that are pushing for heavier cloud storage. But even data that is stored in clouds has to be housed in a data center.

Aaron Wangenheim, T5

Aaron Wangenheim, T5

Between this surging demand from hyperscale users and the general uptick in electronic recordkeeping and communications, the next wave of data center developments really have no choice but to be significantly larger than their predecessors.

In addition, the growing volume of commercial transactions completed online has played a key role in bolstering demand. According to Business Insider, nearly 13 percent of all retail sales in 2017 involved e-commerce transactions, as opposed to just 8 percent in 2016.

Given that so many companies are engaging in these kinds of activities — not to mention rising land and construction costs — data centers are increasingly being designed as large-scale facilities. These structures are typically designed as multi-tenant, or colocation facilities and have becoming increasingly popular in international markets as well.   

Supply-Demand Balance

With demand rising and rental rates for data centers remaining relatively flat, heavy absorption has become the name of the game in recent quarters. And according to a 2017 report by JLL, more than 30 percent of data center space absorbed over the last 18 months is coming from cloud-using companies.

Dallas-Fort Worth (DFW) in particular has been at the center of this growth. The metro’s absorption increased by 50 percent during the first half of 2017 relative to the first half of 2016. Consequently, of the 458 megawatts (3.42 million square feet) that comprise the metro’s total inventory of data center space, less than 12 percent (56 megawatts, or 396,000 square feet) is vacant.

Vacancy is a bit more pronounced in Houston, where natural humidity and a sluggish oil and gas sector have limited the volume of new supply. Vacancy among Houston data centers currently stands at 16 percent, with only 1.5 megawatts (9,000 square feet) under construction.

In Austin and San Antonio, which the report treats as a single market, delivery of new supply has remained steady. However, demand is expected to rise given the high level of interest in the area demonstrated by Microsoft, which already operates four data centers in and around San Antonio. Cloud-using companies occupy roughly 70 percent of the inventory in this market, which posted a 10 percent vacancy rate for 2017.

Data center builders employ unique development strategies that allow them to create large facilities with less risk of oversupply, says Ali Greenwood, vice president of data center solutions at JLL and one of the authors of the report.

Ali Greenwood, JLL

Ali Greenwood, JLL

“With this asset class, larger owner-operators will develop large buildings, say 250,000 square feet,” says Greenwood. “But they aren’t actually adding that much new supply — projects that size will usually only deliver about 20,000 to 40,000 square feet of true IT space. When about half of that space is absorbed, they kick off the next ‘data hall,’ as a means of maintaining balance.”

Fast delivery times also help maintain the supply-demand balance, adds Greenwood.

“Data center developers are often able to deliver from the shell phase to the turnkey phase in about 90 days,” she says. “But because data centers are more expensive to develop than other classes of real estate, nobody’s going to want a little turnkey data center space that’s been sitting there for a couple years.”

Project Evidence

Facebook’s 150-acre data center located at the intersection of State Highway 170 and Park Vista Boulevard in Fort Worth is the embodiment of the move toward larger footprints in Texas.

The facility, which cost about $1 billion to develop, features 440,000 square feet of server space and 70,000 square feet of office/administrative space, with an additional 400,000 or so square feet currently in the pipeline.

Facebook’s 150-acre data center in Fort Worth is the epitome of the move toward larger facilities in Texas. The center requires about 200 employees to operate it.

Facebook’s 150-acre data center in Fort Worth is the epitome of the move toward larger facilities in Texas. The center requires about 200 employees to operate it.

According to Facebook, construction of the facility required about 500 workers at its peak, and operation of the center requires more than 200 full-time employees to maintain server networks, cool the equipment and generally troubleshoot any technical difficulties that arise.

“We put a lot of effort into choosing where to locate a facility like this,” says Lindsay Wiese-Amos, a tech communications manager at Facebook. “We look for everything from a shovel-ready site and access to fiber to a robust electric grid with renewable energy sources and a strong pool of local talent for construction and operation. We’ve found all that and more in Fort Worth.”

Across town in Allen, a northeastern suburb of Dallas, data center REIT CyrusOne is moving forward with plans to develop a three-building campus. Construction of the first phase of the project, which will deliver a 340,000-square-foot building, began in October.

The facility, which will be situated on 65 acres, will be the company’s 11th data center in Texas and third in the DFW area. At full build-out, it will offer more than 100 megawatts of power.

Investment Heats Up

According to a report from CBRE, investment in U.S. data center assets over the last five years totals approximately $45 billion. More than half that amount of capital investment has occurred over the last eight quarters, beginning with the fourth quarter of 2015.

Investment activity during the first half of 2017 alone exceeded $18.2 billion, according to the report. Of that total, about 76 percent, or $13.8 billion, has come from institutional investment groups. San Francisco-based Digital Realty’s acquisition of DuPont Fabros, a transaction valued at roughly $7.6 billion, was a key driving force behind the surging volume of capital flowing into the sector.

The rising stock prices of several data center REITs attest to the health of both the investment and leasing markets of the sector.

The stock price of Denver-based CoreSite Realty Corp. closed at $72.84 per share on Oct. 28, 2016. Roughly a year later, it’s trading around $111.50 per share — an annual increase of about 53 percent.

Shares of Equinix Inc. have appreciated even more drastically during the current cycle. In October 2015, one share of the Redwood City, California-based company’s stock went for $271.31 per share. One year later, the stock price had leapt to $362.38 per share; it’s currently at $467.74 per share, a two-year increase of roughly 73 percent.

Gary Wojtaszek, CyrusOne

Gary Wojtaszek, CyrusOne

“The growth has been incredible,” says Gary Wojtaszek, president and CEO of CyrusOne. “One of the best things about the industry is that in spite of the really strong investment demand for the product, supply has kept pace. It’s pretty well-balanced in most markets, so pricing has been really stable over the last several years.”

Demand from hyperscale users continues to be the leading factor behind healthy returns on investments in data center assets. But a strong influx of smaller customers also contributes to investors’ bullishness on the space, mainly because these consumers often forge long-term partnerships with their data center providers.

“There’s a strong networking element and working relationship between the data center provider and the customer because it’s easier for the customers to grow with you as a provider rather than go somewhere else,” says Wojtaszek. “It’s expensive to get out of a data center and it’s risky to start a new relationship with a new provider in the space that may lack the operational expertise.”

Ultimately, the investment, development and leasing markets for data centers are all enhanced by two attributes that are relatively unique to data itself: data is global in nature, and consumption of it is not a function of job and population growth. As such, the sector is less susceptible to impacts from cyclical economic downturns.

In other words, it  will take a massive reversal in consumer preferences for electronic communications and activity to put any sort of dent in the growth.

— Taylor Williams

This article originally appeared in the November 2017 issue of Texas Real Estate Business.

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