Explosion of Cloud Based Services Driving Demand for More Data Centers Globally
According to JLL's annual Data Center Outlook report, as more global companies move data and information to the cloud, the cloud itself is actually moving closer to them.
Several North American data center markets - like Northern Virginia, Reno and Dallas - have emerged as hotspots as operators and cloud providers follow affordable utility rates, tax incentives and a demand for expanded service offerings. For an industry expected to see revenue grow by 14 percent over the next two years, footprint flexibility has proven to be a key driver.
"For every penny a data center provider can save in Kilowatt hours (kwH), there is the potential to save millions in operations," said Jon Meisel, East Region lead for JLL's Data Center Solutions. "So our clients have to be very strategic with their footprints. It's still about locating near infrastructure robust metropolitan areas like New York and New Jersey, which remain the most important target markets for these providers. But it's also about finding ways to be efficient with their locations. If that means placing some part of their footprint in regions with more flexible utility costs, incentives packages or lower taxes, providers will expand into those areas."
In Northern Virginia, utility costs hover around 5.7 cents per kWh, compared to the national average of 7.4 kWh of the markets JLL surveyed. These costs are part of the reason why in 2014 Northern Virginia surpassed New Jersey in total demand with nearly 25 percent U.S. market share. Competitive utility rates and an abundance of power compared to other Tier 1 markets - like New York/New Jersey and Los Angeles - has made Northern Virginia attractive to key enterprise users like Facebook and Amazon Web Services.
But Northern Virginia is not alone as a surging data center target. In its report, JLL examined 17 markets offering highly competitive data center locations through a mix of lower tax obligations, utility pricing and demand, including:
- Chicago: There has been an increase in demand for space in Chicago from West Coast technology companies who are developing sites for cloud hosting strategies in the Midwest. The Windy City also is No. 2 in data center construction with 345,595 square feet currently in development, just ahead of Silicon Valley, which has 236,000 square feet under construction.
- Dallas: At 5 cents per KwH, Dallas provides one of the country's most affordable major market utility rates. Further, Texas passed tax incentive legislation that provides 100 percent exemption of sales taxes on business personal property to operate a data center over 10 to 15 years for large users. This can equate to millions upon million in savings for a qualified project.
- Minneapolis: Demand is growing significantly and supply has never been higher, driven in large part by the burgeoning healthcare sector. Also, state data center tax incentives allow companies to abate sales tax on hardware, software and power by housing their data center in a qualifying facility.
- Reno: The Biggest Little City in the World is experiencing its first foray into data center development led by Apple, Switch and eBay due to an abundance of power specifically in renewable resources. Proximity to California customers and the new Nevada tax bill provide additional incentives.
- Toronto: Supply has been a historical challenge for the Canadian data center market on the whole, but capital investment by Toronto Hydro within the financial core will help improve some of the city's aging infrastructure. This will continue to draw interest in third-party data center space.
Skyrocketing demand, low risk of natural disasters and proximity to fiber also play key roles in choosing where to locate a data center, meaning providers are being pressed to offer greater coverage and service options. Many of them are turning to mergers and acquisitions to keep pace, like Digital Realty, which recently purchased Telx for $1.9 billion, nearly doubling the provider's footprint and adding substantial services offerings for the company.
"We are seeing clear demand for a complete range of data center solutions," said Matt Miszewski, Senior Vice President of Sales and Marketing at Digital Realty. "We are now building a unique ecosystem of open solutions powering customer growth through exceptional service, adding to our foundation of unrivalled real estate expertise. This acquisition was a strategic move for us, and reflective of what we see in the marketplace. Customers need the reach and support that we are now uniquely positioned to provide in the form of the right service offerings and global footprint."
Added Bo Bond, Central Region lead for JLL's Data Center Solutions: "We've seen a large acquisition spree take place in the sector which has included many of the publicly traded data center REITs. They're buying to increase their footprint, but also to be able to provide solutions, cloud security and connectivity. This gives companies with larger platforms access to offer more services with a larger geographic footprint. In the end, that's going to benefit the user and increase the reach for those providers." Shift to colocation
Construction costs associated with a new data center are high and the infrastructure investment can be as much as two to three times the amount to build, another reason why M&A has surged as small providers combine with larger ones to seek sources of capital. The expense is greater for enterprise users, who have increasingly shifted from owned facilities to the third party market to offset cost and maintain flexibility through colocation.
"Colocation is the choice for more enterprise businesses that had previously built, owned and operated their own facilities due to the upfront capital expenditure associated with building, maintaining and updating the equipment to stay current with new technology efficiencies," said Mark Bauer, West Region lead for JLL's Data Center Solutions. "There is flexibility in colocation, and with the increased availability of experienced data center developers and operators across markets, enterprise customers can quickly acquire space and services to deploy into a colocation facility saving them time, upfront capital and leveraging the new technologies to lower their total cost of occupancy."