Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/818922
www.REBusinessOnline.com Western Real Estate Business • May 2017 • 53 submarkets like Santa Clara, are mov- ing past $100 per square foot. This factor, and the fact that data center developers are competing with tech companies for buildable space, makes new data center development a tough proposition. However, we are second only to Northern Virginia in terms of total megawatt capacity. Northern California, especially Silicon Valley, also continues to be well populated with major data center players and great logos — a situation we expect to continue for the foreseeable future, notwithstanding the region's high costs. Beyond the large cloud opera- tors, Chinese telecoms represent one potential area of growth as they in- creasingly look to establish a footprint in the Bay Area in response to the in- flux of Chinese companies. Mark Bauer, Managing Director, and Darren Eades, Executive Vice President, JLL. Other contributors to this article include JLL's Mark Stratman, Jr. (Phoenix and Denver), Conan Lee (Seattle) and Raul Saavedra (Northern California). We live in the in- formation age. Nev- er have we relied more on technology in our daily lives. If you have ever left your phone in a cab or had no access to the internet for an extended period, you have quickly re- alized this truth. It's painful. Consumers today demand the ability to access in- formation and uti- lize services from any location. This remote ac- cessibility in its sim- plest form is cloud computing. What you might not realize is that, whether the data is hosted in a public cloud offering like Amazon Web Services or in a private cloud owned by an enter- prise, it is all housed in a data center somewhere. As companies shift their operating models to accommodate this remote service delivery, they must weigh the operational benefits and end-user experience of their data center location against their bottom- line costs. Southern California, famous for its great weather and active lifestyle, is equally known for high real estate prices and cost of living. It should come as no surprise, then, that the underlying real estate components of a data center — the land, core and shell — cost more to build and main- tain in Southern California than in most parts of the country. Unfortu- nately for the data center operators, so do the on-going operating costs. Electricity is the single largest operat- ing cost in a data center facility. While all of Southern California has elec- tricity rates higher than the national average, some markets, such as San Diego, have rates nearly double the national average. Sales tax rates are also higher relative to the rest of the country, and the potential to obtain state and local tax incentives is prac- tically non-existent. All of these fac- tors, taken together, make operating a data center in Southern California a very expensive undertaking. A 2015 report by CBRE Research found that users of enterprise data centers could save more than $100 million in capi- tal and operating costs by running a comprehensive nationwide site selec- tion process. Lured by significantly lower oper- ating costs and minimal to no expo- sure to earthquake risk, large users of data centers are moving their South- ern California footprints to more cost- effective, out-of-state markets. Phoe- nix has benefited significantly from this, as its electricity rate is about 50 percent cheaper than Los Angeles and Orange County and 66 percent cheaper than San Diego's. Phoenix has lured many Southern California companies eastward by offering a tax abatement, which effectively lowers the sales tax on data center equip- ment to zero. The Phoenix area saw 10.3 megawatts of net data center absorption in 2016, contrasted with just 2.6 megawatts of absorption in Southern California during the same period. The fourth quarter of 2016 CBRE Research quarterly data center trends report showed net occupancy gains in major data center markets reached near their record highs es- tablished in 2015, while at the same time, other markets slowed. Robust leasing in Phoenix indicates that it is joining the ranks of other major mar- kets like Atlanta, Chicago and North- ern Virginia at the expense of South- ern California. There is, however, a silver lining. Not all applications can operate ef- fectively at great distances from the end-user. Latency, which is the time it takes for information to travel via fi- ber from one location to another, can limit the physical distance an appli- cation can be placed from the end-us- er and can impact the end-user expe- rience. Have you ever been working on something online and received that annoying egg timer or rotating arrow indicating information is being processed? That lag or wait time is latency. Companies must weigh the operational benefits of proximity to Southern California-based end-users with the financial benefits of remote data center location and find the right balance. As companies identify what com- ponents of their IT footprint must be near the end-user and migrate ev- erything else to more cost-effective markets and solutions, the result- ing requirement that will remain in Southern California is much smaller than before. The average data center requirement in Southern California was below 300 kW in 2016, accord- ing to CBRE Research. This is much smaller than the typical wholesale re- quirement and more suited to retail colocation. In response to the smaller average transaction size, large whole- sale colocation operators — facilities that provide space, power, cooling and physical security in dedicated suites similar to a standalone data center — are shifting as well. They are transitioning the operating mod- els in their Southern California facili- ties to more closely resemble a retail model to accommodate smaller re- quirements. T5 Data Centers recent- ly launched its Enterprise Services product, which includes full-service solutions as small as a single rack. Orange County operators, Century- Link and Zayo continue to increase their suite of full-service offerings to cloud and other fully outsourced solutions. The San Diego data center market has been positioned as a retail market for some time and will con- tinue to benefit from the strong bio- tech and defense community. Even with its challenges, Southern California will maintain its data cen- ter presence. Many of the data center providers here are sophisticated na- tional operators, fully capable of rap- idly responding to changes in supply and demand. We expect the Southern California data center market to re- main for the foreseeable future. — Kristina Metzger, First Vice President, and James McCarthy, Client Services Specialist, CBRE's San Diego office SOCAL OPERATORS REPOSITION DATA CENTERS, SERVICE OFFERINGS TO PREPARE FOR THE FUTURE Metzger McCarthy Big Housing Need Met in Small Communities Three HUD Financed, Market Rate Projects Coming Soon to New Mexico Spring River I Luxury Apartments 144 units Raintree II Luxury Apartments 64 units Pecos Vista Luxury Apartments 204 units G R O U N D B R E A K I N G ICON B U I L D E R S 800-787-9090 www.iconbuilders.com Over 13,500 Units Listed On Our HUD 2530 Previous Participation Certification Experts in Government Assisted, Tax Credit, and Bond Projects A p r i l 2 1 , 2 0 1 7