Data Centers in the Desert: Why Phoenix is a hotbed for this technology-centered real estate

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By Tim J. Randall

Entering the complex there is a Fort Knox feeling reminiscent of the classic James Bond movie Goldfinger: security access, cameras, closed-circuit monitors, guards, and badges. While there is no Oddjob at this facility, there is definitely a feeling of control, precision, and protection. The structure itself has the look and feel of a thousand other non-descript commercial buildings, however, once inside the premises the uniqueness of its operation is apparent. This particular building is the home of Phoenix NAP, an operator of one of the many data centers located in the Greater Phoenix Metropolitan area. And in a fascinating juxtaposition, Fort Knox and the data center are both designed to protect a valuable asset – the former gold bullion, and the latter the currency of intellectual property, data, and information.

The modern data center is a relatively new entrant into the technology and real estate space. Specifically, the data center is “the heart and brain behind the storage and transmission of data that empowers computers, phones, smart-phones, hand-held devices, GPS systems and other computer-centric devices.”  From their origins as essentially data processing functions housed primarily in the office space of companies, the data center has evolved to service the geometric growth in technology and information over the past 25 years. Mark Bauer, managing director of Jones Lang LaSalle’s Data Center Solutions Group and his associate, Carter Robinson, point to the development of the data center as an outgrowth of companies large and small needing to manage ever-increasing loads of information and data. As these demands mounted, organizations needed dedicated space to house the requisite technology hardware. Mark Krison and Scott German, Data Center Broker specialists with CBRE, agree with this assessment. “Technology has been the main driver of the data center as more and more information must be stored.”

Evolution

The last two decades have been an evolution of the data center from corporate backroom, to enterprise facilities in which large companies owned and operated their custom space, to now third party vendors owning the building and leasing space to clients. Touring Phoenix NAP, the facility is able to house servers and hardware for companies of myriad size and capability for their individual specifications.  Bauer and Robinson explain this evolution by citing the cost effectiveness of firms moving their data storage to third party facilities. “With technological obsolescence it becomes the data center operator’s responsibility for equipment, upkeep, and refreshment.” 

Cost is a paramount concern for any organization and with technological innovation, the expense of data storage and management is an ever-present concern. Krison and German point to the unique and expensive nature of these facilities both in initial capital expenditure of millions of dollars, ranging from $1,200-$1,700 per-square-foot, and the ongoing cost of upgrades and maintenance. This has propelled the recent data center trend – the positioning of multiple organizational presences inside one third party vendor facility.

Statistics

To say that data centers are big business would be the technology equivalent of the energy boom in Hydraulic Fracturing and Horizontal Drilling. While numbers vary slightly from source to source, total global data center spending in 2012 was, according to Gartner, a leading IT tracking firm, $141 billion. Projected outward, data center spending will reach $218 billion in 2020 according to German and Krison, who cite their resources at Datacenter Dynamics, another leading research organization. Parallel to these findings, U.S. data center spending was roughly one-third, or $50 billion, and Western U.S. investment in data centers was ranked number one in the world in 2012. This last figure is especially interesting because Phoenix has and will continue to play a dominant role in data center expansion.

Why Phoenix?

One of Phoenix’s many attractions to business is its data center infrastructure. With names like IO, CyrusOne, Phoenix NAP, Digital Realty Trust, as well as the enterprise centers of companies like Go Daddy, Phoenix has the branding of a metropolis that understands this dynamic business. According to Bauer and Robinson, the Phoenix footprint of data centers – both third party and enterprise – is 4.5 million square feet. Interestingly however, data centers are measured in the industry by power usage, with 10,000 square feet of space approximating one megawatt. The market though is not saturated as companies look to Phoenix for their state-of-the-art data center needs. Krison and German see “more colocation sites, possibly two to three spaces in the next 12-18 months with 5-8 Megawatts at each facility.”

Krison and German articulate that “companies can find data centers anywhere but Greater Phoenix is one of the best places to locate a data center.” The reason being, they point out, “cost-effective power and lack of natural disasters.” Because power consumption is the baseline for data center measurement, it logically follows that cost of power is a huge factor in a company’s decision to locate in Phoenix. In Arizona, the Kilowatt-per-hour price approximates $0.07, while in Seattle and Portland it is around $0.04, and in California an average of $0.10. As competitors, power cost is a key for states in developing business, and Arizona has a stable power and price distribution from the utility providers.

A second major Arizona draw is connectivity with the vast infrastructure of fiber and cable providing access for businesses to their data and operational efficiencies. Additionally, this hardware cable connectivity places Phoenix as a hub location in the routing of fiber from Los Angeles to Dallas, Denver, Chicago, and then East Coast cities. Tangentially, the composition of reliable and dedicated infrastructure enhances the Phoenix advantage for companies. And a last point on connectivity – Phoenix has relative close proximity to both Los Angeles and Las Vegas, which provides transportation and logistical access for organizations in their supply and value chain.

The third piece of the Phoenix puzzle is the near negligible threat of natural disasters for the area. With particular emphasis on the San Francisco area, the real and recognizable threat of earthquakes place data centers located in the west coast region at great risk for a certain eventuality. Both of the teams from CBRE and Jones Lang LaSalle cited Arizona’s low risk of a natural disaster as a major competitive advantage.

This combination of factors, along with state and local governments and the Arizona Data Center Coalition pushing for legislation making Arizona competitive in their tax treatment of data centers relative to state competitors, provides compelling reasons for business to look to the Grand Canyon State.

Economic Impact

It seems that the meaning of economic impact in today’s climate directly translates into jobs. On this note data center construction and operation mean both direct and indirect jobs for Phoenix residents. A report issued by the Arizona Data Center Coalition indicates that the construction of a $115 million facility creates permanent jobs of 75 direct and 92 indirect, and construction jobs of 393 direct and 365 indirect. These jobs also translate into salaries and wages with over $45 million of income flowing to employees and contractors. To use a term, these are not “Mcjobs!”

Beyond the employment issue, the growth in data centers drives more ancillary business to the area bringing new development, new technologies, and economic revitalization. Also interesting is the accompaniment of call centers and customer service centers to the data centers that are built here. Businesses desire the connectivity of their functional units and this data center and call center confluence is a natural progression.

A third economic impact is the long-term development of a growing economic base for individuals and business, which ultimately drives stronger revenue growth for government to reinvest in infrastructure and education. The virtuous cycle then follows with a catallaxy of private and public sector organizations working together to promote sustainable economic growth.

Data Centers Moving Forward

In today’s data center landscape there are different models: the enterprise framework of the large corporation, the colocation model of the third party vendor, and turn-key modular models built on site or delivered by data center firms such as IO or Digital Realty. The evolution in this space will continue to focus on individual customer needs and experiences.  And, just as technology is constantly driven forward by innovation, so too will the data center model need to nimbly adapt to its users’ needs. Data centers are competing in multiple spaces for business platforms: retail, wholesale, cloud, managed services and power. With specialization an ongoing concern for clients, data centers will continue to “evolve and provide sophisticated and customized solutions for the storage of intellectual property,” according to CBRE’s Krison and German.

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