The Southwest Data Center Game: Campus Style Development May be the Winning Strategy

LOS ANGELES, CA – The Southern California data center arena isn’t exactly the easiest to sum up in a sentence or two. It’s got its strengths as well as its weaknesses, and a lot of firms want to be there. But that doesn’t mean they can make the deals pencil. That’s why CapRE’s Seventh Annual Southwest Data Center Summit: The Telecom Evolution kicked off with a panel discussion called Southwest Data Center Market 360: Has the Outlook for the Los Angeles Market Changed with Advent of Edge, Micro Data Centers and On-Site Power Generation? Below, we highlight a snippet of that conversation, honing in on how SoCal compares to its closest neighbors.

New Square“Not to say that Los Angeles isn’t an active market, but it seems that [it is] pushing a lot of development, and we are seeing this, to the Phoenix market,” remarked Moderator Michael Siteman, Director for Chapter Relations at 7×24. “I think that over the next two years it’s probably poised to maybe even be the #2 data center market, just after Ashburn.”

Next, Siteman looked to two of his panelists for further insight – Alan Kierman, Principal & Founder of Whiteboard Capital LLC and Mark Stratman, Account Director at CyrusOne. “From a finance and capital perspective, Alan, maybe you could give us your view on what you’re seeing and the impact that that is having on the market,” he suggested.

“Sure,” replied Kiernan. “Fundamentally, Phoenix and Las Vegas are more attractive markets. And that plays itself out in other markets as well. Campus developments are obviously en vogue for a lot of reasons, including substantially less drag on IRR than a lot of urban in-fills or going vertical, particularly with new developments in densely populated areas. So it allows you to be able to stagger development costs a lost more by doing things in a Phoenix or in a Las Vegas.”

It allows you to match your development cycle to the absorption rates that are going on without incurring a lot of additional costs, according to Kiernan. “So I think that One Wilshire is always going to be a valuable property,” he continued, “We’re a big fan of trophy properties. But in terms of new development, it’s going to get outpaced substantially by the Phoenix and Las Vegas markets.”

 

CAPRE’s 7th Annual Southwest Data Center Summit was held on October 10, 2018 at Los Angeles Athletic Club in Los Angeles, CA.
CAPRE’s 7th Annual Southwest Data Center Summit was held on October 10, 2018 at Los Angeles Athletic Club in Los Angeles, CA.

Next, Stratman chimed in. “Yeah, no doubt. Just to echo what Alan said, I would argue to suggest that there are essentially only a handful of data center campuses across the country,” he concurred. “We have one of them in Chandler, Arizona, Switch has another in Las Vegas, and they’re huge master campuses. Ours in Chandler has 10 independent data center builds. We’re on our seventh build right now.”

Alan Kierman, Principal & Founder, Whiteboard Capital LLC

“There’s a lot of weird tactical issues that you deal with in customers for campus-style developments,” added Kierman. “You know if you build a three story, six hundred thousand square foot development, that’s great. If you lease a third of it to Microsoft, twenty megawatts or something like that, life is great. You feel good. But customers nowadays are demanding reservations. So they want you to hold the next floor vacant for them. Which then just continues to drag down the IRR that you have on utilized capacity for extended periods of time.

Stressed Kierman, “[These are] the issues you could avoid with campus-style development that make them substantially more attractive at the end of the day.”

At that point Stratman enthusiastically concurred. “Some of our largest customers are the most sophisticated Cloud Service Providers out there and it seems like, with every single requirement, they are asking for continuous dedicated expansion rights. Within the same data hall. Not necessarily somewhere else on the campus, but adjacent to their Day One deployment,” he shared.

Continued Stratman, “And you really can’t offer that, and have inventory sitting vacant without any cash flow attached to it, without being able to get another site within a pitching wedge away to serve as the new allocated capacity for demand that’s coming in in succession behind some of these hyperscale developers.”

“That’s an issue though for all colocation providers, right?” interjected Moderator Siteman, offering a bit of a conclusive remark. “What’s the equation that you use to offer the flexibility to a customer without tying your hands too much and losing your return on investment?”

For more coverage of this panel, check out earlier CapRE Insider Reports: