L.A. Outlook: Why Phoenix, Vegas are on Track to Further Out-Pace SoCal

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.

data center summit“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 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. “And Mark, maybe you could follow up on Alan’s response to build on that from the provider aspect?”

Alan Kierman, Principal & Founder, Whiteboard Capital LLC

“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.”

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.”

 

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.

“And as all of the panel members have mentioned, it’s really conducive to playing into the economies of scale that you get out of the master campus,” Stratman explained. “You’ve laid all of the groundwork, all of the conduits are entrenched, so when we go and build, we can get a site up and running in as little as four to five months. We’ve been acting on that over the course of the last three to four years. and that’s really led into Phoenix ultimately being a catcher’s mitt for a lot of the wholesale demand that we’re recognizing here in the Southwest.”

“So as Michael eluded to, Phoenix is posed well to see and recognize a lot more demand. It’s always been a market where if you build supply, demand will come in succession,” he concluded. “And that’s what we’re betting on from here on out in the years to come. It’s certainly going to be a more competitive landscape in the next year and a half or two years. There are a lot more colo operators making their presence known in Phoenix. And it’s for all of the reasons that everyone here has brought up.”

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