In addition to a vast array of technologies, the digital age has spawned a new class of real estate: data centers. It’s a category that has emerged just in the past decade or so.
“The sector is still defining itself,” says Anthony Bolner, senior vice president of Stream Data Centers. “It has changed significantly in the last 10 years and it will continue to change.”
When companies transitioned from mainframes to a server environment in the 1980s and 1990s, they’d typically store the equipment in an office closet somewhere. But as the servers began to multiply and suck up energy, landlords began insisting that the equipment be moved off site. The attacks of 9/11 heightened the need for companies to secure and back up data, and the proliferation of the Internet increased demand from financial services firms and the government, as well as retailers, health care organizations, and other business types.
All of these trends spurred demand for data center space. Companies quickly honed in on North Texas as an ideal location, with its abundant power and fiber, low risk of natural disasters, central location, and proximity to Fortune 500 companies. Dallas-Fort Worth now solidly ranks as one of the top five data center markets in the country.
Stream began developing data center space about five years ago. Prior to that it bought and repositioned second-generation properties, Bolner says. “We saw demand out there for new data center space and very short supply in late 2006,” he says. The company owns two data centers that have long-term leases to major corporations. It’s in final negotiations with a tenant for a data center it built on spec in Richardson, and it’s readying construction on another that will be built in Dallas this year.
The world’s largest data center landlord is Digital Realty Trust. It has numerous properties in North Texas and is currently undertaking a massive redevelopment of the former Collins Technology campus in Richardson. Dubbed Datacenter Park, the seven-building, 800,000-square-foot, 70-acre complex previously housed Alcatel.
“Dallas is a very important market for us, due to the obvious things: the infrastructure, the highly educated work force, the abundance of good quality, affordable power,” says Glenn Benoist, vice president of portfolio management for Digital Realty Trust.
The company’s other major markets are New York/New Jersey and Chicago, both strong financial markets, and the high-tech hub of Santa Clara, Calif. “In Dallas, we probably have the greatest diversity,” Benoist says of the local client base. “We like to see that; it means we’re not relying on one industry.”
Barriers to Entry
As a real estate sector, data centers differ significantly from traditional office buildings. For example, rental rates are quoted on a price-per-kilowatt-per-month basis, versus the standard price-per-square-foot-plus-electric. And building construction makes up only one-fourth or one-fifth of the total development cost, the rest coming from beefed-up electrical systems, generators, cooling systems, and other requirements, says Peter Tippen, partner with Lincoln Rackhouse.
Launched in 2006 as Rackhouse by former Trammell Crow Co. executives Brant Bernet and Martin Peck, the firm specializes in assisting clients with their data center needs. In the fall of 2010, Rackhouse merged with Lincoln Property Co. to pursue development projects.
Few developers take on data center projects due to the multiple barriers to entry. Beyond the exhorbitant expense, it’s a challenge to get financing, due to the tight capital markets and also because of the nontraditional nature of the real estate class. Lenders still remember how they got burned by the “dot-bomb” crash of the early 2000s.
Another hurdle: knowing exactly what to build.
“Back in 2000, facilities were engineered to handle 40 watts per square foot; that was ample to run the electronics required by most companies,” Bernet says. “But it’s unheard of today. Now it’s 200 watts or 250 watts per square foot. And with that increase comes the need for more cooling, more generators, more power distribution units, everything.”
Peck says the last five years have been “life-changing” in the high-tech realm. “Technology is on such a fast pace, you may find yourself in a facility that literally in 24 months is obsolete,” he says. “As companies try to project their needs into the future, it’s all about power—and all about being able to access and reserve that power.”
Bob Morris, president and CEO of the Dallas-based architecture firm Corgan, is a nationally known expert on data center design. His first project was in 1984, when he was hired by Dean Witter to transform an old Sears building in Dallas into a data center. “It developed into a real fascination with the product type,” Morris says. “They’re incredibly complex, important buildings. Almost everything we do is impacted by these large mission-critical facilities.”
Morris recently wrapped up work on “Project Alpha,” a massive data center for the New York Stock Exchange in New Jersey. At any given time, Corgan has 15 data center projects under way around the globe; its current assignments include a data center in China.
Data centers, Morris says, are becoming more dense, more efficient, and more reliable. Continuing design challenges including dealing with the heat that’s generated by the servers and scalability—preparing for future needs.
As economic development officials begin to appreciate the value of data centers, some markets are coming on strong with tax breaks. According to Morris, it used to be that incentive decisions were based strictly on job creation. But revenue from personal property taxes and other taxes are now getting more consideration.
Tippen says North Carolina is becoming particularly aggressive. “The great news for Dallas is that it’s one of the premier data center markets in the country,” he says. “It’s a strong financial center with a good location in terms of travel and connectivity. We are also just a darn good market in terms of cost of labor, quality of the work force, cost of real estate, and cost of living.
“But we had better be careful, because the state of Texas hasn’t done anything to relieve sales taxes or provide incentives that some of the other states are doing,” Tippen adds. “In that area, we are fighting at a big disadvantage.