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PHX Poised to Become a Data Center Leader

By AZBEX Staff for Arizona Builder’s Exchange

A recently released report from CBRE notes the Phoenix area is poised to become a leader in the data center market, as reflected by steady growth in the sector in the first half of 2017.

“Phoenix is a dynamic market,” said Luke Denmon, of CBRE’s Data Center Solutions Practice in Phoenix. “Every 18 months or so we see our supply profile change in direct response to demands from different segments within the data center universe.”

He continued, “When avoiding natural disasters was the driving force, Phoenix’s data center market grew. Now, the drivers are tied to Phoenix’s lower operating costs and strong regional network infrastructure compared to other markets, and Phoenix is still growing. These are signals that the market has matured to a point at which we can shift to accommodate the various nuances of the different user profiles.”

The National Outlook

Throughout the U.S., data center investment reached a record $18.2B in the first half of 2017, already doubling investment for all of last year. If that pace is maintained, 2017 could exceed the total combined investment of the last three years.

“Over the past five years, more than $45B of investment capital has flowed into the data center sector, with more than 50 percent of that total occurring since the start of 2016,” said Pat Lynch, Senior Managing Director, Data Center Solutions, CBRE. “The robust adoption of rapidly evolving, data-intensive technology continues on a strong upward trajectory and will drive growth in the data center sector going forward.”

Leasing Activity

For the first half, leasing activity totaled roughly 13MW, a positive net absorption of 3.8MW.

The seven major national markets – Atlanta, Chicago, Dallas/Ft. Worth, New York Tri-State, Northern Virginia, Phoenix and Silicon Valley – had a combined positive occupancy gain of almost 88 MW.

Most new leases, the report notes, are from enterprise customers needing between 500kW and 1MW of capacity. As a result, there were few transactions greater than 1MW in the first half, following last year’s leasing binge by large (hyperscale) users.

“With the bulk of Cloud Service Provider-related activity occurring as pre-leasing in new data center projects, it’s not surprising that hyperscale users are temporarily focused on building out and deploying their cloud infrastructure,” said Jeff West, CBRE’s director of data center research. “Demand from enterprise users will continue this year as they execute their slow-and-steady migration of IT workloads to cloud and third-party facilities. Meanwhile, all indicators are that requirements from hyperscale CSP users will substantially return.”

Construction Pipeline

The Phoenix data center construction pipeline currently sits at 28MW.

For Arizona as a whole, the report notes several providers and major users are looking to enter into or expand their presence in the market, which CBRE views as a generally positive trend.

Nationally, the pipeline is accelerating, with just less than 284MW of wholesale capacity under construction in primary markets. Forty-six percent, or 131MW, is pre-leased. Sustained data center service demand has also started to cause an uptick in spec development, though pre-leasing levels over the past few years have been between 45-65 percent.

“Arizona’s data center incentives program will likely also continue to be an attractive draw for future demand,” said Denmon.

According to the Arizona Commerce Authority, the data center incentives program provides Transaction Privilege Tax and Use Tax exemptions at the state, county and local levels for qualified purchases of computer data center equipment. For projects that qualify under the program’s sustainable redevelopment guidelines, exemptions are available for up to 20 years.

Major recent additions in the Phoenix market have included 9MW from CyrusOne at its Chandler campus, which was fully pre-leased. The company plans to add even more capacity, also pre-leased, later this year. Aligned Data Centers has pre-leases in place for 3MW of the 5MW it’s planning to bring online this year in its first phase of development, and it can phase in more capacity if the need arises.

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