Data Center Market Spotlight: Northern Virginia

Our theme this month is site selection. From electricity costs and network infrastructure to the available pool of skilled workforce, data center site selection is one of the most complicated and important business decisions a company makes. Data center location affects everything from the cost of doing business and overall company agility to the quality of user experience. And, like every other aspect of the data center business, where companies choose to put their critical IT infrastructure and why is changing because of … you guessed it: the Cloud. This month, we’ll examine these trends more closely.

Of all North American data center markets, Northern Virginia has been the most consistently active one, due in large part to its history. In the early 1990s, the region played a crucial role in the development of the internet infrastructure as we know it, naturally drawing a high concentration of data center operators who could connect to many networks in one place.

Today, fueled by the big cloud providers’ race to expand data center capacity, the market is hotter than ever. To say that demand for data center capacity in Northern Virginia is outpacing supply would be downplaying the situation.

“Northern Virginia is as tight as I’ve ever seen it,” Jim Kerrigan, managing principal at North American Data Centers, says. “If you want space right now, you’re in bad shape.”

NADC is a commercial real estate company specializing in data center space, and Kerrigan helps companies, including some of the biggest cloud providers, source data centers.

The reality is that wholesale data center developers in Northern Virginia cannot build facilities quickly enough to address the demand. It’s typical for a cloud company to take down 10MW or 20MW at a time, quickly leaving the market in short supply. Less than 10MW is currently available in the area, according to Kerrigan.

In the first quarter alone, Microsoft leased 22MW of capacity in Ashburn, which is where most of the region’s data centers are, according to a recent market report by NADC. Six of last year’s 20 largest wholesale data center leases signed in North America were in Ashburn. The lessees were Microsoft, Apple, Oracle, Uber, Google, and PNC.

Demand in Northern Virginia in 2015 totaled more than 60MW of data center capacity, according to a January 2016 report by Jones Lang LaSalle, a commercial real estate firm with an extensive data center practice. For comparison, companies leased 42MW in wholesale capacity total in the Dallas-Fort Worth market last year and 32.5MW in the Chicago metro.

See also: What Cloud and AI Do and Don't Mean for Google's Data Center Strategy

The Construction Race

Because there’s more demand in Northern Virginia than anywhere else in the US, there’s also more data center capacity under construction than in any other market. Close to 30MW was under construction in the region as of the first quarter of this year, according to Digital Realty Trust’s first-quarter earnings presentation. Digital is one of the biggest players in the Northern Virginia market.

But, because capacity is generally taken down as soon as it comes online, there’s little worry of oversupply. “Current construction pipelines are generally concentrated in top-tier national markets with high visibility on demand, and pre-leasing levels are healthy,” William Stein, Digital’s CEO, said on the company’s first-quarter earnings call in late April. “In addition, market vacancy rates within these markets are in the single digits, and our own portfolios in these same markets are likewise north of 90 percent leased.”

In other words, the providers’ existing capacity is maxing out, and they’re building because they see clearly that the demand is there.

See also: Data Center Market Spotlight: New Jersey

Sabey Dips Toe in the Water

One of the companies building in Northern Virginia is Seattle-based Sabey Data Centers, which held a groundbreaking ceremony in Ashburn Tuesday. This is going to be Sabey’s first data center in Northern Virginia, and the company is threading lightly, starting only with 2.5MW of turn-key space.

The region is “the best market in the world, by pretty much any measure,” Robert Rockwood, Sabey’s eastern region head, says. “We see an opportunity to bring Sabey-quality space into the market now, at a time when absorption is outstripping new construction to a meaningful degree.”

Acknowledging that 2.5MW is a “small first bet,” Rockwood says he feels it is the right move for a private company coming into a market without having customers already signed. Sabey does have existing customers in its other markets, in Washington State and New York City, who are interested in taking space with the provider in Northern Virginia.

Also, the initial 2.5MW of turnkey space that’s expected to come online by the end of the year will be the first data hall in a four-hall building shell. Once the building is outfitted with infrastructure, it won’t take as long to complete the remaining data halls using Sabey’s modular design, he says.

DBT-DATA Buys Land for Construction

One of the developers in Northern Virginia that has kept a low profile but scored some big wins in recent years is DBT-DATA. Two of the company’s operational data center properties in the market are leased to RagingWire, the NTT Communications-backed data center provider, and this week, the developer announced acquisition of two additional properties in the region where it plans to build quickly.

“There’s a race among cloud providers to create capacity,” David Tolson, DBT-DATA’s CEO, says. The cloud companies' business model has been validated, switching on the green light to make the big capital investment necessary to support their growth.

“If you’re going to make that incredibly large capital investment, why not go to the largest, most proven marketplace in the United States,” he says, referring to Northern Virginia.

Pricing Remains Low Despite High Demand

Interestingly, data center pricing in Northern Virginia has remained relatively low, despite the supply-demand imbalance. Some of the recent wholesale deals in the region were in the $105-$115 per kW range – some of the lowest monthly rates in the country, according to NADC.

Kerrigan says there are probably multiple reasons for this. One is that new players have been entering the market and using low rates to compensate for the newcomer’s disadvantage.

Another potential reason is the size of the deals the big cloud providers make. A 10MW deal with a top internet giant is very attractive, and even established players are willing to compromise on the per-kW rate if it means closing a deal like that.

Finally, some of the providers in the market offer a mix of wholesale and retail colo services, and they can afford to lease wholesale at lower rates, compensating for it with income from retail, which yields higher revenue per square foot.