Silicon Valley: A Landlord’s Data Center Market

SAN FRANCISCO - Demand outpacing supply, Silicon Valley is a landlord's wholesale data center market, a state of affairs very different from one year ago.

That’s according to Jeff West, director of data center research at the commercial real estate firm Cushman & Wakefield. West, together with his colleague Bill Dougherty, an executive director at Cushman, delivered a presentation on the region’s data center market at the Northern California Data Center Summit in San Francisco earlier this week.

Demand, he said, was currently three to four times bigger than supply, with all the appropriate pricing consequences. Data center rents in the Valley currently range from about $125 to about $165 per kilowatt per month, according to West, who expects the upper end of the range to move further up this year.

Where to Find 2MW in the Valley?

About 20 megawatts of data center requirements have “toured the market” since January 1 this year, Dougherty said. But, if you need 2 MW of data center capacity in Silicon Valley that’s ready for you to move equipment in, your options are very limited.

Technically, there are about 10 options at the moment, but if you look closer, you'll find that the number is misleading. If you don’t want to sublease your 2 MW, you’re down to eight. Facebook has multiple long-term data center leases in the Valley, but it has been vacating leased facilities over the past several years, moving equipment into the mega data centers it has built for itself around the country and subleasing the space that's still under contract.

If you want new-generation data center space, you are down to only three options in the area, Dougherty said. “We quickly go from a lot of options down to very little in our main market,” he said. Silicon Valley is Northern California’s main data center market.

As a result, CoreSite Realty Corp. and Vantage Data Centers, two of the Valley’s biggest data center landlords, are racing to build out capacity on their campuses to capture the demand, and the big question of the day is when Digital Realty, another gorilla in the market, is going to start building again. Digital has been optimizing its real estate portfolio, identifying and selling off “non-core” properties and not building more capacity in the U.S., while it goes through that process.

Who’s Looking?

Demand for space in the Silicon Valley comes primarily from Asian and local companies. It comes from new and from existing tenants who are growing. “Server hugger mentality of the Bay Area is real,” Dougherty said. A lot of demand is being driven by Chinese Internet companies.

The nature of demand is changing. Data center providers are increasingly finding themselves having to provide varying levels of redundancy under one roof (2N, N+1, N, etc.), which makes for a complicated engineering puzzle. One customer may be satisfied with N, while another, in the same facility, may want 2N redundancy all the way to the rack.

Office Space Too Pricy for IT Labs

Because office real estate prices in the Valley have gone up so much, more companies are looking to put their IT labs into data center providers’ facilities instead of their office buildings, as they have traditionally done. A lab is a tricky proposition for a data center provider. A lab tenant doesn’t need the level of reliability a mission-critical tenant does, and they are not willing to pay for infrastructure redundancy you find in a typical data center, which makes it difficult for the provider to make a margin.

Vantage recently closed a big 3 MW lab deal. The reason the provider was able to make it work financially was that it had enough bare-bones powered-shell building space it had not installed all the backup infrastructure in, Vantage CEO Sureel Choksi said during a panel at the summit. The company is currently in discussions for another multi-megawatt lab deal, he said.

To be sure, most of the demand Vantage sees in both Silicon Valley and Quincy, Washington (its other location), is for 2N space. There is just more demand for lab space now than there was before.

The demand for lab space illustrates how different Silicon Valley is from other data center markets. “Where else in the country do you see a 3-megawatt lab?” John Sheputis, president at Infomart Data Centers, which has a big data center in San Jose, California, asked.

Lab or otherwise, more data center capacity in the Valley is in demand than there is supply, which the analysts expect to result in higher prices. While great for investors in data center providers, this certainly isn’t great news for the buyers.