Pat Lynch

Southern California's data center demand is continuing climb. According to a recent report from CBRE, data center demand in the market is up 38% over the same time last year, with 5.8 million megawatts in absorption. The market's dense population, content consumption and significant presence of tech companies is behind the activity.

"Companies in cloud computing and cloud infrastructure industries are continuing to grow," Pat Lynch, senior managing director of data center solutions at CBRE, tells GlobeSt.com. "When you look at a market like Los Angeles or Orange County, there is a high concentration of people and a high concentration of technology-based companies. While this part of the country remains an expensive place to store and maintain data, there are so many people and so much information being created, the infrastructure requirement will continue to grow."

A shift in the way companies use data center space has also contributed to the heighted activity. "Big, mega-scale companies aren't going to build 100-megawatt sites, but they do have a need to connect to the people in the market. That is driving a lot of the uptick," adds Lynch.

Despite the demand, the Southern California data center market has a 19.7% vacancy rate, flat over the first half of 2018 but up over the second half of the year, when data center vacancy fell to 16.3%. The growth can be attributed to new construction. In the first half of the year, the market added 12.3 megawatts of space. However, Lynch isn't concerned about an oversupply issue. "When you look at the amount of supply, the percentage is a big number, but it is relatively small in terms of megawatts, which is the way that we measure the market," he says. "So, one or two large deals quickly eats up a large part of that capacity. So, for us, we are not concerned about the incremental supply. We are constantly creating incremental demand for data center and telecom space."

In addition, the market is different today than it has been in past years, when network companies dominated the market. As a result, it is better equipped to withstand a downturn. "Real estate is inevitably cycle driven, and this industry is still relatively new," says Lynch. "What is different today is that the people that are building, operating and funding data center space come from a real estate background. It is a much more disciplined approach to supply. For example, people will build a shell but won't complete the internal data center until there is demand. The industry has really evolved over the last few years."

If there were a supply issue, Lynch expects it would be in the more dated segment of the market. "Five years ago, corporate clients were still building their own data centers," says Lynch. "Today, a vast amount of activity is often times helping corporate clients find co-location facilities, so third-party, operated, provided data centers. The oversupply scenario, when it plays out, will come from older, dated corporate centers."