Costs Loom Large in Data Center Decisions

LOS ANGELES—As cloud computing becomes increasingly prevalent, the question for many, if not most, corporate occupiers is not whether to seek out data center space, but how much and where. This leads to what Pat Lynch, managing director for data center solutions at CBRE Group, calls “complex site selection decisions, including whether to lease or own a facility.”

In a new report, CBRE identifies Atlanta, Colorado Springs, Northern Virginia, Portland and Seattle as the five most attractive markets for leasing a data center from the standpoint of cost effectiveness. These five markets scored in terms of project costs; conversely, Boston, Des Moines, Kansas City, Northern Florida and Omaha had the highest total project costs.

Factors to evaluate differ according to whether an occupier seeks to lease or own data center capacity. “For occupiers seeking to preserve capital or lease a data center, the selection process needs to carefully consider the primary cost variables of rent, power and taxes, and recognize the variability that exists from market to market,” Lynch says. “The site selection process for an owned data center will hinge more on the relative costs of power, real and personal property taxes, sales taxes, available incentives and construction costs.”

The CBRE report, written by Jessica Ostermick, director of research and analysis with the firm, analyzed a typical one-megawatt or 1,000-kilowatt data center lease over a seven-year term across 23 key markets in the US. Data center real estate is primarily measured in power utilization instead of square feet, which is a secondary consideration in keeping with the relative importance of power usage over physical space. 

Colocation lease rates per kW are heavily driven by both market competitiveness and maturity. Therefore, lease rates in a less mature and competitive market like Des Moines are higher than in a more competitive and mature market such as Silicon Valley.

The average first-year rent among the 23 markets is $158 per kW per month, or $1.9 million per year. The average cost of power among the 23 markets is $0.076 per kW hour, or $798,000 per year. Although the highest rents were typically found in the Central and Eastern regions, several of the Central region's less mature markets offered the greatest potential tax incentive offset.

Incentive savings represented a reduction of greater than 10% in the total rent payment over the life of the lease, or an average of just over $2.0 million in nine markets: Atlanta, Dallas, Houston, Kansas City, Northern Virginia, Omaha, Phoenix, Seattle and St. Louis. No tax incentives were available for leased data centers in nine of the 23 markets, including both California markets and several in the East.

Moreover, incentives in and of themselves do not guarantee success. CBRE's study found that with lease rates 120% to 140% above average, Kansas City, Des Moines and Omaha lagged from a competitive standpoint despite offering healthy inventive packages.

Supply, meanwhile, is growing at a healthy pace. Total inventory in tier one data center markets—Atlanta, Chicago, Dallas/Fort Worth, the New York tri-state region, Northern Virginia, Phoenix and Silicon Valley—reached 1,140.9 MW, a 31.3% increase year over year. Another 107.3 MW is under construction in these markets.