Real Estate Research
How Phoenix is positioning itself for a boom in big data
Demand for data centres is accelerating. We recently visited Phoenix, a city that is set to capitalise on the opportunity.
Index Rank: 23rd
- World class companies such as Boeing and Intel call Phoenix home, whilst it is also a great place to start a business or study
- High resilience due to power and fibre optic infrastructure and low risk of natural disaster
- Phoenix offers a low cost alternative to data centres in Silicon Valley or Dallas
- Arizona state offers tax exemptions on data centre equipment purchases
- Supply of land is higher than coastal cities
- Weak urban planning means a reliance on cars for transportation
- Median household incomes are below the national average
What are data centres?
Data centres are where the internet lives and scientific breakthroughs are made, yet from the outside they look like ordinary industrial warehouses. Inside they host thousands of computer servers and miles of fibre optic cable.
These support everything from the movies you watch on Netflix to the operations of national governments. A break in service would impact the daily lives of consumers and employees around the world.
Avoiding ‘downtime’ is therefore mission critical, meaning that technical infrastructure and security is more costly than for other types of real estate. When Hurricane Sandy took down New York’s power grid on 29 October 2012, diesel backup generators and flood defences maintained normal service.
A number of cutting edge technologies are expected to intensify demand for data centres. These include virtual reality, artificial intelligence and the ‘Internet of things’.
Cisco forecasts that by 2020 we will transfer and store around three times as much data in these buildings . ‘Hyper-scale cloud providers’ such as Amazon, Microsoft and Google are competing aggressively to store the big data we will create.
This presents a huge growth opportunity for REITs able to quickly develop suitable facilities, potentially offering investors generous income yields of 10-20% on invested capital.2
Cisco forecast for big data produced by smart cities in the future (December 2016)
Cisco forecast for data stored in data centres (December 2016)
Capitalising on this demand
The challenge for landlords is to accommodate the ever evolving needs of their tenants. This begins with a highly reliable and preferably low carbon power supply, with a large facility using more electricity each day than 8,000 households.
Industrial air-conditioning requires chilled water storage, with a mid-size facility using around 2.5 Olympic swimming pools worth of water per year to cool the servers.
Fast fibre connections to distant data hubs are important, whilst enterprises increasingly also want to interconnect locally with their business partners.
Interconnection revenues are growing at 19% per annum at industry leader Equinix, which now hosts 188,400 cross-connects between customers and has a record of 99.9999% uptime3. These fibre ecosystems are increasingly a barrier to entry for new investors and offer 90%+ profit margins given low installation costs.
An oasis in the desert?
The popular perception of Phoenix is that of a sprawling city in the middle of the Arizona desert. Perhaps less well known is that it is also a leading city for entrepreneurs.
The Kauffman Foundation ranks the state in the top 10 nationally for new business start-ups and the number of entrepreneurs in the US per 1000.
New industries, such as clean technology and personalised medicine are growing quickly, owing to good local public research institutions and a strong focus on technology.
With a population of 4.7 million4, the Phoenix metro area is growing as a data centre location due to healthy local demand and reliable infrastructure. The Palo Verde nuclear power station just 75 miles away and the climate is well suited to solar generation.
The metro also intersects the top tier data centre markets of Silicon Valley and Dallas. Three hyper-scale cloud providers have recognised this potential and entered the market in the past year alone.
We visited Digital Realty’s 519,000 sq ft facility in Chandler, which sits 20 miles south of downtown Phoenix and is the largest data centre in Arizona. It is an impressive complex with an extensive security network of barriers and biometric readers. Resilience is increased by an onsite power substation and water storage facility holding 400,000 gallons.
Digital recently doubled the footprint and with the new space mostly let, are considering further expansion. Competition in the city is less fierce than larger markets such as North Virginia, but peer CyrusOne is also developing new facilities locally and recently acquired another 29 acres of land.
The entrance to 2121 South Price Road, Chandler
Phoenix is well placed to capitalise on the explosion in data creation and storage. Early investors such as CyrusOne and Digital Realty should benefit as customers move into the region and cluster in the most well connected and reliable facilities. If developers remain disciplined and phase the delivery of new space into this demand they should benefit from increasing occupancy and income yields, in excess of most other real estate sectors globally. Local government will need to ensure that infrastructure keeps up. As investors in the sector, we remain focussed on companies with the most fit-for-purpose portfolios and the scale to offer tenants the connectivity that will drive their future success.
Find out more about Digital Realty’s strategy:
Get you head into the clouds with Cisco’s forecasts:
1. www.DataUSA.io (2016)1↩
2. RBC Capital Markets, Data Download report (2016)2↩
3. Equinix Q3 2016 earnings presentation 3↩
4. Oxford Economics↩
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