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Saturday, Sep 23, 2023

Data Centers in Demand, But Where Are They?

Real Estate: Lack of vital infrastructure hinders growth.

Burbank is the place in the San Fernando Valley best equipped to house data centers, but that doesn’t mean the industry is rapidly growing in the area.

Data centers — which house a large group of computer servers typically used by companies for the remote storage, processing, or distribution of copious amounts of data — have seen slow growth in the North Los Angeles region, despite an increase in demand.

Darren Eades, a managing director and data centers leasing expert at brokerage Jones Lang LaSalle Inc., said there’s a reason for it.

“It’s about power and fiber,” he said. “There’s over 300 strands of fiber that run into (the) One Wilshire (building in downtown L.A.). There’s where all of the connectivity collides.” 

Eades said that finding data center sites for clients hasn’t been easy.

“I’ve been doing it for 20 years in Southern California,” he said. “There are very few people who do what I do. You have to be very specialized.”

Increased demand

CBRE Group Inc.’s latest North American Data Center Trends Report shows that there were 493.4 megawatts of net absorption in the seven primary U.S. data center markets in 2021 — a 31% increase over 2019’s then-record level, and up 50% from 2020.

Despite a 17% year-over-year increase in primary-market inventory, vacancy fell to just 7.2%.

Occupiers in need of data center capacity in markets with low vacancy should see more options this year, as there are 727.6 megawatts of facilities under construction. However, 44% of this space has been preleased, according to CBRE.

“We expect continued strong data center demand from cloud service providers and social media companies in 2022, particularly for large-scale, single-tenant facilities, as these firms race to build out metaverse and other digital communities,” Pat Lynch, executive managing director of CBRE’s Data Center Solutions, said in the report. “The continued adoption of autonomous vehicles, 5G infrastructure, and blockchain technology will also further fuel the data center real estate market in 2022 and beyond.”

Locally, Eades said much has changed in the last 24 months as consumers look for quicker, more reliable, and safer service.

“A lot of it was triggered by Covid; that led to a lot more media and content,” Eades said.

Online traffic increased when companies began dealing with the dangers of Covid by instituting work-from-home policies.

“There was a huge surge for public cloud services,” said Jennie Karnes, a vice president at CBRE.

Top markets

The seven primary U.S. data center markets are Northern Virginia, Dallas, Silicon Valley, Chicago, Phoenix, New York Tri-State and Atlanta, according to JLL data for the year 2021. 

Northern Virginia topped the list with 303.3 megawatts of net absorption. Looking ahead, Northern Virginia has the largest under-construction pipeline, at 239 megawatts

By comparison, Los Angeles had 13 megawatts of net absorption and nothing under construction in 2021.

In metro Los Angeles, the biggest data center hubs are located in downtown L.A., El Segundo and Irvine.

One Wilshire, located at 624 S. Grand Ave., sees the convergence of subsea cables, domestic and international carriers, public cloud service providers and peering, in which companies exchange network traffic with each other.

“This whole downtown data center market, it started 20 years ago,” Karnes said. “CoreSite had three data centers.”

This was soon followed by the presence of Telehouse America, Digital Realty Trust Inc. and Equinix Inc.  

“They pioneered the market,” Karnes said. “They all have sites at the downtown core.”

Today, One Wilshire remains Los Angeles’ concentrated data center hub.

“At the end of the day, all roads lead to One Wilshire,” Karnes said.

Eades said that options are very limited beyond downtown, El Segundo and Irvine.

“The next option is Burbank,” Eades said. “There’s been a couple data center locations in Burbank. They were going after the Disneys and the Netflixes of the world.”

Local centers

Burbank is home to Cyxtera, a data center at 3015 Winona Ave., which spans 82,910 square feet.

“The Burbank region, it’s the only city north of L.A. that has attracted data center development,” Karnes said.

These facilities, however, operate on a lesser scale than One Wilshire does.

“They’re supporting entertainment, media and maybe some health care,” Karnes said. “It’s so below-the-radar size-wise compared to downtown Los Angeles.”

The demand for Burbank data centers is also considerably less.

“Most of the studios have their own data centers on the premises,” Karnes said.

Ideal properties

The ideal properties for a data center are older industrial buildings that go up about six stories with high clear heights and reinforced floors and roofs designed to house generators and cooling systems.

Finding such buildings has been a competitive endeavor.

“You’re fighting with the Prologises and the Rexfords,” Eades said. “It’s been a little bit of a struggle to identify those locations. We’re continuing to look for our clients for 4 to 8 acres and 250,000 to 400,000 square feet.”

The power limit tends to be 49 megawatts. Beyond that, the wattage goes to another level, called power-plant exemption.

Eades describes 49 megawatts as “a very large facility, that’s a lot of power.”

“We’ve looked outside of Burbank in Sun Valley and other communities,” Eades said. “The city of Burbank is very business-friendly.”

Further west and north in the Valley does not work, experts say.

“Most of the clients are reluctant to go out that far. You want to be as close to One Wilshire as you can because of the latency, the speed of data travel,” Eades said.

The route of the fiber lines dictates where the data centers could be located. 

“When you get outside of the city of Burbank, you start having issues with fiber,” Eades said. “We’ve looked at North Hollywood and we’ve looked at Glendale. We just haven’t found anything amazing. We’ve looked at Pasadena, there are a couple of small data centers there.”

In Southern California, the price of power is expensive, as is the price of land.

“It’s one of the reasons why Los Angeles has never been a hotbed,” Eades said.

Still, Eades said he expects the data center market to continue to grow in the metro L.A. area.

“It has to expand,” he said. “The demand has gone up. We have 100 megawatts of transactions, looking around from 5 to 50 megawatts.”

Outside of the downtown market, JLL recently firmed up a transaction with Prime Data Centers in the city of Vernon for a 30-megawatt location.

“Vernon is similar to the city of Burbank, very business-friendly (and a) low cost of power that made sense to go there,” Eades said.

“I’m extremely bullish on this market,” Karnes said. “Data center demand is definitely going to grow.”

And that demand could hike prices.

“In 2021, pricing was pretty stable,” Karnes said. “Now prices will go up. When you exhaust the primary market, of course you’re going to consider a secondary market.”

As a result, Karnes said more activity in Los Angeles is imminent.

“I just don’t know if they’re going north in L.A. It wouldn’t surprise me if companies are looking,” Karnes said. 

Karnes said it will take an aggregation of network providers or the support of a hyperscale company as an anchor to create data centers elsewhere in North Los Angeles beyond Burbank.

The communities themselves may not be creating incentives for the facilities.

“Data centers don’t drive a lot of new jobs,” Karnes said. “You can have a small team who can run a small or large data center.”

Nevertheless, she thinks it’s a matter of time before more data centers show up in outlier communities, as they have in Vernon. 

Michael Aushenker
Michael Aushenker
A graduate of Cornell University, Michael covers commercial real estate for the San Fernando Valley Business Journal. Prior to the Business Journal, Michael covered the community and entertainment beats as a staff writer for various newspapers, including the Jewish Journal of Greater Los Angeles, The Palisadian-Post, The Argonaut and Acorn Newspapers. He has also freelanced for the Santa Barbara Independent, VC Reporter, Malibu Times and Los Feliz Ledger.

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