Data Centers - A Critical Connection

At a time when demand for data center space is skyrocketing, Dallas-Fort Worth has emerged as one of the top markets in the country.



THE PANELISTS (left to right):

BRYAN MARSH

As vice president, Bryan Marsh serves as Digital Realty’s Central region portfolio manager. He has overall responsibility for strategic planning, acquisitions, development, operations, leasing, and financial performance of 43 buildings with 4.7 million rentable square feet.

BRYAN LOEWEN

Bryan Loewen leads Newmark Grubb Knight Frank’s global data center practice. He works closely with the company’s 300 worldwide offices to help companies develop business continuity plans and mission-critical strategies involving data centers, colocation sites, and hosting facilities.

BILL BURTON

As executive vice president of Hillwood Properties and Hillwood Urban, Bill Burton has been a key player in the transformation of AllianceTexas from raw ranch land to an 18,000-acre, masterplanned development. He also was instrumental in bringing a Facebook data center to Fort Worth.

CAROLINE BRELSFORD

Caroline Brelsford is central regional director for CyrusOne, which specializes in reliable enterprise data center colocation. A seasoned industry executive, she has helped the world’s leading brands reduce risks and costs associated with critical data center infrastructure.

BO BOND

Bo Bond is managing director and co-leader of JLL’s global data center solutions practice team. A recognized industry leader with more than 24 years of experience, he has successfully negotiated more than 20 million square feet of real estate transactions in multiple states.

BRANT BERNET

As senior vice president in CBRE’s brokerage services group, Brant Bernet leads the firm’s data center team. He previously was a principal at Trammell Crow Co., where he helped pioneer high-tech tenant representation. He went on to launch Rackhouse Group, which focused on data center site selection.

ANDY ABBAS

Andy Abbas, co-founder and vice president of Data Agility Group, which specializes in data and data center migrations, data center relocations and consolidations, and related services. He has been in the industry for more than 30 years, holding IT executive posts at AT&T and Sears.


When social media giant Facebook selected a Hillwood site in North Fort Worth for its newest data center, reverberations were felt throughout the market. Hillwood chairman Ross Perot Jr. spoke about its impact at a ground-breaking event last summer: “The fact that we were able to go through the Facebook process, which is very rigorous and very professional, and come out on top, shows the world that this is where you want big data centers to be.” Those involved in the sector have long known this to be true. In fact, Dallas-Fort Worth has quietly become the nation’s No. 2 data center market. To get an update on activity in the region, we gathered some of the top minds in the business for a panel discussion. Here’s what they had to say.

 

CHRISTINE PEREZ: Let’s start with a look back at 2015 and North Texas data center market activity and absorption. Did it fall short, meet, or exceed expectations? 

BO BOND: JLL just released a report on what happened in major U.S. markets—a wrap-up of 2015 and highlights of 2016. Specifically to Dallas, we saw greater than 40 megawatts on the multitenant data center front absorb. That’s 250 kilowatts and up. Outside of that, you would have very large enterprise data centers that were built, which we wouldn’t put in the absorption model. If you look at Facebook, you look at State Farm delivering its data center, we wouldn’t put those into the numbers. 

In 2015, we saw an increase over 2014 and 2013, and it was very strong for Dallas, in comparison to the rest of the country. Northern Virginia, which led it, was well into the 60s. Dallas was the second-largest market in the U.S. from an absorption perspective. I think everybody in this room is pretty excited about that. And I think everybody had a hand in that. As we look forward to 2016, we’re going to find a unique situation where there’s starting to be constraints on space, something that Dallas really has never run into. 

BRYAN MARSH: Just a point of reference for those who may read this and don’t know, the metric for data centers is kilowatts or megawatts; that’s how we measure the increments we lease. It’s all based on IT load—what can service the computers in the data centers. For Digital Realty, we did 15 megawatts of IT loads in 2015. That was up from 7 megawatts in 2014. We almost doubled it. We typically see about 10 or 11 megawatts per year of absorption in our portfolio in Dallas. So, it was a better-than-normal year. 

BRANT BERNET: So your double was just in Dallas?

MARSH: Just in Dallas, right. When Bo was talking about 40 megawatts of absorption in Dallas, about 16 of that was from Digital Realty. 

BERNET: The only thing I would add to that is, in 2015, we ran a couple of projects where really, truly, for the first time, we only had a couple of options. Thankfully, there’s a lot of potential construction going on that will bring that back into alignment.

BOND: Compare that to traditional real estate. For the person looking for a warehouse or retail or office, to have just two or three options total—that’s unheard of. 

BERNET: There were a couple of “sold-out” signs in 2015.

CAROLINE BRELSFORD: A few years ago, we started increasing our scale of the footprint of our data halls—we deliberately enlarged. We take what I’ll call a factory approach or an assembly-line modular approach to building. We structured that process through our construction arm so we could keep up with the type of demands that were coming. We could see it coming on the horizon. The scale has served us well … to have the larger data halls, to be able to scale up additional megawatts on a moment’s notice. That has been key to supporting some of the emerging growth we’ve seen coming into the market. 

ANDY ABBAS: One of the things that we’ve seen, particularly in the scale end, is more organizations creating a lot denser racks, because that would help the real estate requirements. You minimize the requirements to a certain extent and you’re going to have a lot more compute within a rack. That provides scalability to the organization so they can scale better and faster than having to span across multiple data centers and multiple racks. On the flip side of it, that obviously puts a lot of load on the power and cooling for that same rack. Historically, if it has only been 5 kilowatts and now you’re up to 8 or 9 or 10 kilowatts, that increases the load on the entire data center. What we’re seeing is more organizations are wanting to put more functionality and compute in individual servers, versus spanning across multiple—particularly with the virtualization and cloud piece of it. 

BRELSFORD: We call that vertical growth. Because that will also have a positive impact on the client over time. As their IT infrastructure changes, they refresh their servers, the servers process more efficiently, they also reject more heat. When the data center is designed to accommodate the vertical growth, the client does not have to necessarily add more space when they need to refresh their IT kit. It also has positive benefits long term. 

BRYAN LOEWEN: To the original question, what you’re hearing here is, although it may have met some of the opinions here as far as expectations and what we would expect from the marketplace, if you look at it from Wall Street’s perspective and others, I think we exceeded expectations in the market. The inventory is at a low point here. We look at other markets across the U.S., and there are similar markets that had a lot of absorption. But the Dallas-Fort Worth market, when there’s very little inventory left, I think you have to look at it having exceeded expectations. 

BOND: That’s a great point. You look at the public market this past year, everybody thought maybe we were in a bubble here in Dallas, a lot of cranes coming out, headquarters relocations. But if you look across the county, the stock market stayed fairly flat at the end of the year. We’ll use the term in this room, “Big Six.” There are six larger, publicly-traded real estate investment trusts on the data center side, that the market is really starting to track. They ended up 30-plus percent, if you average weight them, over the market. So, performance at the public level is extremely positive.  You look at the traditional real estate category; they’re down five percent. So there are really strong metrics at the public markets level. That’s something we’ve seen over the last few years. The public markets are very instrumental to this industry, how these guys come in and build, and where they build.

BILL BURTON: With regard to the vertical growth inside the buildings: Where does it put stress on the buildings, and does it start to limit anything in this area, with respect to growth? 

BERNET: I think the biggest stress is the power piece. We’ve got good, clean, and abundant power here. So my knee-jerk reaction would be, bring it on. I think it’s going to be fine. Some of the constraints of how you build, especially where you have restrictions on the equipment yard where you can’t bring in more generators, like in a downtown environment, it would be difficult to expand that. But most of what we’re seeing is big equipment yards, big setbacks, the opportunity to grow that equipment yard kind of as large as you want, and then all you’ve got to do is bring in more power. 

 

What is driving all of the demand that we’re seeing, here in this market and nationally? 

BRELSFORD: It’s the explosion of data, the amount of data that continues to compound every year. I read somewhere, to put it in perspective, that we’ll be at 44 data bytes by the year 2020. To give an idea what that means, it would be as if every human being on the planet were receiving 174 newspapers per day, just to get to 1.9 data bytes. A cell phone alone today, an iPhone 6, could support over 100 Apollo-type rockets. The technology in such a small chassis can yield so much processing. Clients today look at the data and they want the velocity of that data. Gone are the days where they want to hear they have restrictions on how they access that data. We’re even seeing clients begin to re-tool their applications with Herculean efforts to do so, such that they’re not bound by a particular geography. The cloud has helped drive that in many respects. That’s why Dallas is such a good location, even for enterprises that aren’t located here today, because of the clean power, the economy, the affordable living, good access to power, et cetera. It makes Dallas a viable option because they’re re-tooling their applications that data can be accessed.

MARSH: We call it “SMACC.” And that’s not trash talk. That’s social, mobile, analytic, cloud, and content. To us, those are the big drivers in the market. Social obviously being Facebook, LinkedIn, online gaming; mobile with smartphones, laptops, wearable devices transmitting data; analytics revolves around big data, analyzing information, and recognizing patterns and making predictions, algorithms, that sort of thing; the cloud, obviously, is where the Internet resides; and then content, with streaming like Netflix and Comcast.

BURTON: That stuff doesn’t go away. And that’s part of the issue. More users, more user engagement. And the product, it’s changed. It’s gone from pictures to streaming. 

ABBAS: That’s in addition to the consumer-driven data, because it’s so easy for organizations to deploy systems—you can deploy a system within minutes, versus having to wait for two weeks. What happens with that is organizations are becoming more fluid in what they’re doing. So if they need to send up a VM (virtual machine) and say, “I’m going to test at one functionality,” they don’t really have to think about it other than, “OK, these are the steps I need to take. Within 20 minutes, I’m going to be done and up and running.” So they’re deploying more and more VMs. That, in turn, is growing the data center environment. As they grow, the back-end infrastructure needs to be able to accommodate that.

BOND: If you look at what happened in Dallas, we’re pretty fortunate here. Because the users that took space in this market in 2015 were extremely diversified. They mirror what happened in the larger office market. If you look at Northern California, it’s major technology companies, major social media companies. But in Dallas, we had major social media companies, a major transportation network company we’re all using to get places on our smartphones. We had huge healthcare land this year. We had nice financial institutions that landed this year. The cloud companies took a ton of space this year. Our automobile manufacturers took space here. So, there was very diversified absorption. It came from every industry vertical. That’s good for all of us. 

 

Caroline, you mentioned talent. How does Dallas stack up in terms of access to talent? 

BRELSFORD: It’s absolutely phenomenal. You have major university systems here. You have good trade schools. Dallas is a place where young, career-minded people want to be. You have transportation systems for those who want to live downtown and maybe commute outward to work. It’s a very diverse and very strong human capital market in my mind. It’s unusual, because we see other markets where you may have difficulty hiring or staffing someone for a period of time until you find the right one. Here, it’s not uncommon for us to have several qualified candidates come in. We’re having to interview more times to try and figure out which one is the right fit. But I believe the quality of living here attracts individuals to work for us and, of course, just the education system here—even for ongoing, continuous education for employees is excellent. 

BERNET: Having said that—and you and Bryan would know better than anybody, because I completely agree with that. But the engineers are in short supply, right? It’s hard to find good engineers to run good data centers, even in Dallas, especially because there’s just so much going on. Is that right? 

MARSH: Yeah. We’re having to raid our competition a little bit for good engineers.

BERNET: Seems like the good ones bounce from place to place. 

BURTON: Don’t you think it’s relative? We’ve got a very large pool relative to the rest of the country. If you’re looking for talent, that’s what we understand in the companies that we’ve worked with. For Facebook most recently, talent was one of the big criteria for them. And then also access from the West Coast, having enough direct flights to and from the Valley. It’s very important getting those people here. Those were two critical components. 

BRELSFORD: I certainly haven’t seen that challenge for our partners delivering what I’ll call higher-end solution technology engineering skill sets. Perhaps, maybe, on some of the mechanical facility side, that might be a challenge for some. One of the other things that attracts clients to this market is the fact you have large hubs for what I’ll call your major OEMs (original equipment manufacturers), your major managed service providers. And there’s always a good head count for those operators to come in and assist clients with their IT strategy or even the management of their infrastructure. It may be unique to certain skill sets around mechanical or cooling, or generator sets on the power side, but we haven’t seen that at this point. 

ABBAS: There’s a lot of attrition going on right now and also layoffs. Obviously, it’s the big boys, like HP, for example. So I think that will help with having resources available for the data center market. One of the key things that probably needs mentioning is a lot of colleges and universities are focusing on this. At the University of North Texas, for example, there’s a brand-new technology lab they’ve developed. And IBM has donated quite a bit of equipment there. I heard the same thing that the resource availability within DFW, because of the growth spurt, is becoming a challenge. The universities are working to circumvent that.

BOND: Again, I don’t want to contradict what you said, but to say there’s been a lot of layoffs, I’m going to raise my hand and say that may be at HP or something like that. But I wouldn’t say there are a lot of layoffs in this town. As a matter of fact, I think there’s a significant amount of growth, and there is a race for good talent. Relatively speaking, we’re not talking about the West Coast here where they’re literally having to bus people in on company-owned buses, set up company-owned apartments, pay significant bonuses and deal with job hopping left and right. This is not the Bay Area, where it’s a talent war. I think we have great talent here.

 

Bill, you mentioned Facebook. What kind of an impact does winning a brand like Facebook have on the region? 

BURTON: For us, it has been outstanding. Facebook is a world-class company. They do a tremendous job. They have tremendous branding, tremendous reach. Their criteria is very, very strict and specific. They dive pretty deep, pretty hard. So when they’re looking at our site and they’re looking at our infrastructure, when they’re looking at our city, when they’re looking at the politics in the state—no stone is left unturned. They always told us they’d protect to the 1 percent of 1 percent, and that’s pretty deep. And so having them go through the process with us and validating the infrastructure program that we have in place, the skills and the talents that are in this area, and then the politics on top of that, I think it says a lot. 

LOEWEN: North Texas has been a tremendous data center marketplace, but the Fort Worth side has not seen the growth that the Dallas and Richardson side has seen. You see in data centers a lot of times the conglomeration of facilities. Facebook and their extreme due diligence process and everything else, is going to lead other companies to say that going west of DFW Airport, that there is a very strong infrastructure. There are land options. There’s a lot of uniqueness out there that I don’t think has been properly benefited to the community. So I think Facebook will probably be one of those pioneers to show the path for other corporations to say, “Look at facilities outside the traditional Richardson corridor.”

BURTON: Facebook was a huge announcement. But in addition, we have AIG, Citigroup, and Blue Cross Blue Shield, who have very significant data center operations. It goes back to the age of the infrastructure and the quality and the redundancy of the infrastructure. Texas being on its own grid, I don’t know that it alone is really that big a deal. But at Alliance, you actually have a location where the Brazos Co-op and Oncor come together at the same location. So you’ve got phenomenal redundancy from independent generating sources, and that’s a big deal. We also have locally- and regionally-looped water. We haven’t really talked about water, but water is a very big factor. Renewable energy is becoming more and more of a factor because of what companies want to operate as well. 

 

We talked about vertical growth. What other trends are we seeing from a development perspective? 

MARSH: Caroline mentioned CyrusOne going to the bigger-scale projects, and Digital has done that, too. So bigger footprints, multi-story buildings, larger data halls, and shared infrastructure, particularly on the mechanical side. We are also seeing customers that are asking for N and N+1 now on the UTF (unicode transformation format) side, the electrical side, where in the past they used to all be pretty much 2N. They’re willing to give up some redundancies in order to save money and reduce cost. The higher densities we talked about, you’re seeing a lot of new technologies there, in order to accommodate, like in-rack cooling, where you’ve actually got water inside the cabinets.

LOEWEN: I think one thing that’s universal is—and this has been over the last three or four years—you’re seeing less and less retrofitting. The guys who had to put their data center inside of an office building and grow it over time, the light bulb is going off and they’re saying, “We need to move this out, move it somewhere that doesn’t have sprinkler systems and floor load issues and power issues.” They’re finding it’s easier, it’s cheaper, and more efficient to build from scratch. From a user’s perspective, you’re seeing a lot more options—not just in the Dallas-Fort Worth area, but really across the whole sector. You see a lot more customer-driven solutions that are allowing for optionalities that go beyond just your box and power-cooling space. 

BOND: I think what we see now from the providers is they see the benefit of larger, campus-type developments, being able to make that dollar go further. And then inside that box it is absolutely customization. I’m listening to exactly what the customer wants. I built a product that is flexible enough that I can absolutely handle the way you want to run your IT. The results have been great on the user side, which then translates back to the provider side, to the public markets, et cetera. It’s always fun to sit in the room with some very smart people dissecting the requirements and coming back with customized solutions. As we go from provider to provider, there’s a lot of time that the solution looks different. You really start to see light bulbs going off on the user side saying, “I just never thought of that.” Right now we are at a new frontier of helping the client truly solve, versus having to fit into what’s available in the marketplace. 

MARSH: Let’s not forget that data centers are the most sophisticated, most complex type of commercial real estate on the planet. So add a zero to everything. It’s because of the redundancies that are built into the system. So if something fails, there’s always a back-up for that. These guys, especially the brokers here—Bo, Brant, Bryan—you know, they can make a ton of money on commissions, much greater than any office deal or retail deal with the size of the transactions. I’m always amazed when it comes out with the list of the biggest real estate deals in Dallas that there aren’t more data center transactions on there. 

 

Well, no one likes to talk about the data center deals. They like to keep them hush-hush.

MARSH: We should, though. Because sometimes we laugh when we see the size of some of those transactions on the office side compared to the deals we’re doing on the data center side. 

ABBAS: The online news source Data Center Knowledge recently published a report that said they’re seeing enterprises reducing their footprint by up to 50 percent. Now, that is huge, because their computing requirements are not going away. So what are they doing with that reduction? Well, they’re going into co-location facilities. There is a huge data center campus in Dallas owned by an organization, and they’re actually moving to a co-location facility. More organizations are realizing that they don’t want to be in the data center business, and they’re consolidating their data centers. We had one organization we worked with that took 34 different sites and consolidated it into one. Now, some of those sites were closets, right? So they weren’t necessarily full data centers, but those types of moves are happening more and more.

BOND: Maybe volume of data centers are being shrunk, a number of them. But I think if you can compute the power behind it, the number of servers is growing astronomically. 

ABBAS: We’re talking about organizations that own their own data centers. 

BOND: Which, in my opinion, are very few and far between. They might have a cabinet closet here or there, and they’re seeing the benefit of consolidating. But when they’re doing that, the overall compute power is still growing at a rate that is a huge hockey stick. 

BRELSFORD: In 2001, the average back-office density per server cabinet was around, maybe, 1 or 2 kilowatts per rack. It’s not uncommon to see a back-office compute rack now 13 kilowatts up to 20 kilowatts per rack. So if anyone has ever heard the term “Moore’s law” and the compounding effect of that, we have definitely seen that. Also, I think that CTOs and CIOs and CFOs, to some degree, want to transfer the risk of that asset to an operator like us. So it’s a risk transferral. It’s risk of either overspending capital or not spending enough if you didn’t get to market in time with your application. It’s the risk of downtime. It’s all these risks that if you can make it somewhat utilitarian and use a operator like one of us, that is sort of the trend we’re seeing. If you think about it, every refresh cycle since 2001 we’ve seen an up-kick in the kilowatts. The footprint might not necessarily grow when the client refreshes, but the density certainly does. If you’re owning and operating your own data center in an office building, you begin to run out of what room to move the air to just cool the heat dissipation for those systems.

LOEWEN: We spend a lot of time translating from CFO to real estate, CFO to legal, CFO to IT. That involvement by the CFO in decisions is because it’s such enormous cost and is becoming a bigger percentage of overall operations. As such, they’re evaluating should it be [capital expense] or should it be [operating expense]. If it’s cap ex, they may do it on their own site. If it’s op ex, they may choose to go and push these things to a third-party operator. As this industry has evolved into a very competent industry, there’s more trust that the risk can be shifted to someone else. Ten years ago, a lot of trust wasn’t built in this industry. It wasn’t distrust, but the fear of the unknown. 

BOND: For years, the CFO was worried about the most expensive item on the ledger, which was labor. The technological infrastructure is equally important today, managing that data. Obviously, it’s very important to recruit and retain talent, but to maintain the data that’s sitting on the server and then determining what to do with it, i.e., the big data concept—it’s very, very important. And that CFO is thinking about it all the time. That CTO, that CIO, they’re very, very integral into the direction of companies going forward. 

 

Earlier, we talked about Dallas-Fort Worth being the No. 2 data center market in the country last year. Our readers may not know all the reasons why. So what makes North Texas such a strong data center market? 

BERNET: Dallas is in the center of the country, so it’s easy to get to. We talked about power. Fiber is abundant. And despite the tragic tornado just after Christmas last year, we’re down at the bottom of Tornado Alley. We don’t really have natural disasters here. It’s a safe place to go. We have great diversity of working people. The total cost here for a colocation—if it’s not the bottom, it’s at the very bottom of the scale. 

BOND: Definitely for a major metropolitan area. I think one of the critical factors outside of our airport, our labor force, our right-to-work state, permits, the abundance of developable land—just the backbone of Texas and ERCOT and our power supply is phenomenal. We can get inexpensive, very available power. That’s the backbone of what runs the data center. And to be fortunate enough to sit on our own grid where, basically, you have Texas and you have two sides of the country and that’s it. It drives so many of the larger user requirements that come here—they feel safe. And at the end of the day, those guys are sleep-at-night guys. Mitigation of risk is everything. And then you roll in the fact that 80 percent of the state of Texas is deregulated, so then the fact that you get to choose and negotiate a power price and model that works for you, is phenomenal. 

LOEWEN: One of the macro effects—and probably complements what Bo is saying—that DFW is home to a lot of major corporations, whether it’s their headquarters or regional headquarters. Subjectivity comes into play in so many data center site selection searches. When I say subjectivity, people will look at various regions. DFW has a lot of metrics that make it a very attractive space. 

MARSH: Dallas is the on-ramp to the Internet super highway across the southern United States. And that goes back to our history as a logistics hub, with the railroads and the interstate system. The fiber follows those routes. If you’re trying to get from coast to coast, Dallas is the place. Chicago is another hub, for the northern part of the hub. What data center users need is a diverse connectivity and a low latency—and they can get that in Dallas. 

BURTON: Is that related—what you were saying, the on-ramp to the super highway is about latency, right? 

BOND: It starts west and comes through Dallas, so it’s very beneficial. Take the online gaming community. A lot of that talent, a lot of development in the state is done out of Austin, but you’ll see a lot of the data centers here, and it’s because of latency. They have a [service level agreement] they have to deliver to the person who buys the game, and that they want all those images to not, as my kids say, glitch. They’ve got to deliver. It’s got to have low latency. It’s got to sit on that highway, and Dallas delivers that, whereas other parts of the state and country don’t. Big financial institutions, healthcare institutions, technology companies have to have an abundance in aggregation of fiber, and it’s a win to be here. 

BRELSFORD: The conditions in this ecosystem that you heard everyone describe for the area are creating a magnet for the technology companies to come in, even some of the startup technology companies. You’ll see more of that, because we’re the foundation of that. When the data centers are in play, you’ll start seeing the market really attract its own little tech hub, if you will. It’s a very exciting time. 

MARSH: It’s not just one thing. It’s everything. You have to have it all. And that’s what makes Dallas great, because it’s basically got it all. 

BOND: We check so many of the boxes. 

BURTON: And a pretty stable government, too, which is very important. 

 

We talked a little bit about supply and demand, with supply becoming more constrained. How are developers responding to that? What do you expect to see in terms of new development this year? 

BRELSFORD: Build, baby, build. You’ll see that with all of us, don’t you think? 

BOND: Absolutely. 

LOEWEN: We tracked at about 650,000 feet of either under construction or potential construction first-phase-type stuff for 2016 and 2017. The market has listened to the fact that demand is high and supply is—like I said, there are some sold-out signs, and you never see that in the data center business.

BURTON: We’ve developed some data centers in the past. It’s really not our core. We build a lot of other product. For us, it’s really looking at the land, and then how do we access all of this infrastructure? How do we maintain the pathways? How do we make sure we can provide an environment that the users will want? And so as we do our land planning and develop around, for example, the Alliance area, we look closely at maintaining and protecting the purest environment we can to provide the flexibility, the speed to market. We also spend a lot of time with our local governments, because we’re in four different cities. When data center operations come in, time is money, and it’s very important to have those good relationships and have them understand what’s driving their business. And so we spend a lot of time with them trying to help educate them on that topic as well. 

LOEWEN: Brant mentioned the supply that’s going on, and there’s been a lot of supply that’s been coming into the Dallas-Fort Worth market lately. Users have historically wanted to see it before they buy it. And that inventory is not sitting in place, for the most part, in Dallas-Fort Worth right now. It’s still a little bit to-be-determined as to what 2016 and 2017 are going to look like, because that inventory is not there, where it has been in the past. It’s been absorbed pretty quickly. 

BOND: Of the Big Six publicly traded data center developers, four of them are here in Dallas, and all four are theoretically swinging hammers or have permits and sitting. So they’re building. But it takes a lot longer with the mechanical and electrical infrastructure that we’ve put into these buildings to be able to bring them to market versus your standard four slab walls. The folks who are in the room have streamlined and do things at lightning speed, but that’s because of the brilliance they have behind their construction teams, their supply chain and working with very smart people who have come up with great designs, and their suppliers being out in front of them. 

MARSH: We have broken ground on a 300,000-square-foot building in Richardson that will be delivered in November. It will start off with 6 megawatts, but will easily grow up to as much as 36 megawatts. We’ve got the scalability and flexibility to meet the market, as the customer demands are there. A year or so ago, we moved to an adjusted time delivery where we wouldn’t have inventory just sitting finished and vacant. Once we got the shell up, we could deliver it, really, in four or five months. We like going that route where we can have pre-leasing in place to eliminate some of that risk and that downtime. But in Dallas, you need to have a little bit of space sitting there ready where someone can move in, because a lot of times these requirements pop up and they need it tomorrow. It’s good to have a little bit available. 

 

When a headquarters moves here or a company sets up a big regional operations center here, does the data center usually come along at some point?

LOEWEN: All across the board, I’d say, yes. State Farm did that, as an example, but it doesn’t always happen. A lot of times that data center piece is a very difficult thing to migrate, and it might lag. Ideally, I think it would be in the same market as that headquarters, but it doesn’t happen all the time. 

BERNET: It just depends on the make-up of that particular company. Some will say, yes, we’ve got to have it right here because I want to go see the blinking lights and make sure that we’re able to touch it and change out the C Drive or whatever we need to do. 

BOND: If you go look at the stack of the bigger [relocation] announcements, I would say more than half of those have moved some form of data center component here. We’re using more data centers, but we have production data centers, we have research and development, business continuity, disaster recovery. Some form of that truly, I believe, ends up in the city.

ABBAS: Organizations historically have wanted their data centers close by, but that’s becoming less and less of a concern. As Bo mentioned, they may like to have some component of their data centers local, but then because their connectivity is so much in abundance, they can have a lot of their [disaster recovery], as well as their—in particular the DR they wouldn’t want in the same location, anyway, but R&D involvement can be at other facilities. I agree with what Brant said, that it’s really been a good half-and-half approach, where a lot of organizations have decided to move, and others have said we’re going to keep them where they’re at. 

LOEWEN: Subjectivity comes into play. Having proximity to the headquarters is definitely an advantage. In a market like Dallas where the rates are competitive, it weighs in our favor when there’s a larger regional headquarters presence there. 

 

What about House Bill 1223, the data center sales and use tax break that passed in 2013? Has that helped?

MARSH: I think that’s why Facebook is here. 

BOND: I call it elephant hunting, because it’s done a great job attracting some very large users here, but I think the state of Texas is missing out on the majority of the market—the smaller users. We’ve been trying for the last couple of sessions to tweak the bill a little bit so it can apply to more customers looking to come into Texas. It has gotten very competitive, and we’re competing with states all around the country.

BOND: In 2013, when HB-1223 was passed, I think, for us, that it started the conversation. In 2015, there was legislation passed, and it actually was larger than 1223. That’s what helped Facebook get here. Stuff that didn’t get passed that a lot of people in the room spent a lot of time working on is where we need to be, where it allows the user to truly benefit coming in and reside still in the masterful hands of a colocation data center operator, whether that benefit starts and inures to the benefit of the two—the tenant, or it can just go directly to the tenant. I hope we as a community can band with other different communities and get down to the state during the next session and see that. We’ve seen projects that would have landed in the state of Texas, probably in the city of Dallas, that went to other markets just because there were absolutely more aggressive state programs in other major metropolitan areas. 

 

What about opportunities for southern Dallas and infrastructure there? Are there things in place in southern Dallas County that could support data center operations? 

BOND: You used the word “infrastructure.” If you were to look at the greater DFW area and, to Bill’s point earlier, and what Alliance brings in this area, it is the infrastructure. So the abundance of power, the abundance of fiber. Fiber is much more rich in the northern community than in the southern community, just based on what’s been put in the ground. You also have a higher potential or perceived risk potentially in the southern sector—little more flood, little more rail. 

MARSH: What southern Dallas does have going for it is its proximity to the big carrier hotels in Dallas, which are 2323 Bryan Street and the Infomart. When you talk about low latency, the closer you can be to those hubs, the better off you’re going to be. There is an abundance of land sitting just across Interstate 30 that’s close to those facilities downtown. So, yeah, if you could get the infrastructure in place and some of the other things, there could be real opportunity connecting back to those gateways. 

BURTON: When we say infrastructure, it’s not enough to have access to it, it’s the redundancy that goes along with that. 

 

Let’s get everyone’s outlook for 2016, the challenges and opportunities. Andy?

ABBAS: The opportunities are great, because there is a lot of activity happening. A lot of companies are realizing they want to move into either a sale/lease-back or move to a colocation facility. There are still a lot of companies wanting to relocate here for all the reasons that we discussed. So there’s a lot of change. And for our business, that’s perfect. 

BERNET: The future is bright. It’s a great time to be in the data center business on all sides, be it land or colocation or real estate or brokerage side. For Dallas, 2016 will have some challenges, because of the lack of space that’s available. But 2017, 2018, we just look into the future—the requirements that started the need for data centers years ago have not changed, except that they have just continued to grow.

BOND: To echo a little of what Brant said, the interim challenge is maybe a lack of supply, but that will take care of itself just by folks that are on the ground today developing. The upside is here. That will be delivered. I think our economy is healthy. As long as we don’t run into a significant global issue, then I think we’re still going to have a bright, bright future here for years to come. 

BRELSFORD: It’s a very exciting time. I share the same outlook as these gentlemen here. We’ll also continue to see a number of enterprises that are out of state come visit this wonderful city and see what we all know to be true in terms of the economic conditions here. We’ll continue to play host, if you will, to visiting entities looking to, maybe, put roots down here. So it’s a very, very exciting time. 

BURTON: As I look at the broader economy, I have some concerns because of the geopolitical situation, as well as things taking place domestically. But as Bo mentioned earlier, with the increased users and user engagement, I think the opportunity in this particular sector is outstanding. We have the cost structure, we’ve got the access, everything that we talked about. This business is going to continue to grow, and I think that looks very well for DFW.

LOEWEN: I think in 2016 and 2017, we’ll see a lot more consolidation in M&A activity in this overall industry. There’ll be fewer companies, but they’ll be larger in size. With the M&A activity and company portfolios that are for sale, we’ll find that there will be consolidation in the overall industry. Dallas-Fort Worth will be one of the markets where you will see a handful of companies picked off. 

MARSH: I think the challenge for Dallas is to develop in a smart manner. We have a history on the real estate side of sometimes overbuilding and getting overly excited, because we have a lot of great developers in the city and it’s a great real estate community. So I hope that the data center [developers] will learn from some of the mistakes that were made in the past in some of those other areas, and be prudent with development so we can keep the supply and demand in check, and keep our rents at levels where we can make money and generate good returns for our shareholders.