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Chicago Unlikely To See Explosive Data Center Growth Outside Of Main And Main Locations

The creation this year of a special tax break for Illinois data center owners and operators raised hopes that the state’s industry is on the verge of a major expansion.

But with most of the land and available buildings in downtown Chicago already taken by multifamily and office developers enjoying a decade-long boom, data centers have few options to expand in the city. 

“It’s tough to find a greenfield site, or a good brownfield site, to repurpose,” JLL Regional Director Sean Reynolds said.

That means the region’s anticipated growth will most likely happen in and near suburban Elk Grove Village, the area’s other data center powerhouse.

Schulze Baking plant at State Street and Garfield Boulevard, which is being converted into a data center.

The top data center markets typically have facilities concentrated downtown and in a few select suburbs, according to T5 Data Centers Senior Vice President David Horowitz. In Dallas, the nation’s fourth-largest data center market, its downtown and suburban Plano hold much of its capacity, and El Segundo, a California suburb just south of downtown Los Angeles, plays a big role in that metro area.

“It’s very hard to create a new market, so the ones that are established are the ones where you see growth,” Horowitz said.

He will speak at DICE Midwest 2019, Bisnow’s Full-Day Premium Data Center Investment Conference & Expo on Sept. 17.

Part of the reason is simple logistics. Potential data center clients may wish to view a number of sites on a given day, and swinging out to Chicago’s Far South Side, or a remote suburb, may not be an option.

“It’s extremely important to be on that tour path,” Horowitz said. “Let’s say they have time to tour 10 data centers, the ones that are going to be on their shortlist are the ones downtown and in Elk Grove Village.”

“The IT talent pool also needs to be considered,” he added.

Many of the technicians that make data centers hum live on the city’s North Side or in the suburbs, and locating facilities outside those areas means punishing commutes for the workforce, he said.

It isn’t unheard-of for data center providers to establish operations outside the Chicago region’s hubs. QTS Realty Trust in 2014 bought an old Chicago Sun-Times printing plant at 2800 South Ashland Ave. in Pilsen, and in 2017 opened it as a data center with 24 megawatts of power capacity, a move that has been largely successful, Reynolds said. 

CyrusOne Inc. owns a major data center in Aurora, Illinois, currently used by Chicago-based CME Group Inc., the world’s largest derivatives exchange. And last year, CIM Group bought the historic Schulze Baking Plant at State Street and Garfield Boulevard on the South Side, and 1547 Critical Systems Realty began converting it into a data center.

QTS Realty Trust's data center in Chicago's Pilsen neighborhood

But these are isolated examples, and experts don't expect to see many more, at least in the near future. Part of the reason is that demand in the Chicago region is expected to grow at a slow and steady pace, rather than an explosive one, according to JLL’s latest data center outlook.

That is part of a national trend, as uncertainty over how to handle long-term data needs has curtailed demand for new construction in many markets, even as data consumption is growing fast. Even in Northern Virginia, the nation’s largest and most active data center market, net absorption in the first half of 2019 was down 40% from the same period in 2018, according to JLL.  

And at least until more companies decide on long-term strategies, a significant amount of supply will be available in the Chicago region, although the market as a whole remains quite healthy, Horowitz said.

“Data center space in Chicago rarely sits vacant for a long period of time.”

In the first half of the year, users typically refrained from signing large deals of 5 megawatts or more, and instead opted for smaller transactions of between 500 kilowatts and 1.5 megawatts, he said. 

That means a modest amount of new construction, mostly in the safe, established submarkets, including Elk Grove Village and the surrounding towns like Des Plaines, Itasca and Franklin Park should meet next year’s demand.

After delivering very little new capacity in the first half of the year, developers in the Chicago area now have data centers with 7 megawatts of power capacity underway, according to JLL. That includes 1547’s South Side project, Iron Mountain’s new data center in Des Plaines, and other developments by CoreSite, Element Critical and Digital Crossroads.

But data center development probably won't stay in these limited areas forever.

Reynolds said the new tax incentives package should put Illinois on the radar screens of big players like Google, Amazon, Microsoft, IBM and Facebook, firms that could establish the kind of massive, hyperscale facilities that need large tracts of low-cost land, something easier to find outside the metro area.

“At some point, one of the major cloud providers will go outside Main and Main.”   

Hear more from RBC Vice President Stephan Abraitis, Walgreens Director of Data Center and Server Services John Brooks, Microsoft Azure Global Black Belt, Intelligent Cloud – Americas' Sohail Zakaria and more at Bisnow’s DICE Midwest 2019.