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Recession-Proof? Data Center Expansion To Continue Even In Market Slowdown As New Tech Transforms U.S.

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Although data center demand and new development slowed throughout much of 2018, experts say users will clamor for space in the near future. Everyday internet users tapping on now-ubiquitous iPhones, along with corporations that need to upgrade their data infrastructure, will fuel demand, kicking off new developments throughout many metro areas even if the economy goes soft.

Recession-Proof? Data Center Expansion To Continue Even In Market Slowdown As New Tech Transforms U.S.
Illinois State Senator Elgie Sims, Jr.; Illinois Department of Commerce & Economic Opportunity Acting Director Erin Guthrie; Digital Realty Trust Vice President Rafal Rak; ComEd Manager, Economic & Business Development, Ed Sitar; Illinois Chamber of Commerce Director, Legislative Relations, Tyler Diers; Chicagoland Chamber of Commerce Senior Vice President Michael Reever; Freeborn & Peters partner Mitchell Carrel.

“Uniquely, communications infrastructure is driven by tailwinds that are disconnected from macroeconomic conditions,” Boundary Street Capital partner Rashad Kawmy said at Tuesday’s DICE Midwest, Bisnow’s data center conference.

Data center expansion could continue even if the economy hits a rough patch because the use of electronic devices keeps growing regardless of consumer spending patterns.

“This is not just real estate, this is tech-enabled real estate, and that technology will continue to evolve,” Kawmy said.

Much of that demand could arise from the advent of 5G, a new cellular network technology that major carriers are rolling out in the U.S. starting this year, or the possible rollout of autonomous vehicles, among many other potential changes.

“We are still in the early stages of this evolution,” said John Brooks, Walgreens’ director of data center and server services. 

Autonomous vehicles will run on data networks, and providers will need to dot the landscape with facilities so communications occur almost instantaneously, LightEdge Solutions Vice President Nate Olson-Daniel said.

Electronic communications happen at the speed of light, he pointed out, so if a moving vehicle is 60 miles from a facility, it would take nearly a millisecond for data to make that round-trip, and that could make a big difference when a vehicle needs to react quickly.

“Do you hit the deer, or miss the deer?” Olson-Daniel asked.      

Part of the present data center slowdown may just be part of the natural ebb and flow that occurs in many other real estate sectors, according to Alex Smith, Cushman & Wakefield's data center advisory group vice chair.

Data center event
Digital Crossroads' Thomas Dakich, Digital Realty Trust's Crystal Lee Delany, Boundary Street Capital partner Rashad Kawmy, Digital Fortress' Timothy Doherty, Walgreens' John Brooks, STACK Infrastructure's Matt VanderZanden, Newmark Knight Frank's Miles Loo

A few internet giants, including Google, Amazon, Microsoft and Facebook, need hyperscale data centers, facilities with more than 400K SF and 40 megawatts of power capacity, and these groups have mostly hit pause on new development, at least for now.

“They went out and took a lot of space in the past few years,” Smith said, but it is only a matter of time before the big players start developing again.

As the sector grows, panelists expect the suburbs, including those around Chicago, will get a substantial portion of the new data center space.

The suburbs have several advantages over the city's downtown, Smith said, including available land at a much lower cost. And customer service is similar, since suburban facilities can get inexpensive connections to 350 East Cermak, a 1.1M SF data center facility on Chicago’s Near South Side, one of the world's most powerful, giving them the same access enjoyed by downtown data centers to its network, cloud and content ecosystems.

Although some worry that the suburbs don't have the dense collection of highly trained tech workers that live in most cities, data center experts at the conference said recruiting and retaining suburban staff isn't a problem.

Michael Pegues, chief information officer of the city of Aurora’s information technology division, said Aurora, located 41 miles west of Chicago, and its surrounding area have the educational infrastructure needed to train a workforce.

Recession-Proof? Data Center Expansion To Continue Even In Market Slowdown As New Tech Transforms U.S.
CyrusOne's Juan Vasquez, Clayco's Otto Nichols, W.W. Grainger's Damon Boyd, ServerFarm's Mike Whitman, Corgan's Eric Closson, Mortenson Construction's Andy Stapleton

“We have more universities in and around the city of Aurora than most cities in the state,” he said. It also has the Illinois Mathematics and Science Academy, one of the state’s leading high schools.

CyrusOne Inc. owns a major Aurora data center, used by Chicago-based CME Group Inc., the world’s largest derivatives exchange, and Pegues believes the city can staff up other centers if developers choose to launch additional projects.

Wherever new data facilities eventually locate, industry stakeholders said Illinois’ creation of a new tax incentives package, signed into law by Gov. J.B. Pritzker earlier this year, allows the state to more effectively compete with the dozens of other states with similar incentives.     

Users will be exempt from sales taxes on the wide array of equipment, including new servers and cooling systems, that need constant replacing,

The incentives were designed to attract the kind of large, hyperscale developments needed by companies like Apple, which in 2017 decided to place a new 400K SF, $1.3B hyperscale data center just outside of Des Moines in Waukee, Iowa, a state that had a robust set of incentives, said Tyler Diers, director of legislative relations of the Illinois Chamber of Commerce, which helped put the legislation together. Only data centers that cost more than $250M and generate at least 20 full-time jobs, not including construction work, can get the benefits.

Almost from the moment legislators passed it, the new incentives program was generating interest among users considering an Illinois location, according to Digital Realty Trust Senior Asset Manager Crystal Lee Delany.

“We started having inquiries from customers on that day.”