If Silicon Valley winds up with a shortage of wholesale data center space, it can blame Washington. Data center projects planned for Santa Clara, Calif. are now taking a back seat to the red-hot northern Virginia market, where the Obama administration's stimulus funding and focus on cloud computing are expected to boost data center construction.
Several data center developers are focusing their limited capital on Virginia projects, and delaying or downsizing projects in Santa Clara, the leading data center hub in Silicon Valley. That's a big change from just 18 months ago, when there was a full pipeline of data center construction projects planned for Santa Clara. But since the economic meltdown last fall, plans for more than 1 million square feet of new space in the city have been postponed or placed on hold.
Data center developers haven't lost interest in Silicon Valley. If capital were freely available, these companies say, they would proceed with projects in both Santa Clara and Virginia. But in a capital-constrained environment, data center builders are having to make tough choices, and are prioritizing their spending in northern Virginia (and in some instances, New Jersey). For the time being, it's clear that the center of gravity in the data center market has shifted East.
It's too early to say with certainty that these delays will lead to space shortages in Silicon Valley. But they set the stage for a tight supply-demand scenario in which landlords with space will have significant leverage. Here's a look at the status of projects planned for Santa Clara:
DuPont Fabros Technology
Last October DuPont Fabros said it would suspend construction on a $270 million data center campus in Santa Clara. The company planned to build a pair of 300,000 square foot data center buildings with a power capacity of 72 megawatts. DuPont Fabros said its decision was driven by spending constraints after it raised just $100 million, rather the $300 million it had hoped, from a refinancing of one of its Virginia properties.
DuPont Fabros said last week that its new development priority is completing its ACC5 data center in Ashburn, Virginia. As a result, it will take $35 million of the equipment it purchased for the Santa Clara project, and redeploy it in Phase II of ACC5. The company also said that its next priority will be its data center project in Piscataway, New Jersey, where there is strong demand for data centers from Wall Street firms.
"Once we redeploy the equipment to ACC5 Phase II, our development in Santa Clara will need approximately $220 million and 12 months to finish," said Hossein Fateh, president and CEO of DuPont Fabros, compared to $80 million to finish ACC5, which is 38 percent pre-leased. "The West Coast location is now number three in our line for restarting, and remains a key component of our strategic US data center plan. We intend to build this data center. However, we need to be absolutely certain that we’re rewarded when we build it."
Terremark postponed a planned Santa Clara data center project earlier this year, focusing its capital budget on building additional space at The NAP of the Capital Region, its data fortress in Culpeper, Va., where it hosts the USA.gov and Data.gov sites on its Enterprise cloud platform.
The good news: after arranging $420 million of debt financing in June, Terremark confirmed Thursday that it will begin construction late this year in Santa Clara, investing $10 million to build out 14,000 square feet of raised-floor space. The company hopes to open the new space in the second quarter of 2010. Terremark says it intends to complete an additional 30,000 square feet of space at its new facility, but says the construction timetable for the second phase will be "success-based" and dictated by leasing.
Terremark CEO Manuel Medina says this approach will accommodate fast-growing customers at its existing Santa Clara site, which is adjacent to the expansion space. "We actually are already selling the space," said Medina. "Now that we've got the funding, we can give the customers an exact date when they can occupy. We're seeing very strong demand from our existing customers there. We fully expect to have signed contracts before we actually break ground.
"It's a very, very robust market today in Santa Clara," said Medina, adding that the recent fundraising "opened opportunities that we were in danger of losing if we could not have started the Santa Clara expansion on a timely basis." Nonetheless, the $10 million investment in Santa Clara's first phase is considerably smaller than the $50 million, 50,000 square foot phase II buildout underway at the NAP of the Capital Region in Virginia.
CoreSite, A Carlyle Company
CoreSite, previously known as CRG West, bought land in Santa Clara last year and announced plans for a three-building complex featuring 350,000 square feet of data center and office space and 50 megawatts of power. The project was initially scheduled to be completed by the third quarter of 2009.
The timetable on that project has slipped into mid-2010. In the meantime, CoreSite is completing an expansion in its data center in Reston, Virginia that will come online later this year.
"We expect to be done (in Santa Clara) in the second quarter of 2010," David Dunn, Senior Vice President of CoreSite, recently told DCK. "There's obviously been some slippage. We're working out some capital structure issues on that site."
That's about the same time that Terremark plans to open phase I of its project, meaning that about 65,000 square feet of wholesale space will come online in Santa Clara by July 2010.
Key Factors in Supply vs. Demand
How significant will these delays become? Here are a few factors that could influence the equation:
- Several providers (notably Quality Technology Services) still have space available in Santa Clara, which has the best power prices in the Valley (through Silicon Valley Power, the city utility).
- Failures by venture-backed startups could return some currently occupied space to the market. Several data center operators say they are closely tracking the venture-backed companies in their tenant base.
- There is also new space available in other municipalities, including the Fortune Data Centers project in San Jose. The Sacramento market could benefit if customers look beyond the immediate Bay Area.
- A wild card in the equation is Digital Realty Trust, which owns seven buildings in Santa Clara but has not announced any new construction this year. While it is not building in Silicon Valley at the moment, the real estate investment trust is keeping its options open. "We are actively marketing build-to-suit on our parcel in our campus and are actively pursuing an additional site for further expansion," said Chris Crosby, senior vice president of Digital Realty. Digital's streamlined data center construction process can convert shell space into a turn-key data center in five to six months.
On the demand side, reports persist of a number of large requirements seeking space in northern California. Given the time needed to fund and build a data center, any space crunch in Silicon Valley would not be resolved quickly - particularly if demand in the northern Virginia and New Jersey markets market remains strong.