A look at the Microsoft Corp. data center in the San Antonio suburb of Westover Hills. Local officials made aggressive use of economic incentives to land the $550 million project. (Credit: Aero Photo).

Economic development officials in San Antonio have been touting the city as a data center destination for years. The game-changing moment arrived in 2006, when Microsoft was scouting locations for a $550 million data center project. Local officials retooled their incentives, hoping to present Microsoft with an offer it couldn’t refuse.

“We were very aggressive,” recalls Mario Hernandez, who heads the San Antonio Economic Development Foundation. “We knew we had to be more aggressive because we needed a data center anchor, and we saw Microsoft as that anchor.”

Building A Data Center Cluster
The city won the project, and has used the Microsoft win to attract other data center projects, including projects from Stream Realty and Power Loft on nearby tracts in the Westover Hills section of the city. Frost Bank, Valero, Lowe’s and Christus Health Systems also operate data centers in the city, which is also home to a major cloud computing player in Rackspace (RAX).  

San Antonio offers one of the best examples of an economic development official’s data center dream scenario: one major project prompts other companies to follow, opening the floodgates for an influx of investment.

There are key differences between San Antonio’s assets and approach, which won’t work for every region. But the city’s approach offers insights for other areas seeking to attract data center projects.

San Antonio offered Microsoft a 10-year property tax abatement, making an exception to rules that limited abatements to six years unless the project created 500 jobs. Although Microsoft would need just 75 workers to staff the data center, the 10-year abatement was approved – along with a recommendation that city-owned utility CPS Energy foot the bill for $5.2 million in power transformers for the Microsoft data center.

Goal: A ‘Must See’ for Site Location
“It was a very unusual move,” said Hernandez. “But we knew that project would put us on the map, and it has. It has sent a very clear message. When Microsoft makes a decision for you, it gets attention. It has provided us the leads for most major data centers that can operate in this part of the country. We have become a ‘must see’ for most data center projects.”

San Antonio is the seventh-largest city in the U.S. with more than 1.3 million residents, according to the latest data from the U.S. Census Bureau. Affordable land is plentiful, and the city has a favorable profile for natural disasters, with no history of earthquakes and an average of one tornado a year. San Antonio is about 120 miles inland, blunting the potential impact of all but the most powerful hurricanes. 

Power Usage Benefits City 
The city also owns the local power and gas utility, and makes 14 cents on every dollar spent on power by large users. ”We’ve always been an attractive community for power-intensive operations,” said Hernandez. “We have an added incentive to attract data centers because of the unique ownership structure, which justifies targeting data centers. You can see the impact that it has on the financing of government.”

A key factor for Microsoft was the availability of recycled water for use in its cooling towers. The San Antonio Water System has been offering recycled water to its industrial customers since 1996. Recycled “grey” water isn’t fresh or drinkable but is not contaminated by any toxic substances or toilet wastes, and is considered environmentally friendly because it reduces demands for fresh water.

Water Availability During Drought
Hernandez says recycled water is also more available then fresh water in a crisis. “It saves money on price, but it also guaranteed a supply in the event of a drought,” he said. “You’ve got to be able to provide that predictability.”

While the long-term economic benefit remains unclear for some states that have used incentives to attract large data center projects, Hernandez says the strategy has been a  winner for San Antonio.

“We’re convinced that if you want to have part of the ‘home of the Internet’ in your community, you have to make sure that you’re a player,” he said.

While the San Antonio suburb of Westover Hills has developed into a booming hub for single-tenant corporate data centers, CityNAP sought to build a network access point (NAP) in downtown San Antonio to provide interconnection services to telecom providers. CityNAP operates a 10,000 square foot carrier neutral data center at 415 North Main Street and has 18 customers, according to the San Antonio BizJournal, which said the company owes at least $230,000 to its landlord, Pecan Paragon Ltd.

CityNAP was founded by Frank Robles, a telecom industry veteran who was an early employee of pioneering ISP NetCom and later founded metro network provider Yipes Communications. Graham Weston, the executive chairman of San Antonio-based managed hosting firm Rackspace (RAX), reportedly encouraged Robles to establish a NAP in the city.

Last year CityNAP touted its status as a “green” data center by signing a new contract with CPS Energy to purchase all of its power from renewable wind-generated electric sources. In January 2008 CityNAP signed a management agreement with Neopolitan Networks, another San Antonio company founded and headed by Robles. Neopolitan, which specializes in metropolitan area networks connectivity, agreed to assume full management of CityNAP.

The facility will have eight-inch thick concrete walls and a 24-inch thick concrete roof system designed to withstand 175 mph winds, and can be expanded to 350,000 square feet while maintaining a 200-foot setback. Stream says the data center will have two 10 megawatt utility feeds, each expandable to 30 megawatts each. The primary feed will come from the recently announced 200 megawatt Westover Hills substation located immediately adjacent to the site, with the second feed available from a 200 megawatt substation located 1.5 miles from the site. Power in San Antonio is available at approximately 5 cents per kilowatt hour, the company said.

The Stream Realty site is adjacent to where Microsoft is building a $500 million data center to support its Office Live services. Microsoft’s commitment was announced in January, 2007 and has been followed by the announcements of multiple data center projects in Westover Hills, which will soon be home to mission-critical facilities for Lowe’s, Christus Health Systems, Valero Energy, Frost Bank and Power Loft.

Stream Realty describes the Westover Hills data center as “LEED directed” with access to gray (recycled) water and multiple fiber optic providers. The project is scheduled for completion in February 2009.

Stream Realty has been an investor and developer of data centers for more than 10 years, and has bought, sold or developed more than 1 million square feet of data center space in Texas and California. Stream also leases or manages more than 45 million square feet of commercial buildings in Houston, Austin, Dallas, San Antonio, and Fort Worth.

“It’s massive. It looks like a small town being built here,” said Bexar County Judge Nelson Wolff. The project is scheduled to be completed in Juy 2008, and is expected to create 75 jobs. The San Antonio center is the second major facility being built in the U.S. to support the expansion of Microsoft’s Live line of online services, following the construction of a similar data center in Quincy, Washington. Microsoft’s commitment was announced in January, and has been followed by the announcements of data center projects by the National Security Agency, Stream Realty and Christus Health Systems.

Microsoft’s decision to locate its $550 million data center in Westover Hills has been followed by announcements of data center projects by the National Security Agency and Stream Realty. As was the case in those projects, Microsoft’s decision to build in San Antonio (which followed a national search) was cited as a factor in the data center site location for Christus.

Mario Hernandez, president of the San Antonio Economic Development Foundation, told the San Antonio Express-News that he expects that at least two other local companies will announce similar data center projects this year. Hernandez and a group of local officials recently visited Silicon Valley to scout data center prospects.

Christus will house confidential patient and hospital records and company information in the data center. The hospital system needs more storage space, as existing data centers in San Antonio and Houston are almost full.

Officials in San Antonio, Texas are living the dream, as Microsoft’s decision to locate a $550 million data center in the Westover Hills area has been followed by announcements of data center projects by the NSA and Stream Realty. The San Antonio Economic Development Foundation said it is working with five other companies looking at San Antonio for new data center sites, including some speculative projects.

San Antonio provides an example of data center clustering, in which a regional market becomes an aggregation point for many mission-critical facilities. This trend has usually been focused on major Internet markets (NYC, Washington, Silicon Valley) but is now providing opportunties for smaller markets (the industry phrase used to be second-tier markets) amid shifting criteria for data center site location.

Many cities are touting their attractivness for data center development, marketing their power rates, fiber infrastrucutre and available land. The challenge for secondary markets pursuing data center business is getting the first one, which creates a comfort level for other prospects. San Antonio officials have leveraged the attention generated by Microsoft’s choice.

Earlier this year, Bexar County Judge Nelson Wolff Wolff and other San Antonio officials visited with NSA officials at the agency’s headquarters to pitch the data center project. “We told them we were going to get Microsoft, and that really opened up their eyes,” Wolff told the San Antonio Express-News. “This has gotten a lot of people’s attention around the world,” added Charles Wender, Westover Hills developer.

A similar phenomenon occurred in Quincy, Washington, where Microsoft’s decision to build was quickly followed by data center announcements by Yahoo, Sabey Corp., Ask.com and Intuit.

It’s not yet clear whether Google’s site location decisions will have the same kind of coattails, given Google’s penchant for secrecy and reported focus on locking up power capacity. But officials in towns that will be future homes to Googleplex data centers – towns like Lenoir, N.C.; Goose Creek, S.C.; Pryor, Oklahoma and perhaps Council Bluffs, Iowa – are certainly hoping to see the cluster effect benefit their economies as well.

Westover Hills is already home to Microsoft’s 470,000-square-foot data center and a $60 million Lowe’s data center. San Antonio will apparently also get an NSA data center in a former Sony plant. The San Antonio Economic Development Foundation said it is working with five other companies looking at San Antonio for new data-center sites, including some speculators.

Dallas-based Stream Realty is a veteran of the data center real estate market. In recent years, the company has been buying and selling data center properties in California, including a Sprint facility in Santa Clara that sold for $95 million in 2005 and the former WorldCom data center that Stream Realty sold to Apple Computer in early 2006.

Stream Realty may be selling in California, but it’s building in Texas. The company’s plans for San Antonio could eventually include as much as 350,000 square feet of data center space. Stream Realty has a similar building under construction in Plano, a suburb of Dallas.

The facility will be the third major data center for San Antonio, joining a $126 million Lowe’s data center and a planned $550 million Microsoft facility. San Antonio is gaining traction in data center site location searches because it has the cheapest electricity in Texas, which is a favored region for data centers because the state has its own power grid and is less vulnerable to rippling outages on the national power grid.

The NSA’s need for additional data space may be related to infrastructure challenges at its facilities at Fort Meade, Md. where the NSA has maxed out the available power from the local utility company.

The exact size of the planned NSA data center was not detailed. The former Sony plant consists of two connected buildings with office and research and development space totaling 470,000 square feet. The NSA leased the site from Corporate Office Properties Trust (COPT) in 2005, with plans to locate as many as 6,000 employees at the site. More recently they have scaled back those plans, citing funding issues. The new data center is part of revived interest in the site, as landlord COPT is now planning an adjacent business park to hosue contractors.

Mario Hernandez, president of the San Antonio Economic Development Foundation, told the San Antonio Express-News that the number of NSA employees in San Antonio is expected to double to more than 4,000 in coming years, including a “very large data center presence.”

Robert Peche, the city’s economic development department director, said the NSA was “looking at several sites around the country for a data storage facility. The fact they chose to come here is good news. We hope there is more to come.”

CityNAP is a 10,000 square foot carrier neutral data center and Internet hub in downtown San Antonio, which is emerging as an attractive market for data center site location due to its combination of affordable local power and few natural disaster risks. But San Antonio did not have a network access point, to provide interconnections for network service providers.

Robles is a telecom industry veteran who was an early employee of pioneering ISP NetCom and later founded metro network provider Yipes Communications. Graham Weston, the executive chairmman of San Antonio-based managed hosting firm Rackspace, encouraged Robles to establish a NAP in the city. CityNAP now offers a choice of connectivity from carriers including AboveNet, AT&T, Level 3, Verizon, Time Warner Telecom and XO communications.

CPS Energy says renewable energy from wind, solar and landfill gas now comprises 11 percent of the power company’s peak electrical demand.

The software giant is scaling up its data center infrastructure as it moved to a “software as a service” model focused around delivering consumer and business services through web portals like Office Live. Microsoft broke ground last June on a 75-acre data storage facility in Quincy, Washington which could eventually psan 1.4 million square feet.

The project still must go before the Bexar County Commissioners Court, which is expected to approve a similar package of incentives. The tax abatement was approved for 44 acres of undeveloped land in the Westover Hills development at 5150 Rogers Road. The city is also asking CPS Energy to approve up to $5.2 million in assistance to help pay for electrical infrastructure for the project.

The San Antonio site ranked best on a checklist of 31 criteria for Microsoft, which also considered sites in the Austin market. Microsoft estimates that the project will take 18 months to two years to complete. Once the center is fully operational, it will become the biggest customer of CPS Energy, said the utility’s chief executive, Milton Lee. Manos said Microsoft plans to operate a “green” data center, and will use 8 million gallons a year in recycled water from the San Antonio Water System. It also plans to conserve trees at its building site and to save energy wherever possible, Manos said.