Data Center Market Strong in Bay Area

CGR West's recent purchase of the Valley Exchange in Milpitas is one indicator of the rebound in the region's data center market.

The strength of the data center real estate market in Silicon Valley has caught the attention of the San Jose Mercury News, which used CRG West's recent acquisition of a development property in Milpitas has an opportunity to explore the broader data center recovery. The former MCI data center at 1656 McCarthy Boulevard stood empty for six years before being bought by CRG in December. An excerpt:

"This (demand for data centers) is a reaffirmation that Silicon Valley will remain at the heart of technology growth in California," said Jameson Agraz, a CRG vice president, who is marketing the Milpitas center. It's a lucrative place to be. While prime office space in downtown San Jose is about $2 per square foot per month, Dunn said space in a data center rents from $15 to $30 per square foot per month. Even at that price, it took just nine months for CRG to fully lease its newly opened 16th floor data center at Market Post Tower in downtown San Jose last year. "Do we think this is a gamble? Absolutely not. The forecast for the next 24 months shows demand is rising," Agraz said.

Data center deals in the Valley are becoming more competitive. One potential buyer said last week that they've been looking at opportunities in the Valley, but have been outbid several times in recent months.

At least one major player, Dallas-based Stream Realty Partners, has seized upon the recent strength as an opportunity to sell and take profits, according to the Merc story:

Robert Kennedy, managing director of the Dallas commercial real estate firm Stream Realty Partners, said he bought six data centers in 2005, mostly in the valley, and sold them all in the past year after realizing the profit to be made. "It's a niche market and there's not a whole lot of players involved because it takes a lot of money," he said. "These are a different type of building; these buildings are designed to house machines." So why did Kennedy's company's decide to leave the market? "We're not an operator of data centers. We're real estate guys."

Interestingly, even as Stream Realty is exiting the data center market, a number of other real estate companies have been announcing major data center projects in recent months, a trend that's likely to tell us whether non-specialist commercial developers can succeed in the data center sector.