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Digital Realty's ACC7 data center (formerly DuPont Fabros) in Ashburn, Virginia DuPont Fabros Technology/Digital Realty
Digital Realty's ACC7 data center (formerly DuPont Fabros) in Ashburn, Virginia

Atlanta, Seattle Among Cheapest Places to Lease Data Centers

Report finds tax incentives cannot offset high costs in immature markets

Leasing wholesale data center space is an expensive proposition for any company. Location has massive influence on cost, which adds to the complexity of the already extremely complex process of data center site selection.

In a recent report, commercial real estate firm CBRE analyzed total cost of leasing 1 megawatt of data center capacity for seven years in 23 U.S. markets and found that Atlanta, Colorado Springs, Northern Virginia, Portland, and Seattle are the most cost-effective places to do it. Boston, Des Moines, Kansas City, Northern Florida, and Omaha were on the opposite end of the spectrum.

The amount of activity in the lowest-cost markets is telling. Atlanta, for example, saw an 80,000 square foot lease by Twitter, opening of a Peak 10 data center, and acquisition of a local provider by zColo this year. Northern Virginia is on its way to overtake New York as the biggest data center market in the nation by 2015, according to 451 Research.

Here are the findings on a map, courtesy of CBRE:

(click for larger image)

(click for larger image)

"For occupiers seeking to preserve capital or lease a data center, the selection process needs to carefully consider the primary cost variables of rent, power and taxes, and recognize the variability that exists from market to market,” Pat Lynch, managing director of data center solutions at CBRE, said in a statement.

Average cost for a 1 megawatt lease over a seven-year term across the 23 markets is $45.9 million, according to the report:

  • $158 per kW per month, or $1.9 million – average first-year rent
  • $0.076 per kWh, or $798,000 per year – average cost of power
  • $1.9 million – average total tax payment over the life of the project

Tax Breaks in Immature Markets Not Effective

Many states use tax breaks to attract data center construction to areas where they want to boost the economy. Some states offer tax incentives not only to data center providers but also to companies who lease to nudge their data center site selection decisions in their direction.

Tax incentives in areas that don’t already have active data center markets, however, do not necessarily make it advantageous for somebody to lease there, CBRE found. Markets with little competition tend to have higher prices for tenants.

A less mature and competitive market like Des Moines will have higher lease rates than a first-tier market like Silicon Valley, according to the analysts. So, even though places like Kansas City, Des Moines, and Omaha offer good incentive packages, they cannot offset rates in those markets which are 120 percent to 140 percent higher than the average.

Government incentives usually shave off about 10 percent of the total cost of a long-term lease, according to CBRE.

Of the 23 markets the report analyzed, nine did not offer incentives for leased data centers.

Data Center Construction Boom Continues

Wholesale data center inventory across the country is continuing to grow to keep up with growing demand. As of the second quarter of this year, inventory in primary markets went up more than 30 percent year over year.

Primary markets boasted 1,140.9 megawatts in Q2 and 107.3 megawatts more was under construction, according to CBRE. The category includes Atlanta, Chicago, Dallas-Ft. Worth, New York-Tri State Region, Northern Virginia, Phoenix, and Silicon Valley.

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