City in focus

How Phoenix is positioning itself for a boom in big data

Demand for data centres is accelerating. We recently visited Phoenix, a city that is set to capitalise on the opportunity.

02/02/2017

Ben Forster

Ben Forster

Equity Analyst, Global Real Estate

City: Phoenix
Index Rank: 23rd

Strengths

- World class companies such as Boeing and Intel call Phoenix home, whilst it is also a great place to start a business or study
- High resilience due to power and fibre optic infrastructure and low risk of natural disaster
- Phoenix offers a low cost alternative to data centres in Silicon Valley or Dallas
- Arizona state offers tax exemptions on data centre equipment purchases

Weaknesses1

- Supply of land is higher than coastal cities
- Weak urban planning means a reliance on cars for transportation
- Median household incomes are below the national average

What are data centres? 

Data centres are where the internet lives and scientific breakthroughs are made, yet from the outside they look like ordinary industrial warehouses. Inside they host thousands of computer servers and miles of fibre optic cable.

These support everything from the movies you watch on Netflix to the operations of national governments. A break in service would impact the daily lives of consumers and employees around the world.

Avoiding ‘downtime’ is therefore mission critical, meaning that technical infrastructure and security is more costly than for other types of real estate. When Hurricane Sandy took down New York’s power grid on 29 October 2012, diesel backup generators and flood defences maintained normal service.

A number of cutting edge technologies are expected to intensify demand for data centres. These include virtual reality, artificial intelligence and the ‘Internet of things’.

Cisco forecasts that by 2020 we will transfer and store around three times as much data in these buildings . ‘Hyper-scale cloud providers’ such as Amazon, Microsoft and Google are competing aggressively to store the big data we will create.

This presents a huge growth opportunity for REITs able to quickly develop suitable facilities, potentially offering investors generous income yields of 10-20% on invested capital.2

Cisco forecast for big data produced by smart cities in the future (December 2016)


Cisco forecast for data stored in data centres (December 2016)


Capitalising on this demand

The challenge for landlords is to accommodate the ever evolving needs of their tenants. This begins with a highly reliable and preferably low carbon power supply, with a large facility using more electricity each day than 8,000 households.

Industrial air-conditioning requires chilled water storage, with a mid-size facility using around 2.5 Olympic swimming pools worth of water per year to cool the servers.

Fast fibre connections to distant data hubs are important, whilst enterprises increasingly also want to interconnect locally with their business partners.

Interconnection revenues are growing at 19% per annum at industry leader Equinix, which now hosts 188,400 cross-connects between customers and has a record of 99.9999% uptime3. These fibre ecosystems are increasingly a barrier to entry for new investors and offer 90%+ profit margins given low installation costs.

An oasis in the desert?

The popular perception of Phoenix is that of a sprawling city in the middle of the Arizona desert. Perhaps less well known is that it is also a leading city for entrepreneurs. 

The Kauffman Foundation ranks the state in the top 10 nationally for new business start-ups and the number of entrepreneurs in the US per 1000. 

New industries, such as clean technology and personalised medicine are growing quickly, owing to good local public research institutions and a strong focus on technology. 

With a population of 4.7 million4, the Phoenix metro area is growing as a data centre location due to healthy local demand and reliable infrastructure. The Palo Verde nuclear power station just 75 miles away and the climate is well suited to solar generation.

The metro also intersects the top tier data centre markets of Silicon Valley and Dallas. Three hyper-scale cloud providers have recognised this potential and entered the market in the past year alone. 

We visited Digital Realty’s 519,000 sq ft facility in Chandler, which sits 20 miles south of downtown Phoenix and is the largest data centre in Arizona. It is an impressive complex with an extensive security network of barriers and biometric readers. Resilience is increased by an onsite power substation and water storage facility holding 400,000 gallons.

Digital recently doubled the footprint and with the new space mostly let, are considering further expansion. Competition in the city is less fierce than larger markets such as North Virginia, but peer CyrusOne is also developing new facilities locally and recently acquired another 29 acres of land.

The entrance to 2121 South Price Road, Chandler

Our verdict

Phoenix is well placed to capitalise on the explosion in data creation and storage. Early investors such as CyrusOne and Digital Realty should benefit as customers move into the region and cluster in the most well connected and reliable facilities. If developers remain disciplined and phase the delivery of new space into this demand they should benefit from increasing occupancy and income yields, in excess of most other real estate sectors globally. Local government will need to ensure that infrastructure keeps up. As investors in the sector, we remain focussed on companies with the most fit-for-purpose portfolios and the scale to offer tenants the connectivity that will drive their future success.

Further reading

Find out more about Digital Realty’s strategy:

https://www.reit.com/news/reit-magazine/september-october-2016/real-estate-digital-age 

Get you head into the clouds with Cisco’s forecasts:

http://www.cisco.com/c/en/us/solutions/service-provider/visual-networking-index-vni/index.html


1. www.DataUSA.io (2016)1

2. RBC Capital Markets, Data Download report (2016)2

3. Equinix Q3 2016 earnings presentation 3

4. Oxford Economics

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Important Information: The views and opinions contained herein are those of Schroders' Global Cities Team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or schroders.com contains additional disclaimers which apply to third party data. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.