Finding a Needle in a Haystack Data Centers in Populated Urban Areas

Idioms like “Finding a needle in a haystack” have continued to be a part of common language for long periods of time. Handed down through generations, phrases like this one eloquently and succinctly define something we are trying to explain.

I am always fascinated by the origins of such sayings. In this case, there are many different theories of the origin including Miguel de Cervantes’s magnum opus, Don Quixote, in which there is a line “As well look for a needle in a bottle (bundle) of hay.” But the earliest reference I could find was in a Fujian proverb that dates back 2,000 years and reads “To dive into the sea, to feel for a needle.” Although different from its more commonly used phrase, it has the same meaning.

Finding land for data center development in many markets is very much like trying to find a needle in a haystack. The demand for data center sites was robust before the pandemic. Since the pandemic, the digital transformation of most corporations due to “work from home” and e-commence transformation has fast forwarded demand by 5 or even 10 years. As such, many Hyperscaler’s (AWS, Google, Meta, Microsoft etc.) and Wholesale cloud services providers (Compass, Digital Realty, Equinix Etc.) continue to scour the globe looking for sites to build new data centers.

Typically, these groups are looking for large tracts of contiguous land (20 to 50 acres or more) located in or adjacent to dense populations. Their requirements necessitate proximity to power grids and fiber optic networks. To complicate things further, these are exactly the type of sites that companies in logistics are looking for. Another industry whose services has been “hyper-jacked” by pandemic (and hopefully post pandemic) demand.

Both the logistics and the data center industries are well capitalized. In the case of the data center industry, they are more capitalized than ever.

As a result, these two titian industries have more money than ever and have been bidding up the price of land. Therefore, the site selection process has become much more complicated.

The following is an outline of some of the challenges we have seen and some of the strategies used to mitigate negative effects of site selection for data centers.

Who are you? I’d tell you but then I would have to kill you.

Plans for where a company intends to locate a data center are generally closely held secrets. Partly due to competitive reasons but also due to the fact that when the identity of a company that is looking for a site for data center development is known, the price magically inflates. Shocking! (not really). As a result, and particularly in the early part of the search, a cloak of anonymity is required.

Here we have found that the strategic use of a real estate broker can be an excellent approach.

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Since the data center site selection business is a specialized niche, we have found that the use of a professional data center broker twined with a local market expert can provide the needed data center expertise, local market insights, preserve confidentiality and assist data center acquirers achieve their objectives.

We have also successfully employed a staged process with a progressive “need to know” based approach that helps to determine if there is the potential a deal without necessarily disclosing the identity of the purchaser or any proprietary information. Preliminary discussion between broker and landowner can also employ non-disclosure agreements signed by the parties, a letter of intent with an associated early access agreement to allow for site due diligence followed by more traditional and formal agreements of purchase and sale.

What many acquirers have found is that timelines need to be extended as site selection in many cases includes land that is currently not zoned for data centre development.

In addition, adequate amounts of power are not always readily available or can only be arranged at significant cost. Many municipalities are offering incentives to attract data center uses while others are trying to figure out how to capitalize on and tax the growing population of data centers in their jurisdictions.

Is this site for sale? No – but how much are you offering?

Pop quiz – what is the best site to buy? Answer: The one that is not for sale. With demand for land outstripping supply, sites openly for sale are becoming increasingly scarce. When something does come to market there will typically be many parties interested, the deal will proceed along a rapid path and with few conditions and a short conditional period (if it is conditional at all).

It is also the case that to find the required blocks of land, data center acquirers need to deal with multiple owners to try and assemble the requisite amount of land for a data center. Thus, land acquirers need to be “deal ready.”

It is also the case that more and more of the opportunities are “off market”.

Successful land acquirers need to know the market they intend to transact in. They need to have their corporate processes tuned for speed and they need to be able to make decisions quickly. Here again, the strategic use of a broker can assist with the early market education, the assessment of timing and requirements to complete a transaction and most importantly the insights in the local market to be able to identify the off-market locations and the established relationships to be able to get to the appropriate people (principals) and leverage their relationships to be able to create a transaction where others may not be successful.

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This is particularly true with landowners who are ultra-high net worth individuals and either do not have to or do not want to sell. In some of the transactions we have been involved with, solving for inheritance or adverse tax consequences has been the key to unlocking successful transitions. In other cases, it has been the relocation of an exciting, operating business that made the difference.

Flexibility is also key here as some principals may not want to sell outright. Considering land leases, joint ventures and others non-traditional structures may be the key to unlocking the perfect site – even if it is not the perfect deal structure.

Where are the Jobs?

Since some of the land that site acquirers will be considering may not be currently zoned for data center uses, the local municipality may have an important role in the success of a site selection project.

Official Plans specify municipal plan for growth and development. Variations to those plans are going to be largely political and based on the “what’s in it for me” principle. Data Centers, in and of themselves, do not typically employ many people for the square footage they occupy.

Notwithstanding, the positive economic impact of data center development is substantial. The money invested (and jobs created) in the initial construction is very large when compared to other uses. Also, a data center operator will invest many times more money in the equipment that goes into the data center, which equipment is usually sourced domestically, creating more impact and more economic value.

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It is also worth noting that this equipment usually has an economic life of 3 to 5 years, making refresh investing an additional benefit. Lastly, the development of a data center will attract additional uses that will want to locate close by, thereby adding more value.

The strategic use of a real estate data center professional can help the data center acquirer to access the right municipal staff and political influencers and help make the economic business case.

Finding your Needle in the Haystack

Is finding a needle in a haystack difficult? Yes. Impossible? No. Let us show you how.

The Cushman & Wakefield’s Global Data Center Advisory Group has worked with Hyperscalers, Cloud Service Providers and Enterprise Customers to assist them with finding new Data Center sites and facilities and/or to dispose of surplus facilities.

For more information on how Cushman & Wakefield’s can assist you with you Data Center needs please contact us.