Data Centers – Construction Moves into the Cloud

By Richard Branch, Senior Economist, Dodge Data & Analytics

BEDFORD, MA – March 1, 2018 - The construction of data centers has increased dramatically over the past several years, with their massive size and high cost of construction often shaping growth patterns for the sector and the nation’s regions. A data center is a building (or group of buildings) that centralizes IT operations and, in many instances, becomes the internal-facing “brains” of a company. Data centers can also be external-facing, such as those used by Facebook, Amazon, and Google to power their massive internet presence. In recent years, increasing demand for corporate cloud space and rising use of social media have been key drivers behind the upward trend in data center construction.

Data centers are tracked in two different locations within the Dodge Data & Analytics historical starts database. Larger data centers ($50 million+) are included in the office construction category, while smaller centers are placed into the communications building category of the starts database. Data centers are therefore not tracked as their own separate category, although our news gathering organization does attempt to flag data center projects by using the term “data center” in the project title. Therefore, a text search of project titles using that phrase does yield useable results, even though it may undercount the size of the market.

In 2000, data center starts totaled a mere 1.5 million square feet (msf) and the dollar value of those starts was $300 million. The largest data center started that year was built by the Sabre Corporation in Tulsa OK, a company founded by American Airlines in 1960, and spun off in 2000, to facilitate airline bookings in North America. The facility was 225,000 square feet, with construction costs totaling $60 million. Data center construction faltered over the next two years as the dot.com bubble burst, dropping to just 84,000 square feet in 2002. Starts rose again from 2003 through 2007 when they reached a pre-recession peak of 3.1 msf and $1.4 billion. The top project of 2007 was a 450,000 square foot/$550 million facility built by Microsoft Corp. in San Antonio TX.

The recession had a notable negative effect on data center construction, although not to the same extreme as other commercial building types. Starts fell 42% to 1.8 msf in 2008, but quickly rebounded, posting solid growth in both 2009 and 2010, when starts reached 5.2 msf and $2.1 billion. The largest project to break ground in 2010 was a 100,000 sf/$300 million facility built by Google Inc. in Pryor OK. In 2009, Google and other internet companies began to offer browser-based applications through services such as Google Apps.

While initially called “killer apps” because they were intended to displace traditional desktop software such as Microsoft Office, adoption was slow, and a see-saw pattern developed in data center starts over the next three years. Starts fell 27% in 2011, rose 1% in 2012, and dropped 33% in 2013 to 2.5 msf/$1.3 billion.

Social media had yet to play a prominent role in the demand for data center space. Facebook was founded in 2004, and initially membership was limited to Harvard before expanding to other colleges and universities. Similarly, Twitter was launched in 2006, and the first iPhone was released in 2007. As adoption of social media took off, and new apps like Instagram and Flickr were launched to allow users to post photos and videos, the demand for cloud storage began to climb. Prior to 2010, the number of social media users worldwide was less than a billion; by 2013, it had climbed to 1.6 billion people.

The launch of the iPad in 2010 was intended to capture the new market in streaming video from companies such as Netflix, which began to stream video in 2007, and Amazon Prime Video which launched in 2011. The iPad and similar tablets also filled a void between the small size of a smart phone and a traditional laptop. They were quickly adopted in the workplace with more employees using Google Apps and Microsoft Office Online (launched in 2010).

In 2014, data center construction starts jumped 142% to 6.1 msf/$3.3 billion, and starts ascended further in 2015. In 2016, data center starts climbed another 20% to 8.2 msf/$3.6 billion. The largest project in 2016 was a 1.3 msf/$600 million facility built by Switch in McCarran NV. That year also saw the start of three Facebook data centers in Forest City NC, Los Lunas NM, and Prineville OR.

In 2017, the square footage of starts was flat, although the dollar value moved 17% higher to $4.2 billion. The largest project started last year was a 1.0 msf/$750 million Facebook data center in Sandston VA. Since 2014, Facebook has built 11 data centers totaling $4.0 billion making the social media giant the top owner of data centers in the 2014-2017 timeframe. In 2017, the number of global social media users reached 2.5 billion, having grown 9% annually from 2014 through 2017. During this span of time, Microsoft Corp. started $1.7 billion of construction on six data centers and Switch Corp. started work on six facilities totaling $1.6 billion.  

Since 2014, Iowa has ranked as the top spot for data center construction, with starts reaching $2.5 billion over the four years from 2014-2017. There are many factors that determine where a data center should be built, but the decision is weighted most heavily towards network access, land availability, electricity, and taxes. Iowa’s central location means that it has access to internet backbones that traverse the country, abundant land on which to build, as well as local governments willing to offer substantial tax abatements. Data centers use massive amounts of electricity, and rates in the state are below the national average and amongst the least expensive in the country. Moreover, many of the top players in the data center space are attempting to use renewable energy sources to power their facilities and Iowa is one of the top states for renewable electricity production (over a third of the state’s electricity is wind generated). In 2017 TradeWind Energy began construction of the $430 million Rattlesnake Creek wind farm in Dixon County NE. The wind farm will produce 320MW of electricity, with Facebook contracting 200MW of the output to power nearby data centers.

Starts in Virginia totaled $2.1 billion over the same period. Like Iowa, Virginia has relatively low electricity rates, is home to major nodes of U.S. internet infrastructure, and is home to federal government and intelligence operations. Texas ranked third for data center construction with $1.6 billion in starts from 2014-2017. Wind power accounts for 15% of Texas’ generation mix.

Beyond 2017, rapidly increasing data consumption and storage needs, as well as speedy adoption of cloud-based software, will translate into the further buildout of data center infrastructure. As of December 2017, the Dodge project news database contained over $21 billion in data center projects in various stages of planning or bidding. Over half of those projects are owned by the major players: Switch, Apple, Facebook, and Microsoft. For the foreseeable future, U.S. data center construction will continue to provide a silver lining for every cloud.