Not Your Father’s Data Center - The Data Center World of CBRE

Episode Date: June 29, 2020

Haynes Strader, Vice President of Data Center Solutions, CBRE, sees the market for data center needs flourishing, even during the pandemic. “It’s been an exciting and crazy 2020, and a challenging one for many of our clients,” Strader said. “From a data center perspective, the COVID-19 crisis created a real sense of urgency for digital transformation for a lot of enterprises, and that’s kick-started a lot of projects in cloud. You have three years of IT planning and planned transformation happening in about three months.” The good news for those markets where data center needs were down in 2019 is that the first quarter of 2020 saw growth, a trend expected to continue next quarter. Some areas, such as Austin, TX, have limited data center capacity due to rapid business expansion and need solutions to meet their data center challenges. And, while Strader sees concern that some markets could be overplaying their hand in building out future data center capacity, the current growth trends indicate little to suggest these buildouts are unfounded. “I think the projected growth for this year supports the current market narrative as long as there isn't too much speculative supply built,” he said.

Welcome to Not Your Father's Data Center podcast, brought to you by Compass Data Centers. We build for what's next. Now, here's your host, Raymond Hawkins. Welcome again to another edition of Not Your Father's Data Center. Today, we have Haynes Strader, Vice President of Data Center Solutions with CBRE out of Dallas, Texas. Haynes, how are you today? I'm great. I'm great. Thank you for joining us. Guys, if you will, Haynes, can you give us a little bit of background?

I know you and I both seem to get in this business about the same time, a little over five years ago, and have had similar parallel paths in the industry. We'd love to get a little bit of your background, a little over five years ago, and have had similar parallel paths in the industry. We'd love to get a little bit of your background, a little bit of your history, and then we'll get into CBRE and some markets and what you're seeing out there. Absolutely. Yeah, Raymond, I think we sat down probably, I don't know, maybe a month after I started at CBRE at Kubi's for some breakfast. But I've been with CB for six years now, five years, really five and a half doing data centers only. CBRE is the world's largest brokerage firm. But prior to that, I went to SMU and then I was a teacher for a couple of years and did a year of IT outsourcing

consulting before I moved over to real estate. And, uh, as I got into the real estate industry, I think I saw an opportunity to get into something that was a little more entrepreneurial within a big company. And, uh, that was the data center group. And I've got two great partners, Brent Burnett and Chris Herman that, uh, have been with me from the, from the start and have really helped me get to where I am now. And we actually just brought on a fourth partner, Mikey Gillette, which we're really excited about. So we're growing, the practice is growing and all we do are data center transactions all around the country. So whether that's representing tenants that are leasing space or representing owners of data centers that are

selling their buildings, disposing of those assets, end users often that have assets that they're either fully occupying or partially occupying and trying to dispose of those assets. And then also site selection. So helping companies find and buy land or buildings to build out data centers. So we do that all over the world. Most of what my team does is in the United States, but we're active in a few markets outside of the United States. And our overall practice with CB is about a hundred brokers globally. And here in the U S it's about, it's about 30 of us really focused on, on U S transactions. So it's been a really fun business. It's a, it's a very small world and it's been, you know, the first few a very small world. And the first few years, we're definitely drinking out of the fire hose. But I think that's kind of the cool thing about this

business is as our world changes and IT changes and infrastructure changes, we have to keep up. And I think that's unique to data centers in a way, in the sense that a lot can happen in a 12 to 18- month period. You know, in office and industrial and retail, you see these shifts over and they're kind of like tectonic plates. You see the shifts happening, you know, in live time, but it can take years and years and years. And then obviously it can all be thrown into disarray by something like COVID. So, you know, it's been an interesting time to be in real estate. I think the nice thing is the data center sector has survived, if not flourished during this most recent kind of crisis. And it's been an interesting start to my career. Thanks for the background. I will ask you

to expand a little bit on the teaching just for a minute, because I think what you did teaching is pretty fascinating stuff. One quick question. What does this say about the state of our industry that the two SMU guys ended up hiring an Aggie? Is that any indication of trouble ahead, or should we be excited about Mikey joining the team? No, that's a good point. There was a lot of concern at first, but no, Mikey was the student body president of A&M and a really, really sharp young guy that we're very excited to have on board. But, you know, I think it's safe to cover your bases. We've got Brant's kids are UT and Texas Tech and Chris is University of North Texas. And we've got Mikey from A&M and me from, and Brent from SMU. So I think we've got all the, all the majors. If you can get a Red Raider on the team, you'll have it all, all rounded out.

That's good. That's right. A Red Raider and a Horned Frog. That's exactly right. All good. Well, I appreciate that. And I've had a chance to meet Mikey and seems like a sharp young man and excited to have him on the team.

But I do want to give the Aggies a kick in the gut any chance I can. No, it's great. Haynes, do you mind going back just a little bit? I know because you and I have known each other for so long. The Teach for America piece, I just think it's fascinating. I think it's part of your backstory. I think it's really, really cool. Would you take just take two minutes?

I know you and I get to talk a lot. I love the story you told me the other day about how that last group of kids is all graduated and how you still touch with them. I know it's not data center stuff, but I think it's part of the color of what a great guy you are. Could you give us two minutes on that and we'll dig into the data center stuff? Sure. Yeah. So, you know, I have awesome parents that were very supportive of me going to SMU and I was able to graduate without any debt. And I had an opportunity to go teach for a couple of years through a program called Teach for America,

which basically recruits people that traditionally would not have gone into the education sector and places them in Title I, which are the highest need public schools around the country. In Dallas, it's been a very, very successful program. It's one of the most successful markets in the United States for Teach for America. And so I was recruited out of SMU to do that. I was very fortunate to get placed in Dallas, which is not common to get to stay kind of in your home turf. And I taught in Arlington. I taught sixth grade English in a charter school that was part of the Uplift Charter Network, which is a really cool group of charter schools in North Texas. And I taught

sixth grade English at Summit in Arlington with about 130 kids a day. And I literally remember Googling what an adverb was on my first day. I had no idea what I was doing. And I think I went in with really high hopes of, I was going to fix education and I was going to change America and all this stuff. And it took about 10 minutes of 12 year olds beating the tar out of me to figure out quickly that they were going to change me more than I was going to change them. And it really was a remarkable experience for me. And I think it helped me grasp a little more of reality. And I've stayed very close with a number of my students, all of whom have now graduated from high school, which is a big part of Uplift is everybody graduates. So that's been exciting, helping some of them get jobs, helping some of them deal with other things in their lives and seeing them flourish. And it's a neat program if you have

an opportunity to research it a little bit. It's been really successful in Texas. It's successful around the country, but I was fortunate to have that opportunity. Well, pretty cool stuff. First of all, thank you for being willing to serve and work in that way and to serve our community and bring the education experience you got at SMU to students. I just think that's really, really awesome. And then that perspective when you come to the business world, right? I think that understanding how tough it is to be a school teacher and what they go through and having a room full of, I don't know what sixth grade is, 12 or 13 year olds, something like that. That's right.

That can humble you pretty quick. Yeah. Yeah. A lot of prepubescent angst going on. Yeah. Sixth graders. Yeah. I'm still not sure.

I wrote it down. I'll look up what an adverb is after we talk today because I'm not 100% sure myself. So good stuff, Haynes. Thank you for that. Well, Haynes, I know when we get to spend time together, we talk a lot about the industry and about the markets. And really our idea here is just like anybody that would go eat lunch or dinner with you and I, that they would get to listen in on what we would talk about. So I'd love to talk through, I know you're here,

and you talked about there's about 100 guys globally in the data center business, but would love to talk about, I think lots of people talk about Northern Virginia, lots of people talk about Northern California. Would love to get your take on a few other markets, maybe Texas specifically. I think there's lots happening here right now, maybe a little bit around Phoenix, Chicago, maybe Denver. Talk about some markets that are closer to us and that you hear and what you guys see in those places and use that maybe as a place to kick off. Yeah, that's great. Yes, we track the market really, really closely. And I'll talk about kind of center of the country, like you mentioned. But I think if those listening ever want a more specific market update, we can always jump in. So it's been a really exciting 2020. It's been a crazy 2020,

and obviously a challenging one for many of our clients and families and friends. But from a data center perspective, the COVID-19 crisis, I think, created a real sense of urgency for digital transformation for a lot of enterprises. And that has kickstarted a lot of projects in cloud. I think you basically have three years of IT planning. Planned transformation happened in about three months for a lot of big companies. And that quickly turned up cloud demand. It quickly turned up expansions for certain companies.

It certainly, for others, retail, hospitality, travel, different issues. But for a lot of technology services, financial services, the move to digital infrastructure and the expansion of their current digital infrastructure has been felt. And in Texas, that's no exception. So I'll start in Dallas and kind of move south. Dallas had a very sleepy year in 2019. We ended up with about 27 megawatts of net absorption, which is, or sorry, 25.8 megs

of net absorption, which is as slow of a year as we have had since 2014. Normally, we're tracking about 40 to 45 megawatts of absorption a year. And so Dallas also has an abundance of data center supply. There's about 60 megawatts of turnkey capacity sitting ready to go in Dallas today. And unfortunately, the lack of activity in 2019 has really been difficult for many providers, and it's driven down pricing substantially, and especially for stuff that was built three, four, or five years ago at higher per megawatt build costs, that's getting harder and harder to sell. The good thing for Dallas is we saw about 11.5 megs of net absorption just in the first

quarter, and we anticipate the second quarter is going to look pretty similar. That's a really good kickback into activity. And we're also seeing several cloud providers circling the market, both from a colo and development standpoint. Obviously, there's a large cloud provider developing in South Dallas, but there's a number of others that are actively in this market, which has been good. As you move down to Austin and San Antonio, Austin is experiencing a tremendous amount of office growth and residential growth as companies are moving large amounts of their workforces out of, and Dallas is too, but Austin, I think, gets a lot more of the media attention around it. But big name tech companies coming from California and coming to Austin with their workforces. And a lot of those companies bring along with them

data center capacity. So Austin has had historically four to five megs a year of absorption. And in 2019, they had 12.6 megs. And this includes San Antonio, by the way, which is also a very large market for two different cloud providers. But so far, we've seen about a meg and a half for Austin proper and another four megs in San Antonio. So five and a half megs already this year, which is, again, a strong start for that market. That's exciting, again, and I think we're seeing capacity supply in Austin is very, very limited, less than 5 megawatts available across Austin and San Antonio today. trying to find new capacity is very challenging in Austin. There's not an abundance of available infrastructure in Austin proper. As you go outside of Austin,

LCRA service area and as you go south into San Antonio, there's quite a bit of opportunity, but there has not been as much speculative development. So I think we'll see power pricing is a little bit higher, but just given everything that's going on in Austin, I think we're going to see continued growth in that market. And you may have seen this morning, it was announced that Tesla has acquired land for a planned gigafactory for their Cybertruck and Model, I think it's a Model Y, that's going to go into that market. And it's not Austin proper. It's a little bit east of Austin. But that's really exciting. And you look at what happened in Reno after they developed their plant there and just the amount of really cool tech development

and subsequent data center development that happened because of the infrastructure there. I think there's a very similar opportunity for the overall Austin-San Antonio market. So that's an exciting development in my mind from our perspective. As it goes south to Houston, we've seen a relative slowdown just due to oil and gas. And I think there has not been as much activity. We're tracking about 500 kW of total activity for this year. Last year, they had a big deal that was 15 megawatts that really drove most of the absorption in that market.

And I think there are one or two big deals circling that may land this year, may land next year. But there's not an abundance of activity in that market. So we'll see what happens in Houston. I think, obviously obviously what's going on in the oil and gas sector is going to have a big impact and whether they go to cloud or whether they build their own cloud and, you know, whether they're leveraging services like Doug and Triton and other, you know, services that do kind of these oil and gas focused cloud services versus

the big public guys will be interesting. So, you know, we're monitoring that closely. And, you know, Houston obviously has some hazard risk challenges associated with hurricanes, but most of the data centers have not only survived, but are really designed to weather those storms well, which we've seen. So, you know, we'll see what happens in Houston. It's obviously, it's also a burgeoning, growing office market. This economic slowdown has certainly impacted that market more substantially, I think, in some ways from a data center perspective. Yeah. Do you want to give two minutes on San Antonio? Numbers I mentioned for Austin include San Antonio. Include San Antonio. Okay. What's going on in San Antonio is really Westover Hills. That area is getting pretty close to being maxed out as far as just available land for development for data center.

And we're seeing a push kind of southwest towards one of the major cloud providers developments out there. But I do think we're going to continue to see interest in that market. I just I don't know that we're going to see a lot of speculative build out there because I think it's very driven by two companies, basically, that are that are that are the end users in that market. Yep. Understand. And Austin and San Antonio being so close, I could see even those those markets merging or being seen almost as one because they're geographically pretty close. Exactly. All right. What do you guys see out in Phoenix? So Phoenix has also, you know, I think I personally, and this isn't, you know, CBRE's official opinion or anything, but I've been concerned about Phoenix because there's been so much new supply and planned supply

running to that market. It had a very big, I think they had almost 60 megawatts in 2018 of absorption, and then about 33 megawatts in 2019 of absorption. So two standout years for a market that historically had not had those kinds of numbers. And then we've seen 25 megawatts of capacity kind of built out over the last 18 months. And several providers, including Compass, acquiring large land sites in that market in Goodyear to develop massive campuses. And I think I've kind of viewed that similar to Dallas, where we had some big years and there was a rush of suppliers to the market that I think has created a little bit of an oversupply situation in our market. But the reality is demand continues to be strong. And I think there is so much pressure to get out of some of the

Californian markets with new expansion, a lot of which has gone to Nevada. And I think a lot of that's now getting directed both to Nevada and to Arizona before it gets to Texas. So I think we've seen nine megs of absorption here in the first half of the year. There may be one or two more that I'm missing there. We haven't done our final tally for the first half of the year, but that's a really solid start. And I think that it will probably end up, again, close to a high 20s, low 30s kind of year in Phoenix, which I think supports the current market narrative as long as too much speculative supply isn't built.

And I think long term, you know, there's some really good opportunities in that market. They have a great incentives package in Arizona and specifically in the Phoenix area for data centers. And I think, you know, the largest users in the market are very savvy on how to take advantage of those programs. And it's a little more tenant friendly than the Texas incentives. And it's now very similar to what's offered in Chicago or in Illinois. So I think we're going to see more activity in Phoenix. You know, I'm hoping I was my earlier hesitance on that market was wrong. But it's really up to a couple of the big end users, most of whom are based in California, to decide whether Arizona is the market they want to expand in or whether that's going to get more spread out. We certainly agree with you that there's just people working hard to get out of the California data center business. And Phoenix has been a place for that gravity to begin to pull. I think it'll get bigger out

there as well. We would agree with you much like the comments around one or two big suppliers in Austin or one or two big users in Austin or in San Antonio, I think you'll see very similar things happen in Phoenix. One or two big users will end up drawing other data center activity out there because of the infrastructure that gets developed. Yeah, the infrastructure is great and the power availability there is good, but there's also a ton of renewables. Have you all interacted with that much? Yeah, yeah. We're doing good in the renewable front out there as well.

Agreed, yeah. And I think that's really important for certain users. You know, we're seeing, we have lots of clients that care about, you know, having green energy and all of that, but when it gets down to the bottom line, only a handful are willing to pay for the difference. And I think what we're seeing in markets like Arizona is renewable energy is actually almost, almost price comparable to non-renewable at sale. Just about at parity. Yeah, that's right. Just about at parity. Yeah.

Let's take a minute and talk about Denver, if you don't mind. Yeah. So Denver, this is public, but we helped one of the largest banks in the world source a couple of sites there to do their enterprise data center, next-gen data centers. And those will be two of the biggest data centers in that market, all owned by an end user. The colo market, it's traditionally a retail colo market. But the reality is there's quite a bit of supply. It's about 25% vacant in that market right now with 22 megs. So there's a fair amount of supply spread around the market, but it's in little chunks.

It's not 5, 6, 7 megs sitting in any one building that's built out. And so it remains a mostly retail market. And I think that's allowed for some price protection in that market. We saw about 400 kW of absorption in 2019. I think there's a chance for that to be a little bigger in 2020. But to date, activity has been pretty slow. I think it's about 200 kW to date that we've been able to track. But, you know, what's cool about the Denver market is the connectivity.

There's just fantastic fiber connectivity and really low latency between both the East and the West Coast. And I think, you you know everything else that's going on in denver again it's it's a burgeoning uh office and residential market obviously has a great work-life balance play uh atmosphere high quality of life market that's for sure exactly yeah being able to hop on the train or hop in your car get out to a mountain and ski in the winter and hike in the summer is pretty sweet and And I think we're seeing, you know, I think, frankly, no official comment from CB on what's going to happen to office. But I think as we see the companies that can justify remote work and employees that like it are going to be seeking out those markets probably more actively than they have in the past, just because that work life balance is so important for lots of people.

So we'll see. But from a data center perspective, we just haven't seen any major end users do super large deployments that they haven't owned. So there's actually a number of owned large enterprise data centers in that market, but very few of those have gone to Colo. And we haven't really seen substantial developments from the public REITs in that market.

Flex Central is probably the largest provider in their private, obviously, in that market. And they've done very, very well. And I think for the most part, everybody in that market, Sixterra, Equinix, Flex Central, CoreSight, have done well and have great assets. So it's more of a matter of, I think, patience and catching up. You know, it wouldn't surprise me if three or four years from now we're talking about Denver like we're talking about Phoenix, but I just don't think we're there yet. Yeah, I think you can see just quality of life and connectivity. I think you'll see both of

those things help that market continue to grow. I think we'd see that world the same way as you guys do. Haynes, that's super great insight and depth around markets. This is the kind of advice folks can get if they reach out to our friends at CBRE. I'd love it if you, you know, no customer names and no proprietary information, but do you mind telling us one or two, you know, customer stories or client stories? What's a client who comes to CBRE? Where are they at? What are they struggling with? What questions are they asking? And how are you guys helping guide them? I'd love to take me through a client journey with you guys. And again, not looking for any proprietary or customer info, but just a day in the life of a CBRE data center client.

What I love about our business is every client is very different and has very different requirements and often are in very different stages of their technology journey and digital infrastructure journey. And so we have clients that are extremely sophisticated and throw us a playbook of here's exactly what we want you to do. Tell us what the options are and go fill our requirement. Those deals are usually larger and with well-known companies that you would be familiar with. And we love getting those deals. But the reality is in those instances, we're really just brokers. We're going out and negotiating the best possible pricing, best possible terms, making sure we're seeing all the options in the market.

I think the deals that, you know, where we add a ton of value and when we add a lot of value in those deals, but it's just, it's more of we're allowing our client to do what they do best and we're doing what we do best, which is to be the broker and to go actually, you know, run the site selection process where we can add a lot of value with certain clients. And we just did this with one of the country's largest healthcare providers in Texas. One of the country's largest healthcare providers, but the site they selected was in Texas. They had 33 basically data centers, most of which were sitting in hospitals around the country. And they had four primary hubs. And the goal was to consolidate those 33 sites they were spending, you know, as you know,

whether you're running a three megawatt data center or 500 kW data center, you still need basically the same amount of employees to manage each of those sites. And there's obviously a lot of redundancy issues and capital investment required with maintaining those environments. And so doing that, you know, 33 times over is extremely expensive. And what we help them do is kind of walk through what assets were core to their business and needed to be moved. And their IT group was very, very sharp. And the reason this was so spread out is they had acquired, there's a lot of mergers and acquisitions

that had gone on. So they had acquired most of these hospitals and they were dealing with legacy infrastructure that other IT organizations have put together. And their goal is to really streamline it, save costs. So we helped them identify which assets were going to be moved. We helped them interview and source a migration partner to help them actually physically do the move.

And then we went through their current inventory of data centers and went out and looked at new potential data centers and ended up being able to move into a site that they were currently leasing that was up for renewal by doing a long-term blend and extend with the landlord, but were able to achieve. They were pretty over market with the provider that they were with, but they had a lot of growth because they were going to consolidate. And so we were able to offer the landlord, the owner of the building, some growth and with really flexible terms. And the total savings to that client just on that one consolidation, which encompassed about 15 of those 33 sites, was about $23 million over 10 years. And versus staying in place and renewing as is and kind of status quo. Had they been interested in doing, I think, something a little more cumbersome,

there was more savings available to them as far as having to move more sites and building a bigger environment. But a big part of their strategy was not consolidating everything to one site. So I think what will ultimately happen is we'll do the same thing for a second site and whether that'll go to a new building or in one of their existing sites, we'll see, but that's a couple of years out from now. But, you know, that took that whole process. And in the meantime, we renewed a couple other colos. We actually put them in one new colo for one of their network sites. That whole process took about three and a half years of work with them. Ultimately, getting all of the stakeholders, IT, finance, real estate or facilities and procurement on the same page, humming end up finding great success for our clients. And that's what makes us successful is when our clients are happy.

So, I think that's one example. I'll share a short additional example. We recently had an opportunity to help a client that was sourcing new co-location in a Northeastern market. And procurement had been running the process, procurement. But I think part of their deal was they were running it very similar to how you would purchase software. And they weren't thinking about it as a real estate asset. And so ultimately, it went to finance, which flagged facilities, which flagged us.

We read the contract that they were about to sign and noticed a number of issues, including the fact that there was no cap on the amount of capex exposure that this client was going to have in this facility, which for a typical colo, you typically have no capex exposure or very limited and so we were able to come in and drive a competitive process they ended up with the same provider but drove down the price really improved their their contract terms because we were thinking about it as real estate and not just as an i.t environment and i think it's really important to consider both sides of that that coin the i.t piece is first and foremost because it's the purpose of the environment think it's really important to consider both sides of that coin. The IT piece is

first and foremost, because it's the purpose of the environment, but it's still a physical space. And just like your house or your apartment or your office building, you want to think about, you don't want to buy your house right in the middle of the 100-year floodplain. You definitely don't want to put your data center there. And I think a lot of people don't even run those tests when they're looking at their sites. And obviously, the COLO providers do. And the good thing is if you have a good partner like Compass, you can trust that they've done their homework on where those sites sit. But a lot of legacy assets, and even after Sandy, FEMA updated all the maps in the Northeast. So half of the older data centers actually do sit in now 100-year floodplain.

And just not going through that process properly, I think, can lead to ultimately really critical mistakes. And so that's part of, again, I think where we add value is just helping clients think through things that maybe they wouldn't think through on the IT side. Because they're not doing COLA transactions every single day. And we are. So I don't know if that's, if that's kind of what you were looking for, but no, that, that was perfect. Haynes. I think it's, it's an, a great example. Both the stories you tell of, you know, we spend time with our customers and say, Hey, we're in the business of developing land and developing and building data

centers every day. It's what we do every day. And not that our customers aren't brilliant people with great businesses, but it's generally not what they centers every day. It's what we do every day. And not that our customers aren't brilliant people with great businesses, but it's generally not what they do every day. And I think that's exactly what we see out of you guys, our friends at Seabury. You're in the business of evaluating and understanding what's the best way to merge your real estate and your data center needs,

your technology needs together and make good decisions. And we just think the world of the advice you guys give not only the team here, you and Brant and Chris and now Mikey, but just CBR in general. You guys are just as classy as it gets and as professional as it gets and as knowledgeable as it gets. And we think it's important that folks engage with you to understand what they're doing because you guys do it every day and do a great job with it. Well, Haynes, man, I really, really appreciate you joining me. And there's so much knowledge and

so much experience. We might ask you to come do it again because there's still more questions I'd love to ask you. But from a podcast duration, we're probably good. We're about 30 minutes in and super, super grateful to have you join us. And again, thank you so much for the service you did at the beginning of your career. Being a school teacher, I just think that speaks volumes about your character and what kind of guy you are and why we love doing business with you thanks for joining us and uh look forward to seeing you in the marketplace buddy thank you ram and i really appreciate the opportunity and the only only thing i'd add is if you have not been to south dallas to check out the new compass uh powered shell and and the campus they're

building down there it is really cool it's worth worth worth a COVID free trip to Texas next time you can get down here. Worth checking out. We appreciate that, buddy. Yeah, absolutely. Thanks, man. Appreciate it, Haynes. See ya. Be good. Bye now.