Amazon Continues its Cloud Expansion in Northern Virginia

Amazon Web Services continues to lease large amounts of new data center space in Northern Virginia, adding more capacity to the world’s largest cloud computing cluster. AWS also has begun provisioning slightly larger data centers, a sign that it anticipates strong demand into the future.

Amazon’s investment in new data centers was visible in this week’s earnings report for Corporate Office Properties Trust (COPT), which has been the primary developer in Northern Virginia for Vadata, Amazon’s data center operating unit. Over the last five years, COPT has leased 26 data centers to Vadata, totaling more than 3.5 million square feet of space in Northern Virginia, according to SEC filings.

COPT delivered four new data centers to Vadata in the first half of 2019, and has signed new leases for another five data centers, representing 1 million square feet of new cloud capacity.

The continued leasing for AWS is notable because it comes amid reports of a moderation in hyperscale leasing in Northern Virginia during the first half of 2019, as customers digest the record-setting volume of space leased in 2018. At least for the moment, AWS appears to be more active than its leading rivals. (NOTE: Watch Data Center Frontier in coming days for a broader mid-year review of Northern Virginia data center trends. Subscribe to our newsletter to get our latest news). 

Powered Shell at Cloud Scale

Northern Virginia is strategically important to AWS, whose US East region spans at least 40 data centers across Loudoun and Prince William counties. The region is one of the primary battlegrounds in the cloud computing wars, as Microsoft, Google and Oracle are also adding data centers in their bid to gain ground on Amazon.

Amazon’s key partner in the region has been COPT, a real estate investment trust that is a leading landlord for the U.S. government and defense contractors. The company is best known for leasing specialized space for national security tenants, but has quietly become one of the largest providers of cloud computing real estate.

In its work with Amazon, COPT builds powered shells, undeveloped space with the power and fiber connectivity already in place. Amazon then fills the building with its custom-built data center infrastructure. Most other hyperscale operators lease turn-key space, with the developer delivering a completed data hall.

COPT doesn’t publicly name AWS as its tenant, consistent with customer confidentiality practices. But the company’s latest SEC filing identifies Vadata as its second-largest customer, and the 3.5 million SF of space Vadata leases is consistent with the total square footage of the property’s data center shell business, suggesting Vadata is the primary tenant for this line of business.

COPT: More Deals in the Pipeline

The new leases complete an 11-building development plan first reported in late 2017, according to Stephen Budorick, COPT’s President & Chief Executive Officer. Budorick said the program grew to include 220,000 more square feet of space than originally planned – which roughly equals one extra data center shell.

In last week’s earnings call, Budorick said that COPT envisions “another half dozen or so additional opportunities with this customer on land we already control.” He said none of those deals are contingent on the federal JEDI cloud computing contract, a potentially huge deal in which AWS is widely perceived to be a leading contender. The deal has reportedly been delayed for additional review sought by President Trump.

“To the best of our knowledge, none of the planned developments we’re doing in cloud computing anticipate the JEDI contract,” said Budorick.

In addition to its data center shell business, COPT Data operates a multi-tenant wholesale data center property in Manassas, Virginia (the former PowerLoft project), which has about 19 megawatts of capacity. The company also deploys edge computing solutions using modular data centers.

A Bigger Building Template for AWS?

The COPT-AWS relationship is an example of a programmatic approach to real estate development, a common strategy for companies seeking to build a large network of facilities. In a programmatic real estate venture, investors and a developer team up on a series of projects, usually targeting a strategic niche or product type, and often for a single tenant. The arrangement provides a steady source of capital, focused development expertise, and a repeatable game plan for bringing new projects to market.

As the data center industry’s largest assembly line for cloud data centers, the COPT-Vadata relationship provides some insights into trends in Internet-scale development. That includes the shift toward larger buildings and larger data center campuses.

Amazon historically has standardized its data centers to house between 50,000 and 80,000 servers, according to company presentations. That consistent approach can be seen in COPT’s many data center projects for Vadata, which typically come in two standard sizes of 149,000 square feet or 216,000 square feet.

The five data centers that COPT is currently building are larger than previous builds for Vadata, including several planned for 230,000 square feet and one at 274,000 square feet – nearly twice the size of AWS’ original template.

The 5 data centers COPT is currently building are larger, including several planned for 230,000 SF and one at 274,000 SF – nearly twice the size of AWS’ original template.

The additional space might make a modest difference on a single building or campus, but a shift to a larger development template would boost capacity more meaningfully when applied across the 10 to 20 data centers that AWS is adding each year.

Cloud Growth Funds COPT’s Business

A programmatic approach can simplify the process of selling or refinancing properties or portfolios. This has proven true for COPT, which has created several joint ventures in which it has sold an equity interest in its single-tenant data centers. The company has used the proceeds to fund development of projects for the defense industry, which offer a better financial return than data center shells.

These joint ventures allow developers to finance new construction without having to issue stock or borrow. Similar JVs have been developed by Equinix, QTS, Digital Realty and other data center developers.

In June, COPT announced a joint venture with Blackstone Real Estate Income Trust to acquire seven of COPT’s single-tenant, data center shell properties for $265 million. COPT will receive $238 million and retain 10 percent stake in the properties.

“We are excited to form this new partnership with Blackstone, and believe this transaction demonstrates the strength of demand for strategically located data center shell properties leased to high credit tenants, as well as the strength of our development platform,” stated Stephen E. Budorick, COPT’s President & Chief Executive Officer.

“Demand for data center shells continues to be strong, and our recent joint venture transaction demonstrates the value proposition of that development platform,” said Budorick. “We monetized profits in seven of these assets and are recycling the proceeds into an expanding set of development projects, creating value for shareholders and providing a highly cost effective capital source.”