Digital Realty Plans for Next Phase of Growth in Silicon Valley, Manassas

With an eye toward the future, Digital Realty has bought property in Silicon Valley and Northern Virginia, providing a blueprint for long-term growth in two key cloud computing hubs.

The land purchases illustrate the importance of controlling real estate in strategic data center markets, as providers seek to stay ahead of the requirements of fast-growing hyperscale customers.

“One thing that’s really important to our customers is the ability to expand,” said William Stein, the CEO of Digital Realty, on the company’s earnings call Thursday. “They want to be able to look and see that there’s room for their growth on a campus, either in the existing facility or in a building next door. We think that scale, and particularly global scale, is a key differentiating factor in this business, and is becoming more and more important to our customers.”

Having a public timeline for expansion in cloud markets is critical. That’s especially true in Silicon Valley, where new data center space is in short supply, and Digital Realty had not announced plans for new projects beyond the 6 megawatts it is now delivering at 3205 Alfred Street in Santa Clara.

Santa Clara

On June 19, Digital Realty paid $55.5 million to acquire two office properties in Santa Clara next to one of its existing data centers on Lafayette Street. The buildings currently serve as the headquarters campus for Hitachi Vantara, which will move into a new facility next spring at another site in Santa Clara. Once the tenant has vacated and its lease is concluded, Digital Realty will knock down the existing buildings to make way for 403,000 square feet of new data center space.

The new project will provide Digital Realty with 48 megawatts of capacity in Santa Clara. The deal terms illustrate the challenges of expansion in Santa Clara, which is the preferred location for data centers in Silicon Valley because the price of power is cheaper than surrounding towns. Digital Realty paid about $4.3 million per acre for the property, about three times the per-acre price for recent deals in Ashburn, Virginia.

That’s because Santa Clara has effectively run out of development sites on vacant land, meaning data center developers must buy properties with existing structures, raze the buildings, and redevelop the property for data center use. Two other data center providers, CoreSite and Vantage Data Centers, are pursing a similar strategy with their latest developments in Santa Clara. This process also creates a longer timeline for bringing new capacity to market, adding extra time to demolish buildings and complete permitting for new construction.

“Santa Clara is a very tight market,” said Stein. “It’s the one market where supply is constrained and we see rents improving. This particular location was adjacent to an existing data center of ours. It allows us to create a campus in that particular sub-market.”

Digital Realty’s Silicon Valley portfolio now spans 18 properties, more than 2 million square feet of space and 99 megawatts of IT load.

Manassas, Virginia

Digital Realty is already the largest player in Ashburn, the primary cloud hub in Loudoun County, where it operates three huge campuses in”Data Center Alley” with more than 370 megawatts of capacity. The company has another 63 megawatts of space under construction, with 87 percent pre-leased (including a 25-megawatt lease to a single tenant), and capacity to add another 390 megawatts, according to Stein.

Digital Realty is now looking beyond Ashburn with its latest land acquisition. The company has purchased a 62-acre parcel on Godwin Drive in Manassas for $16.5 million, which can support up to 1.7 million square feet of data center buildings and 192 megawatts of capacity. The deal marks Digital Realty’s first foray into Prince William County, and it is not tiptoeing in.

Stein said development of the Manassas site will be subject to market demand, and support customer expansion requirements once Digital completes its existing campus in Ashburn.

Prince William County has welcomed several huge new data centers, including campuses for CloudHQ, Iron Mountain, Amazon Web Services and QTS Data Centers. Some of these projects have chosen Manassas because it is more affordable than Ashburn, as seen in Digital Realty’s ability to acquire land for $266,000 per acre, about $1 million per acre cheaper than some recent deals in Ashburn.

But Stein says there is a strategic reason to build a separate campus in Manassas, as cloud builders seek to create “availability zones” to provide failover options for clients. Major cloud service providers (CSPs) prefer several availability zones within a geographic region – close enough for low-latency data replication, but distant enough that a disaster would not affect both data centers.

“In Manassas, what we’re seeing is that the CSPs are basically going with three availability zones in the market,” said Stein. “Manassas represents a different availability zone than Loudoun, so it gives us the opportunity to land the same customer in the market, but in a slightly different location. Manassas is very attractive from that standpoint.”

Stein: Demand Remains Strong

Stein indicated that Digital Realty will continue to pursue land banking in key markets, purchasing land for future demand. This is increasingly important as leasing deals get larger and larger, effectively shortening the shelf-life of existing land and vacant space. Major data center developers – and there are none larger than Digital Realty – will need to constantly be scanning the horizon for the expansion campuses.

“There are some markets where the inventory is being churned through very quickly, particularly in Northern Virginia,” said Stein. “That’s why we’re adding land. We’ll probably have some other land announcements this quarter. We’re very focused on securing the front end of the supply chain. We’re laying down pads on our campuses so that we can build quickly when the demand materializes.”

Demand remains strong, Stein said, to the point where it’s difficult to keep pace.

“The data center sector has been prone to oversupply in the past, but demand is rapidly outpacing supply,” said Stein. “On current form, we see a greater risk of running out of inventory and missing the opportunity to support our customers’ growth than risk of oversupply. We are taking proactive steps to secure our supply chain and replenish our inventory balance.”