The Silicon Valley Data Center Market Remains Strong But Faces Challenges for Future Expansion to Meet Demand

The Silicon Valley Data Center Market remains one of the dominant markets in the U.S. Depending upon how the existing capacity and total square footage dedicated to data center use is calculated, Silicon Valley is the No. 2 market behind Northern Virginia and in particular the Ashburn submarket.

The Silicon Valley market is unique in data center site selection as it remains in a near-constant “pre-leasing” mode, meaning that as soon as any data center capacity — whether wholesale colocation or turnkey data center — begins construction, the pent-up demand gobbles up the capacity before construction is complete.

The region — generally starting with San Jose to the east working westward up to and including Palo Alto — is concentrated, especially for data center site selection, in the city of Santa Clara, where Silicon Valley Power is the electric provider. PG&E is the electric provider for the rest of Silicon Valley region, including nearby San Jose where a few other colocation operators are located. However, PG&E’s power rates can be 20%-30% higher than Silicon Valley Power’s.  Given that power is the number one expense category in data center operations, this power cost delta in PG&E rates is a strong deterrent to considering any location outside of the Santa Clara municipality. 

Within the 19 square miles that comprise Santa Clara, Silicon Valley Power is the low-cost and very reliable power provider that has embraced the data center market. In fact, Silicon Valley Power has estimated that it has a substation in every half-mile radius of the city, which is far denser than any other region in the U.S. 

The Silicon Valley market has significant challenges for future growth including:

• Soaring land values in the immediate Santa Clara area and the surrounding region
• Ongoing risk factors that include seismic instability and climate exposure
• Stringent community and municipality requirements related to both renewable energy initiatives and the significant and concentrated power used by data centers

The available land suitable for data center use or any real estate development, especially in Santa Clara, is becoming extremely scarce. Land prices have jumped over the past few years to where asking prices are nearing and sometimes exceeding $100 per square foot. Colocation developers have had to “go vertical” on newer sites to leverage the cost of the land and infrastructure. Recent announcements from some turnkey data center groups are proposing three to four floors of raised-floor environment.

Silicon Valley has several competitors in the market

Just about every major colocation operator and developer has a presence in the market, some of them significant: 

• Digital Realty: Owns and operates 11 facilities, some of these leased to other colo operators, totaling over 1.07 million square feet and 154 megawatts of power
• Equinix: Hasover 570,000 square feet of colocation space across 14 locations in the region
• Vantage Data Centers: Has over 335,000 square feet across 21 acres with 75 MW critical IT load in place. It will have 21 MW available on a new 9-acre campus around mid year. Vantage can accommodate up to ~70 MWs across the multi-story 541,000 SF complex.
• CyrusOne: One of the largest colo operators in the U.S., CyrusOne recently acquired ~23 acres in Santa Clara for a new Silicon Valley campus projected to provide up to 100 MWs upon full buildout, including a new substation on site.
• CoreSite:Not including Peering Exchange (former MAE West) at 55 South Market in downtown San Jose, CoreSite has four data centers, primarily in Santa Clara with two others in San Jose and Milpitas, approaching 1 million square feet of colocation and powered shell space.

Several other colocation operators with a national multisite presence have enterprise-class colocation facilities that will continue to be market players including:

• RagingWire: Recently secured a 3.3-acre site for a four-story, 160,000 SF facility with 16 MWs across 64,000 square feet of raised floor available. Projected completion in early 2020. RagingWire also markets to Silicon Valley customers to its Sacramento campus that can offer competitive power pricing in a location with significantly less risk factors.
• QTS Data Centers: With over 25 existing data centers with over 650 MW of power capacity across its footprint, QTS’s Santa Clara campus totals 135,000 square feet and 55,000 of raised floor with 5+ MWs.

Conclusions

The Silicon Valley region will continue to be a major player in the data center and colocation world due to its proximity to the major players in the Internet and cloud sectors. At the same time, several nearby data center markets, such as Phoenix, Las Vegas/Reno, and Portland/Hillsboro provide an excellent cost-effective alternative to Silicon Valley’s much higher prices. Yet its location in the mecca of the tech world will ensure that Silicon Valley will remain a top data center market.