Real Deals

Real Deals: Server farms are sprouting in NC

dbracken@newsobserver.comMarch 27, 2013 

When Google announced six years ago that it would build a $600 million data center in Lenoir, it instantly put North Carolina on the map with data center developers everywhere.

In the years since, both the Triangle and the state have seen a wave of investment in such properties, both from larger corporations such as Disney, Apple and Facebook and now from investors and data center operators that rent space to multiple tenants.

The latest data center deal involves Carter Validus Mission Critical REIT, which this week paid $19.5 million for a Duke Realty building in Morrisville. The 145,000-square-foot property was originally built for the Web-hosting company Interpath but is now home to Peak 10, the data center company.

The sale comes a few months after two data center operators – Greensboro-based DataChambers and New York-based Sentinel Data Centers – announced their own projects in the Triangle.

That such properties are becoming a significant real estate asset class speaks to the fact that data is the one thing that the country hasn’t had trouble producing in recent years.

“The slowdown in the economy did not stop technological advancement and people using iPhones and iPads and companies moving from technology being a benefit to technology being an absolute necessity,” said Doug Hollidge, managing partner with Five 9s Digital, a Charlotte brokerage and advisory firm that focuses on data centers.

The industry’s growth over the past dozen years has spawned a number of business models, many of which are now on display in the Triangle. Carter Validus’ model is similar to other real estate investment trusts – the private company just focuses on data centers instead of apartments or office buildings. It targets fully leased “mission critical” buildings that will deliver steady cash flow to its investors.

Large investments

DataChambers and Sentinel, meanwhile, are developers and operators that are investing large amounts of money in their recently acquired properties.

Greensboro-based DataChambers paid $4.7 million in September for a 49,000-square-foot data center in Garner that had been owned by Centurylink. The company is reinforcing the building and installing tens of millions of dollars worth of servers that will be used to offer IT services such as data backup and cloud-based services.

Sentinel is building a much larger data center in Durham that will cater to Fortune 1000 customers. The company paid $24 million for a 420,000-square-foot building, and will invest $174 million in the project overall.

Todd Aaron, a Sentinel co-founder and co-president, said the property’s location in the Research Tri-Center was more important than the actual building. All of the major telecommunications carriers in the Triangle run fiber lines near the property, which also is adjacent to Duke Energy high voltage power lines.

“We actually build on site a utility-grade substation,” Aaron said. “So we’re able to take capacity at very high voltage, which is significantly more reliable, more cost-effective.”

Sentinel’s customers sign long-term leases for space, power and cooling capacity in the center and then pay a fixed monthly rent over the term of the lease. Aaron said the company’s main competition is large companies that are considering building and operating their own data centers.

Incentives at work

North Carolina, particularly the state’s western foothills, has become a favorite location for corporations to build data centers because of the temperate climate, inexpensive and reliable power and lower exposure to natural disasters.

The state has also gone out of its way to court such projects by offering millions in incentives.

A bill passed by state lawmakers in 2010 was specifically tailored to companies building large data centers. The law grants an exemption for taxes on electricity and business property if a company invests at least $250 million for land and construction over five years.

Not many jobs created

Such incentives have drawn criticism because data centers don’t create many jobs. Sentinel, which received $800,000 in incentives from Durham County, expects to employ 19 people at its facility.

But there’s little doubt that the Triangle and other parts of the state will see a lot more such real estate projects as the economy improves. Sentinel, in addition to signing up large companies that already have a presence in the Triangle, also expects its Durham data center to be attractive to out-of-state companies offering cloud-based services.

“The trend toward cloud services is really one that de-emphasizes geography,” Aaron said. “ ... What that means is that stuff migrates to wherever it’s most cost-effective and efficient to be and that’s places like North Carolina.”

Bracken: 919-829-4548

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