Southern California is witnessing a shift in the data centre landscape, moving from the periphery to the forefront of development as demand surges amidst the exponential growth of artificial intelligence (AI) and cloud storage. Historically, the region has lagged behind other parts of the United States in establishing data centres despite its advantageous location and demographic factors. The only significant expansion in recent years was at the notable One Wilshire data centre in downtown Los Angeles in 2016. However, this trend is now on the verge of transformation.
Darren Eades, Managing Director at JLL, highlighted the changing dynamics as more cities traditionally focused on office or industrial development open themselves to data centre projects. “We're seeing a lot of cities being more open to data centres when they traditionally weren't,” he remarked. This shift is linked to the acknowledgment that data centres may represent “the highest and best use at the time” while providing substantial value for the municipalities involved.
Noteworthy cities such as Vernon, Monterey Park, and El Segundo are now actively developing or expressing interest in future data centre projects, buoyed by the increasing global demand driven by AI integration across various applications. The region's large population and strong connectivity to Asia via undersea fibre optic cables underscore its potential as an attractive site for these facilities, despite historical challenges including a tight infill market, escalating electricity costs, and high land prices.
According to a report from JLL, data centre occupancy rates in greater Los Angeles have hovered just above 4% in the first half of 2023. Among the pressing issues for new developments is procuring sufficient power, which can take several years to establish if not already available on-site. Areas like Monterey Park have benefited from recently upgraded electrical infrastructure, making them more appealing to developers.
On Saturn Street in Monterey Park, a significant data centre project is underway, setting up a 218,000-square-foot facility with a capacity of 33 megawatts on a site that was previously an office complex. The location's proximity to the Mesa substation, which has recently undergone capacity enhancements, significantly influenced the decision to build there. The property, sold to Revantage—part of Blackstone’s portfolio—illustrates the company's conviction in data centres as a “generational investment opportunity.”
Further solidifying the trend, Dallas-based Prime Data Centres has recently inaugurated a data centre in Vernon, spanning 243,000 square feet and operating on 33 megawatts, now fully leased to two AI companies even before its completion. Mark Jobson, Senior Vice President of Marketing for Prime Data Centres, noted that early confirmation of power availability and the strategic development of an on-site substation were pivotal to Vernon being chosen for this project.
Discussions are also reportedly ongoing in Vernon concerning additional data centre developments, with CoreSite recently acquiring a seven-acre site for $61.5 million. Jobson conveyed that “Vernon’s government is ‘data centre-friendly’”, reflecting a growing willingness among local authorities across the nation to adapt their perspectives on such facilities.
However, concerns surrounding energy and water consumption persist, particularly in water-scarce regions like Southern California. To address these issues, developers are introducing innovative solutions. Prime Data Centres’ facility in Vernon employs a “closed-loop” cooling system designed to minimize water usage, a notable advancement in areas with stringent environmental regulations.
El Segundo is emerging as another focal point for data centres due to its advantageous location near undersea fibre connections. Currently, it hosts several colocation facilities from leading industry players including Equinix and Digital Realty. Mayor Pro Tem Chris Pimentel remarked on the quieter, less disruptive nature of data centres compared to traditional industries like aerospace, which historically had a far greater impact on local communities.
Despite the enthusiasm and increased interest from municipalities, brokers and developers continue to grapple with the challenge of finding optimal sites for these facilities. A recent KPMG study indicated a heightened urgency amongst tech tenants needing data centres, with many prepared to pay a premium for necessary electricity as urgency swells in a market described as being on the brink of a long-term imbalance between demand and supply. Eades stated, “I don’t think we’ll ever be able to catch up. There’s so much pent-up demand in the marketplace,” highlighting the burgeoning opportunities and challenges within Southern California's evolving data centre sector.
Source: Noah Wire Services