March 27, 2023 Robert Davis, Bisnow Denver
Data center development activity is picking up in Colorado cities like Aurora and Colorado Springs as supply constraints and macroeconomic conditions push developers away from primary markets like Northern Virginia and Silicon Valley.
The activity represents an about-face for data center developers, who seemed to avoid Colorado earlier in the pandemic because it lacked state-level incentives for these projects. Now developers are rethinking that stance as tech behemoths like Microsoft and federal agencies like the Department of Defense expand their data center operations in Colorado, drawn by the amount of available land and power. But water availability could become a concern.
“There’s more interest in Colorado than ever,” CBRE Senior Vice President Greg Vernon said. “If you talk to any economic development group, they’re having a lot of conversations about data centers right now. I think the market fundamentals are going to attract a lot of additional development activity here.”
One reason Colorado is seeing increased data center development activity is utility companies in top-tier markets like Northern Virginia are scaling back their energy production. Dominion Energy said in July 2022 that it can’t meet Northern Virginia’s energy demands and will provide significantly less electricity to data center developments until 2026, Data Center Dynamics reported.
A new report from CBRE adds credence to the idea that the data center tides may be turning in Denver’s favor. The city’s data center inventory increased by about 1.6 megawatts during the second half of 2022, which tied the Mile High City with Central Washington for the fifth-largest increase in a secondary market. The report also says that Colorado has increased its rack density to accommodate larger data center projects in the future.
Vernon points to “first-mover” transactions, like Microsoft purchasing 264 acres near Denver International Airport for more than $64M in February, as evidence that Colorado is becoming an increasingly attractive state for data center development. Blackstone-backed QTS Realty Trust made a separate purchase of a 67-acre plot in Aurora, according to Mile High CRE.
Meanwhile, the state’s largest energy provider, Xcel Energy, plans to provide a carbon-free electrical system by 2050, greatly increasing the company’s need for battery energy storage systems.
“It’s really hard to ignore Colorado from a market standpoint,” Vernon said, pointing to the state’s growing information technology and cybersecurity industries as examples of growing demand for data centers.
Some developers also see the potential to create a data center market in Colorado before big names like Microsoft and QTS can complete their projects.
Wes Swenson, CEO of Novva Data Centers, is looking to stay ahead of the trend. Novva opened a 122K SF, 6 MW data center in Colorado Springs in 2021 and has plans to expand the operation to more than 30 MW in the near future. Before Novva arrived, Colorado Springs had about 0.5 MW of data center capacity in the area, Swenson said.
Swenson added that Novva also considered buying land in Aurora but chose not to because he thinks the market is more crowded than in Colorado Springs. Swenson said Novva could still expand into Aurora or Denver at a future date.
“We felt like Colorado Springs was a first-mover kind of opportunity,” Swenson said.
Diode Ventures, a subsidiary of Kansas engineering firm Black & Veatch, is another data center developer that sees market-creating opportunities in Colorado. The company is planning a data center in the Rolling Pebble Technology Park in Aurora, near Denver International Airport.
The company chose to build in Aurora because the city’s sales and property tax incentives put it “on par” with other top-tier markets, Diode Project Development Manager John Handley said.
Andrea Jones, Diode’s director of origination, said Diode’s only concern with moving into Aurora is the availability of power to operate its data center. Jones said Xcel has been a “really good partner” as the company moves through the planning process.
“It’s kind of like an ‘if you build it, they will come’ situation,” Jones said, referring to the competition that could soon follow Diode into the Aurora market. “But that’s why we looked at Aurora. There are places we have looked at building in the past that simply couldn’t provide enough power for our facilities.”
CBRE’s Vernon said he anticipates demand for data centers in Colorado to continue growing. But there are still a couple of issues that the state needs to address before it can become a more attractive city for data centers, like Atlanta or Phoenix.
One issue that Vernon sees is that Colorado lacks state-level incentives to bring large data center developments to the state. This is the same issue that industry professionals told Bisnow about in August 2022, saying regulations on an industry that rewards speed to the market can stifle development activity.
“People are trying to get smart in this space, which is very tricky — it’s very technical, the dollars are so much bigger for replacement costs and new construction than other asset classes, and people don’t understand who the tenant actually is and what they do,” Jules Sherwood, founder and principal of Kenai Capital Advisors, told Bisnow.
Another issue that could derail data center development is access to water for cooling solutions. Like many states in the Western U.S., Colorado is facing a water shortage. Some developers like Novva have added waterless cooling systems to compensate for Colorado’s water availability. Vernon added that other developers are investing in renewable energy to decrease their draw from the state’s electrical grid as well.
“Colorado is well-positioned to capture more data center demand, in addition to the normal enterprise activity that we typically see,” Vernon said.
CORRECTION, MARCH 30, 10:08 A.M. ET: This article was updated to clarify that the land acquisitions made by Microsoft and OTS were separate from one another.
