The influence of cloud computing on commercial real estate
It’s been said that the only thing constant is change. Nowhere is that truer than in the world of technology. And when technology changes, it has a way of affecting pretty much everything else—including commercial real estate.
One of the biggest tech trends of the past few years has been the move to “the cloud.” The cloud is a complicated concept, but at its most basic it means organizations are outsourcing a lot of their computing and data storage needs to technology companies, which operate massive data centers serving dozens, hundreds or even thousands of clients.
Using the cloud has a lot of advantages, including the potential for big financial savings, says Jarrod Hunt, senior vice president of industrial services for CBC Advisors.
For new and quickly growing companies, being able to house data in the cloud means they don’t need to guess at what their computing needs will be in the future and then build out expensive server infrastructure based on those predictions. Instead, they can outsource their data needs to external servers run by tech companies and quickly adjust their data subscriptions as their needs grow or shrink, Hunt says.
Using the cloud can also free you from trying to keep up with the increasingly complex needs of running a data center, as web and subscription-based applications become more pervasive in the business world. The cloud also offers the promise of zero downtime—something few small companies can guarantee for themselves.
“Many advantages have prompted organizations to convert IT infrastructure to cloud-based models,” says Vince Martinez, Chief Information Officer of CBC Advisors. “These conversions range from financial controls to asset management systems and much more.”
CBC Advisors is one of the many businesses that have made that change in recent years, and the move has paid big dividends. The company grew quickly over the course of a few years, and the technology they had been using was no longer sufficient. “We turned to a solution that offered extreme scalability, no downtime and a complete transition away from the traditional server room,” Martinez says.
So what does this mass exodus toward the cloud mean for commercial real estate?
Disappearing Server Rooms
If you’ve ever held a laptop on your lap for a long time, you know that computers generate heat. And when you fill a room with racks and racks of servers, all running at once, the heat builds up quickly. Without proper cooling, you get malfunctioning computers and even the threat of fire. Keeping a server room air conditioned takes a lot of power and can require specific building infrastructure accommodations, such as additional vents.
Simply put: server rooms have specific requirements to function properly—and those requirements can get expensive.
The good news for businesses is that as they move to the cloud, they’re expensive, space-eating server rooms are becoming obsolete. Hunt says many companies have simply converted their formerly state-of-the-art server rooms into more office space. Other companies decided to get rid of the unneeded space to save money.
Shrinking Retail Warehouses
Advancements in computing have had a particularly large impact on the real estate needs of retail companies, Hunt says. Big data allows retailers to better track inventories and predict which products they’ll need to have in stock and at which stores. This means they waste less space stocking the wrong products and are able to get the right products to the places they need to go.
Electronics retailer Best Buy has introduced a smaller format storefront, Hunt says. They found that, for many of their customers, the store acts as kind of a showroom for their products—they check products out in person, get their questions answered by in-store personnel, then go home and order them from the company’s website. This means there’s less need to fill their store with extra inventory.
Meanwhile, Walmart has also introduced a smaller store concept, about half or a third as large as their usual locations. They’ve realized that they don’t need to keep as much inventory onsite because a significant portion of their business is now done online.
Both of these companies are now benefiting from the cost advantages of having more of their inventory in inexpensive warehouses and fulfillment centers than in expensive storefront locations.
“We’ll continue to evolve over time as people’s shopping patterns change and their habits change along with technology,” Hunt says.
Data Centers as Real Estate
Of course, data centers themselves have real estate requirements. On the West Coast, the San Francisco region is the most active data center market due to its proximity to Silicon Valley. The Pacific Northwest is another hot spot because energy is relatively inexpensive there. But as demand grows for new infrastructure, developers are taking a more strategic approach to site selection.
Big data centers have big power needs to run their servers and the air conditioning it takes to keep them cool. That means data centers are usually located in places where power is cheap and abundant. Another factor? The likelihood of a natural disaster.
One of the reasons companies entrust their data to the cloud is for peace of mind: If your data is housed off-site, you don’t have to worry about outages or even catastrophic info loss due to fires, floods, tornadoes, break-ins or other incidents in your own data center. That means those off-site data centers have to be incredibly secure.
Those two prerequisites—inexpensive power and inherent safety—have made the Intermountain region a new hot spot for data center location. “In the Intermountain region we don’t have tornados and we don’t have hurricanes. We don’t have a lot of ice storms,” Hunt says. “That has created a natural market here in the Rocky Mountain states for data centers.”
One of the most striking examples is a $1.5 billion, one-million-square-foot data center the National Security Administration completed near Bluffdale, Utah, in 2014. If the federal government agency that is dedicated to security chooses to build its data center in the desert of Utah, you can take it as a sign that it’s a good place for a data center, Hunt says. Several other companies have followed suit.
For example, Facebook recently evaluated Utah as a site for its newest data center, but ultimately selected New Mexico, another Intermountain state. The data center will represent a massive, $1.8 billion construction project just south of Albuquerque. Facebook cited access to renewable energy sources as a major reason it was evaluating both Utah and New Mexico for the center.
Tech companies, like Facebook, are clearly big users of data center server space. But a wide range of industries have large data needs—banking and finance, for example, handles increasingly colossal amounts of data, particularly as more people do their banking online. The fact is that cloud computing will continue to have major, if somewhat invisible, impacts on businesses of every strip—especially on their future real estate needs.