Why data centers are flocking to Austin's northern suburbs

Incentives, access to power among key differentiators, CEO says

Apr 4, 2022, 2:55pm CDT

For the better part of a decade, Skybox Datacenters LLC CEO Rob Morris had been itching to break into the Austin market.

He patiently watched as his company expanded in other parts of Texas, including Houston and Dallas. The slew of technology companies moving into Austin over the past 24 months finally meant it was time to complete what he called his "Texas Triangle": the company plans to open the $548 million "Skybox Austin 1" in Pflugerville in January 2023.

Skybox Datacenters aims to break ground in May on this 110,000-square foot facility in Pflugerville, which is expected to create 10 full-time jobs. It is part of wave of data centers headed to the north side of the metro.

"The hyper-scale cloud companies are looking to establish a large presence in Central Texas, in the Austin market. With that increase in demand, it simply made sense for us," Morris said. "The amount of interest and inquires that have been received since we announced a few weeks ago is unlike anything we've ever seen before."

With a booming tech sector and limited data center space, Austin and the surrounding Central Texas area have become a hotbed for data centers over the last year — a trend that experts expect will continue.

Skybox, along with Las Vegas-based Switch Inc. (Nasdaq: SWCH) and Seattle-based Sabey Data Center Properties LLC, have announced plans to open in the northern Austin suburbs, while Meta Platforms Inc. (Nasdaq: FB), parent company of Facebook, is planning a massive data center in Temple, investing about $800 million in the town that lies between Austin and the Dallas-Fort Worth metroplex.

That has made Central Texas one of the most competitive data center markets in the country. Looking at both Austin and San Antonio, CBRE Group Inc. (Nasdaq: CBRE) found the data center vacancy rate fell to an all-time low of 2.5% in 2021. That was a year-over-year drop of 30 basis points, or 0.3 percentage points, and the second-tightest supply recorded by CBRE among 17 North American markets.

"Not only in Central Texas, but just nationally, the data center market is growing relatively rapidly. As we focus into Austin, we are seeing a lot of the current data centers get tapped out of space. And while there [are] construction starts, there is incredibly low vacancy with small chunks of space left in the Austin data center market," said Mikey Jaillet, associate at CBRE. "With the continued influx of relocations from Silicon Valley or other areas of the United States into Central Texas, with Austin obviously being the focal point, there really is a demand level that is very high in that market. I think that's why you're seeing groups such as Skybox, Sabey or Switch purchase or start new construction elements in that market."

In the past, the region has seem data centers cluster near Austin-Bergstrom International Airport, like those owned by Data Foundry and CyrusOne. Now, much of the activity is on the north side of the metro, largely due to available space, cheaper land and incentives. But another big driver is the fact that the northern suburbs are in the utility area of Oncor Electric Delivery Co., which is Texas' largest transmission and distribution electric utility. Data centers require a lot of power to operate.

"Historically data centers do tend to cluster together loosely. But at the same token, I think what data centers look for is a piece of land that makes sense from all of your hazard-risk perspectives, coupled with right attributes of fiber and power," Jaillet said.

Morris said those were among the key metrics that Skybox was attracted to, adding that he looked at two other locations on the north side of the metro before settling on Pflugerville. The company also has locations in Northern Virginia, Chicago and Santa Clara, California.

He said that being on the deregulated side of the grid with Oncor made sense because it offers some of the cost-effective and lowest-cost power in the country, while also providing innovative programs about renewable power. He also said incentives — the Pflugerville Community Development Corp. provided Skybox a 10-year agreement that will provide an expansion grant of up to $1.575 million, capped at $225,000 annually — have been crucial in attracting large and reputable companies.

Morris said Skybox plans on breaking ground by the end of May, and that the company has enough space on the site that it's already making plans to build an additional 60-megawatt data center on the campus.

"There are so few locations in the country that aren't dealing with the insane growth of demand for industrial and power connectivity," Morris said. "Austin does present an environment where it can be enabled, which is becoming more challenging in other parts of the state right now. We're very excited to grow here and I think the future is bright."

Sabey Data Centers is constructing a two-building, 300,000-square foot campus at 1300 Louis Henna Blvd. thanks to an incentives agreement approved by Round Rock City Council that requires the company to invest at least $185 million in property improvements and $5 million in new equipment and business property, while creating 20 high-paying jobs over five years, with salaries around $90,000. Switch is building a 1.5 million-square-foot data center on the campus of Dell Technologies Inc. known as "The Rock."

Sabey declined comment for this article and Switch did not respond to multiple requests for comment.

Some are skeptical of the incentives provided to data centers.

Nathan Jensen, a University of Texas professor of government, said that from a big picture perspective on incentives, often times "you're incentivizing companies that would have come anyway," saying research has found that between 75% and 98% of companies would have come without them.

"You're burning dollars," he said. "A lot of research suggests you're burning a whole lot of dollars for essentially companies that were coming."

He thinks data centers run counter to economic development goals such as the creation of high-quality jobs. Data centers typically don't create many direct jobs — and then do even worse in terms of spillover jobs, compared with something like an automobile company that might attract suppliers to a region. Data centers do create construction jobs and add tax revenue in a community because they are expensive.

"The job impact is almost zero, so then you're asking yourself what are the costs and benefits for the community? The benefits are the tax revenues," he said. "It's one of these industries where there are very few benefits and additional costs that are different from other industries ... It's odd to me but it's not unique to Texas."

While Skybox is building its data center on a speculative basis, meaning no tenants have signed on to use it, Morris said the majority of the company's clients at other locations in large data center markets are Fortune 100 companies and big providers of cloud data storage. He said companies also look for data center operators that not only lease out space but also operate the data centers for clients.

"Big tech prefers to focus their available resources on development of the core technology, whether that be hardware or software, and they look to other companies like Skybox to operate the actual facilities on their behalf so they can focus on their core products," Morris said.

Jaillet said "unprecedented" demand for data center space around the country means the Austin area hasn't seen the last of these sorts of announcements.

"Austin is going to be a market that's going to be really fun to watch over the next couple of years, because I do think you're going to see new construction starts from more than the groups that we have discussed that have publicly started," he said. "I just think there's a lot of demand drivers that could influence other groups to land here."

Jaillet said that Austin has always been a strong data center market, although a significantly smaller one than Northern Virginia, Atlanta, Phoenix, Dallas/Ft. Worth and Chicago, the five U.S. markets with the most net absorption of space in 2021, according to the CBRE research. Northern Virginia had net absorption of 303.3 megawatts of data center capacity in 2021, more than four times that of No. 2 Atlanta.

But Jaillet expects Austin to become an increasingly active player in the data center market, particularly because of the growth of big tech companies in the Austin metro. Austin Business Journal research found that Dell Technologies Inc., LLC, Apple Inc., IMB Corp., and Tesla Inc. comprised the largest tech employers in the area, as of the first quarter of 2022.

The market had 29 megawatts of capacity under construction at the end of 2021, according to CBRE, more than twice the total of 14 megawatts in 2020.

"The Austin market, if you look over recent history, it's a lot of tech clients that are driving the demand there, and the groups that have relocated, there is generally data center requirements that follow that as well," Jaillet said. "Austin has always been a data center market, but it's never been a massive data center market. If you look at the difference between Northern Virginia or Dallas compared to Austin, it really is night and day.

"With that being said, it is a market that people are really looking at because the tech economy and with the amount of compute that is driven through tech economies, data centers have to follow."

Justin Sayers

Staff Writer

Austin Business Journal