Announcer: Welcome to “Not Your Father’s Data Center” podcast, brought to you by Compass Datacenters. We build for what’s next. Now, here’s your host, Raymond Hawkins.
Raymond: Welcome again to another edition of “Not Your Father’s Data Center.” Today, we have Haynes Strader, Vice President of Data Center Solutions of CBRE out of Dallas, Texas. Haynes, how are you today?
Haynes: I’m great, I’m great.
Raymond: Thank you for joining us. If you will, Haynes, can you give us a little bit of background? I know you and I both seem to get in this business about the same time, a little over five years ago, and have had similar parallel paths in the industry, and would love to get a little bit of your background, a little bit of your history. And then, we’ll get into CBRE, and some markets, and what you’re seeing out there.
Haynes: Absolutely. Yeah, Raymond, I think we sat down probably, I don’t know, maybe a month after I started at CBRE at Kuby’s for some breakfast. But I’ve been with CBRE for six years now…five years…really five and a half, doing data centers only. CBRE is the world’s largest brokerage firm. But prior to that, I went to SMU, and then I was a teacher for a couple of years and did a year of IT outsourcing consulting before I moved to real estate. And as I got into the real estate industry, I think I saw an opportunity to get into something that was a little more entrepreneurial within a big company, and that was the Data Center Group. And I’ve got two great partners, Brant Burnett and Chris Herrmann, that have been with me from the start and have really helped me get to where I am now. And we actually just brought on a fourth partner, Mikey Gillette, which we’re really excited about.
So, we’re growing, the practice is growing, and all we do are data center transactions all around the country. So, whether that’s representing tenants that are leasing space or representing owners of data centers that are selling their buildings, disposing of those assets, end-users often that have assets that they’re either fully occupying or partially occupying and trying to dispose those assets, and then also site selection, so helping companies find and buy land or buildings to build out data centers. So, we do that all over the world. Most of what my team does is in the United States, but we’re active in a few markets outside of the United States. And our overall practice with CB is about 100 brokers globally. And here, in the U.S., it’s about 30 of us really focused on U.S. transactions.
So, it’s been a really fun business, it’s a very small world. You know, the first few years were definitely drinking out of a fire hose, but I think that’s kind of the cool thing about this business, is as our world changes, and IT changes, and infrastructure changes, we have to keep up, and, you know, I think that’s unique to data centers in a way in the sense that a lot can happen in a 12 to 18-month period. You know, in office, and industrial, and retail, you see these shifts…and they’re kinda like tectonic plates…you see these shifts happening, you know, in live time, but it can take years and years and years, and then, obviously, it can all be thrown into disarray by something like COVID. So, you know, it’s been an interesting time to be in real estate. I think the nice thing is the data center sector has survived, if not flourished, during this most recent kinda crisis, and it’s been an interesting start to my career.
Raymond: Thanks for the background. I will ask you to expand a little bit on the teaching just for a minute because I think what you did teaching is pretty fascinating stuff. One quick question, what does it say about the state of our industry that the two SMU guys ended up hiring an Aggie? Is that any indication of trouble ahead or should we be excited about Mikey joining the team?
Haynes: No, that’s a good point. There was a lot of concern at first. But no, Mikey was the student body president of A&M and really, really sharp young guy that we’re very excited to have on board. But, you know, I think it’s safe to cover your bases. Brant’s kids are UT and Texas Tech, and Chris is University of North Texas, and we’ve got Mikey from A&M, and me and Brant from SMU. So, I think we’ve got all the [crosstalk 00:04:31].
Raymond: If you can get a Red Raider on the team, you’ll have it all rounded out. That’s good. [crosstalk 00:04:35] Texas.
Haynes: That’s right, a Red Raider and a Horned Frog. That’s exactly right.
Raymond: All good. Well, I appreciate that. I’ve had a chance to meet Mikey, and seems like a sharp young man, and excited to have him on the team, but do wanna give the Aggies a kick in the gut any chance I can, so.
Haynes: No, that’s great.
Raymond: Haynes, do you mind going back just a little bit? Because you and I have known each other for so long. The Teach For America piece, I just think it’s fascinating, I think it’s part of your backstory, I think it’s really, really cool. Would you just take two minutes? I know you and I get to talk a lot. I love the story you told me the other day about how that last group of kids is all graduated and how you still stay in touch with them. I know it’s not data center stuff, but I think it’s part of the color of what a great guy you are. Could you give us two minutes on that, and we’ll dig into the data center stuff?
Haynes: Sure, yeah. You know, I have awesome parents that were very supportive of me going to SMU, and I was able to graduate without any debt, and I had an opportunity to go teach for a couple of years through a program called Teach For America, which basically recruits people that traditionally would not have gone into the education sector and places them in Title 1, which are the highest-need public schools around the country. In Dallas, it’s been a very, very successful program. It’s one of the most successful markets in the United States for Teach For America. So, I was recruited out of SMU to do that. I was very fortunate to get placed in Dallas, which is not common, to get to stay kinda in your home turf. And I taught in Arlington, I taught sixth-grade English in a charter school that was part of the Uplift charter network, which is a really cool group of charter schools in North Texas, and taught sixth-grade English at Summit in Arlington with about 130 kids a day.
Raymond: Oh, wow.
Haynes: I literally remember googling what an adverb was on my first day. You know, I had no idea what I was doing. And I think I went in with really high hopes of, you know, I was gonna fix education and I was gonna change America, and all this stuff. It took about 10 minutes of 12-year-olds beating the tar out of me to figure out quickly that they were gonna change me more than I was gonna change them. And it really was a remarkable experience for me, and I think it helped me grasp a little more of reality. And I’ve stayed very close with a number of my students, all of whom have now graduated from high school, which is a big part of Uplift, is everybody graduates. So, that’s been exciting, helping some of them get jobs, helping some of them deal with other things in their lives, and seeing them flourish. It’s a neat program, if you have an opportunity to research it a little bit. It’s been really successful with Texas, it’s successful around the country. But I was fortunate to have that opportunity.
Raymond: Well, pretty cool stuff. First of all, thank you for being willing to serve, and work in that way, and to serve our community, and bring the education experience you got at SMU to students. I just think that’s really, really awesome. And then, that perspective when you come to the business world, right? I think that understanding how tough it is to be a school teacher, and what they go through, and, you know, having a room full of…I don’t know what sixth grade is, 12 or 13-year-olds, something like that.
Haynes: That’s right.
Raymond: That can humble you pretty quick.
Haynes: Yeah. Yeah, a lot of pre-pubescent angst going on with sixth-graders.
Raymond: Yeah, yeah, yeah, yeah. I’m still not sure. I wrote it down. I’ll look up what an adverb is after we talk today because I’m not 100% sure myself, so. Good stuff, Haynes. Thank you for that. Well, Haynes, I know when we get to spend time together, we talk a lot about the industry and about the markets. And really our idea here is, just like anybody that would go eat lunch or dinner with you and I, that they would get to listen in on what we would talk about.
So, love to talk through…I know you’re here, and you talked about there’s about 100 guys globally in the data center business, but would love to talk about…I think lots of people talk about Northern Virginia, lots of people talk about Northern California, would love to get your take on a few other markets, maybe Texas, specifically. I think there’s lots happening here right now. Maybe a little bit around Phoenix, Chicago, maybe Denver. Talk about some markets that are closer to us that you hear and what you guys see in those places, and use that maybe as a place to kick off.
Haynes: Yeah, that’s great. Yeah. So, we track the market really, really closely. I’ll talk about kinda center of the country, like you mentioned. But, you know, I think if those listening ever want a more specific market update, we can always jump in. So, it’s been a really exciting 2020, it’s been a crazy 2020, and, obviously, a challenging one for many of our clients, and families, and friends. But from a data center perspective, the COVID-19 crisis, I think, created a real sense of urgency for digital transformation for a lot of enterprises, and that has kickstarted a lot of projects at cloud. I think you basically have three years of IT, you know, planned transformation happen in about three months for a lot of big companies. And that quickly turned up cloud demand, it quickly turned up expansions for certain companies, and certainly, for others, you know, retail, hospitality, travel, different issues. But for a lot of technology services, financial services, the move to digital infrastructure and the expansion of their current digital infrastructure has been felt. And in Texas, that’s no exception.
So, I’ll start with Dallas and kinda move south. Dallas had a very sleepy year in 2019. We ended up with about 27 megawatts of net absorption, which is… Or, sorry, 25.8 megs of net absorption, which is as slow of a year as we have had since 2014. Normally, we’re tracking about 40 to 45 megawatts of absorption a year. And so, Dallas also has an abundance of data center supply, there’s about 60 megawatts of turnkey capacity, sitting, ready to go in Dallas today. And, you know, unfortunately, the lack of activity in 2019 has really been difficult for many providers and it’s driven down pricing substantially, and especially for stuff that was built three, four, five years ago at a higher-per-megawatt build cost that’s getting harder and harder to sell.
The good thing, for Dallas, we saw about 11.5 megs of net absorption just in the first quarter, and we anticipate the second quarter is gonna look pretty similar. That’s a really good kickback into activity. And we’re also seeing several cloud providers circling the market, both from a colo and development standpoint. Obviously, there’s a large cloud provider developing in South Dallas, but there’s a number of others that are actively in this market, which has been good. As you move down to Austin and San Antonio, you know, Austin is experiencing a tremendous amount of office growth and residential growth as companies are moving large amounts of their workforces out of…and Dallas is too, but Austin, I think, gets a lot more of the media attention around it. But, you know, big-name tech companies coming from California and coming to Austin with their workforces, and a lot of those companies bring along with them data center capacity.
So, Austin has had, historically, 4 to 5 megs a year of absorption, and in 2019, they had 12.6 megs. And this includes San Antonio, by the way, which is also a very large market for two different cloud providers. But so far, we’ve seen about a meg and a half for Austin proper and another 4 megs in San Antonio, so 5.5 megs already this year, which is, again, you know, a strong start for that market. So, that’s exciting, again, and I think we’re seeing capacity supply in Austin is very, very limited, less than 5 megawatts available across Austin and San Antonio today. So, trying to find new capacity is very challenging in Austin, there’s not an abundance of available infrastructure in Austin proper. As you go outside of Austin, LCRA service area, and as you go south into San Antonio, there’s quite a bit of opportunity, but there’s not been as much speculative development.
Power pricing is a little bit higher, but just given everything that’s going on in Austin, I think we’re gonna see continued growth in that market. And you may have seen this morning, it was announced that Tesla has acquired land for planned Gigafactory for their Cybertruck and Model…I think it’s a Model Y…that’s gonna go into that market. And it’s not Austin proper, it’s a little bit east of Austin. But, you know, that’s really exciting. And you look at what happened in Reno after they developed their plant there and just the amount of really cool tech development and subsequent data center development that’s happened because of the infrastructure there. I think there’s a very similar opportunity for the overall Austin-San Antonio market. So, that’s an exciting development in my mind, from our perspective.
As you go south to Houston, we’ve seen a relative slowdown just due to oil and gas, and I think there has not been as much activity. We’re tracking about 500 kW of total activity for this year. The last year, they had a big deal that was 15 megawatts, that really drove most of the absorption, that market. I think there are one or two big deals circling that may land this year, may land next year, but there’s not an abundance of activity in that market. So, you know, we’ll see what happens in Houston. I think, obviously, what’s going on in the oil and gas sector is gonna have a big impact. And whether they go to cloud, or whether they build their own cloud, you know, whether they’re leveraging services like DUG, and Triton, and other services that do kinda these oil and gas-focused cloud services versus the big public guys, will be interesting.
So, you know, we’re monitoring that closely. And, you know, Houston, obviously, has some hazard risk challenges associated with hurricanes, but most of the data centers have not only survived but are really designed to weather those storms well, which we’ve seen. So, you know, we’ll see what happens in Houston. It’s also a burgeoning growing office market. This economic slowdown has certainly impacted that market more substantially, I think, in some ways from a data center perspective.
Raymond: Yeah. Do you wanna give two minutes on San Antonio?
Haynes: Numbers I mentioned for Austin include San Antonio.
Raymond: Include San Antonio, okay.
Haynes: Yeah. Yeah, what’s going on in San Antonio is really Westover Hills, that area is getting pretty close to being maxed out as far as just available land for development for data center. And we’re seeing a push kinda Southwest towards one of the major cloud providers developments out there. But I do think we’re gonna continue to see interest in that market, I just don’t know that we’re gonna see a lot of speculative build out there because I think it’s very driven by two companies, basically, that are the end-users in that market.
Raymond: Understand. And Austin and San Antonio being so close, I could see even those markets merging or being seen almost as one because they’re geographically pretty close.
Haynes: Exactly.
Raymond: All right. What do you guys see out in Phoenix?
Haynes: So, Phoenix has also… You know, I think, personally…this isn’t CBRE’s official opinion or anything, but I’ve been concerned about Phoenix because there’s been so much new supply and planned supply running to that market. It had a very big…I think they had almost 60 megawatts in 2018 of absorption, and then about 33 megawatts in 2019 of absorption. So, two standout years for a market that, historically, had not had those kinds of numbers. And then, we’ve seen 25 megawatts of capacity kinda built out over the last 18 months, and several providers, including Compass, acquiring large land sites in that market in Goodyear to develop, you know, massive campuses. I’ve kinda viewed that similar to Dallas where we had some big years and there was a rush of suppliers to the market that I think has created a little bit of an oversupply situation in our market.
The reality is the demand continues to be strong, and I think there is so much pressure to get out of some of the Californian markets with new expansion, a lot of which has gone to Nevada. And I think a lot of that’s now getting directed both to Nevada and to Arizona before it gets to Texas. So, I think we’ve seen 9 megs of absorption here in the first half of the year, there may be 1 or 2 more that I’m missing there. We haven’t done our final tally for the first half of the year.
But that’s a really solid start, and I think, you know, that it’ll probably end up, again, close to high 20s, low 30s kinda year in Phoenix, which I think supports the current market narrative as long as too much backup supplies are built, and I think long-term, you know, there’s some really good opportunities in that market. They have a great incentives package in Arizona, and specifically for data centers in the Phoenix area, and I think, you know, the largest users in the market are very savvy on how to take advantage of those programs. And it’s a little more tenant-friendly than the Texas incentives, and it’s now very similar to what’s offered in Chicago or in Illinois. So, I think we’re gonna see more activity in Phoenix. You know, I’m hoping my earlier hesitance on that market was wrong. But it’s really up to a couple of the big end-users, most of whom are based in California, to decide whether Arizona’s the market they wanna expand in or whether that’s gonna get more spread out.
Raymond: We certainly agree with you that there’s just people working hard to get out of the California data center business, and Phoenix has been a place for that gravity to begin to pull. I think it’ll get bigger out there as well. We agree with you, much like the comments around the one or two big users in Austin or in San Antonio. I think you’ll see very similar things happen in Phoenix, one or two big users will end up drawing other data center activity out there because the infrastructure there gets developed.
Haynes: Yeah, yeah, the infrastructure’s great, and the power availability there is good. But there’s also a ton of renewables. Have you all interacted with that much?
Raymond: Yeah, yeah, we’re doing good in the renewable front out there as well. Agreed, yeah.
Haynes: Yeah. And I think that’s really important for certain users, you know? We have lots of clients that care about having green energy and all of that, but when it gets down to the bottom line, only a handful are willing to pay for the difference. And I think what we’re seeing in markets like Arizona’s, renewable energy is actually almost price-comparable to non-renewable.
Raymond: Just about a parity. Yeah, that’s right.
Haynes: Yeah.
Raymond: Just about a parity, yeah. Let’s take a minute and talk about Denver, if you don’t mind.
Haynes: Yeah. This is public, but we helped one of the largest banks in the world, sourced a couple of sites there to do their enterprise next-gen data centers, and those will be two of the biggest data centers in that market owned by an end-user. You know, it’s traditionally a retail colo market, but the reality is there’s quite a bit of supply, it’s about 25% vacant in that market right now with 22 megs. So, there’s a fair amount of supply spread around the market, but it’s in little chunks, it’s not 5, 6, 7 megs sitting in any one building that’s built out.
And so, it remains a mostly retail market, and I think that’s allowed for some price protection in that market. We saw about 400 kW of absorption in 2019. I think there’s a chance for that to be a little bigger in 2020. But to date, activity’s been pretty solid, I think it’s about 200 kW today that we’ve been able to track. But, you know, what’s cool about the Denver market is the connectivity. There’s just fantastic fiber connectivity and really low latency between both the East and the West Coast. And I think, you know, everything else that’s going on in Denver…again, it’s a burgeoning office and residential market, obviously has a great work-life balance play atmosphere.
Raymond: High quality of life market, that’s for sure.
Haynes: Yeah, exactly. Yeah, being able to hop on the train, or hop in your car, get out to a mountain, and ski in the winter, and hike in the summer is pretty sweet. I think, frankly…and no official comment from CB on what’s gonna happen to office, but I think as we see the companies that can justify remote work and employees that like it are gonna be seeking out those markets probably more actively than they have in the past just because that work-life balance is so important for, you know, lots of people. So, we’ll see.
But from a data center perspective, we just haven’t seen any major end-users do superlarge deployment that they haven’t owned. So, there’s actually a number of owned, large enterprise data centers in that market, but very few of those have gone to colo, and we haven’t really seen substantial developments from the public REITs in that market. Flexential is probably the largest provider, and they’re private, obviously, in that market, and they’ve done very, very well. And I think, for the most part, everybody in that market, Cyxtera, Equinix, Flexential, Coresite have done well and have great assets. So, you know, it’s more of a matter of, I think, patience and catching up. You know, it wouldn’t surprise me if three or four years from now we’re talking about Denver like we’re talking about Phoenix, but I just don’t think we’re there yet.
Raymond: Yeah, I think you can see just quality of life and connectivity, I think you’ll see both of those things help that market continue to grow. I think we see that world the same way as you guys do. Haynes, that’s super great insight and depth around markets. This is the kind of advice folks can get if they reach out to our friends at CBRE. I’d love it if you…you know, no customer names and no proprietary information, but do you mind telling us one or two, you know, customer stories or client stories? What’s a client who comes to CBRE? Where are they at? What are they struggling with? What questions are they asking? And how are you guys helping guide them? I’d love to…take me through a client journey with you guys. And, again, not looking for any proprietary or customer info, but just a day in the life of a CBRE data center client.
Haynes: What I love about our business is every client is very different, and has very different requirements, and often are in very different stages of their, you know, technology journey and digital infrastructure journey. And so, we have clients that are extremely sophisticated and throw us a playbook of, “Here’s exactly what we want you to do. Tell us what the options are, and go fill our requirement.” Those deals are usually larger and with well-known companies that you would be familiar with. And we love getting those deals, but the reality is, in those instances, we’re really just brokers, we’re going out and negotiating the best possible pricing, best possible terms, making sure that we’re seeing all the options in the market.
I think the deals, you know, where we add a ton of value…and we add a lot of value in those deals, but it’s more of we’re allowing our client to do what they do best and we’re doing what we do best, which is to be the broker and to go, actually, you know, run the site selection process, where we can add a lot of value with certain clients. We just did this with one of the country’s largest healthcare providers in Texas…one of the country’s largest healthcare providers, but the site they selected was in Texas. They had 33, basically, data centers, most of which were sitting in hospitals around the country, and they had four primary hubs, and the goal was to consolidate those 33 sites.
They were spending… As you know, whether you’re running a 3-megawatt data center or a 500-kW data center, you still need basically the same amount of employees to manage each of those sites, and there’s obviously a lot of redundancy issues and capital investment required with maintaining those environments. And so, doing that, you know, 33 times over is extremely expensive. And what we helped them do is kinda walk through what assets were core to their business and needed to be moved. And their IT group was very, very sharp, and the reason this was so spread out is they had acquired…there’s a lot of mergers and acquisitions that had gone on. So, they had acquired most of these hospitals, and they were dealing with legacy infrastructure that other IT organizations had put together, and their goal was to really streamline it and save cost.
So, we helped them identify which assets were gonna be moved, we helped them interview and source a migration partner to help them actually physically do the move. And then, we went through their current inventory of data centers, and went out and looked at new potential data centers, and ended up being able to move into a site that they were currently leasing that was up for renewal by doing a long-term blend and extend with the landlord but were able to achieve… They were pretty overmarket with the provider that they were with, but they had a lot of growth because they were gonna consolidate, and so we were able to offer the landlord, the owner of the building, some growth with really flexible terms. And the total savings to that client, just on that one consolidation, which encompassed about 15 of those 33 sites, was about $23 million over 10 years, versus staying in place and renewing as-is and kinda status quo.
You know, had they been interested in doing, I think, something a little more cumbersome…there was more savings available to them as far as having to move more sites and building a bigger environment, but a big part of their strategy was not consolidating everything to one site. So, I think what will ultimately happen is we’ll do the same thing for a second site. And whether that’ll go to a new building or in one of their existing sites, we’ll see, but that’s a couple of years out from now. And in the meantime, we renewed a couple of other colos, we actually put them in one new colo for one of their network sites. That whole process took about three and a half years of work with them. And, you know, ultimately, getting all of the stakeholders, IT, finance, real estate, or facilities and procurement on the same page humming is really 90% of the battle. And I think when we’re enabled to be that partner that can communicate through all those channels, we end up finding great success for our clients, and that’s what makes us successful, is when our clients are happy.
So, you know, I think that’s one example. I’ll share a short additional example. We recently had an opportunity to help a client that was sourcing new colocation in a northeastern market, and procurement had been running the process, but I think part of their deal was they were running it very similar to how you would purchase software, and they weren’t thinking about it as a real estate asset. And so, ultimately, it went to finance, which flagged facilities, which flagged us. And we read the contract that they were about to sign and noticed a number of issues, including the fact that there was no cap on the amount of capex exposure that this client was gonna have in this facility, which for a typical colo, you typically have no capex exposure or a very limited. So, we were able to come in and drive a competitive process. They ended up with the same provider but drove down the price, really improved their contract terms, because we were thinking about it as real estate and not just as an IT environment.
And I think it’s really important to consider both sides of that coin. The IT piece is first and foremost because it’s the purpose of the environment, but it’s still a physical space. And just like your house, or your apartment, or your office building, you don’t wanna buy your house right in the middle of the 100-year floodplain, you definitely don’t wanna put your data center there. I think a lot of people don’t even run those tests when they’re looking at their sites. You know, obviously, the colo providers do, and the good thing is, if you have a good partner like Compass, you can trust that they’ve done their homework on where those sites sit.
But a lot of legacy assets, and even after, like, Sandy, [inaudible 00:29:40] updated all the maps in the northeast, so half of the older data centers actually do sit in now 100-year floodplain. And just not going through that process properly, I think, can lead to, ultimately, really critical mistakes. And so, that’s part of, again, I think, where we add value, is just helping clients think through things that maybe they wouldn’t think through on the IT side because they’re not doing colo transactions every single day and we are. So, I don’t know if that’s kinda what you were looking for, but.
Raymond: No, that was perfect, Haynes. I think it’s a great example, both the stories you tell of, “We spend time with our customers and say, ‘We’re in the business of developing land and developing and building data centers every day. It’s what we do every day.’ And not that our customers aren’t brilliant people with great businesses, but it’s generally not what they do every day.” And I think that’s exactly what we see out of you guys, our friends at CBRE, you’re in the business of evaluating and understanding what’s the best way to merge your real estate, and your data center needs, your technology needs together and make good decisions. And we just think the world of the advice you guys give not only the team here, you, and Brant, and Chris, and now Mikey, but just CBRE in general, you guys are just as classy as it gets, and as professional as it gets, and as knowledgeable as it gets. So, we think it’s important that folks engage with you to understand what they’re doing because you guys do it every day and do a great job with it.
Well, Haynes, man, I really, really appreciate you joining me. And there’s so much knowledge and so much experience, we’d might ask you to come do it again because there’s still more questions I’d love to ask you, but from a podcast duration, we’re probably good, we’re about 30 minutes in. And super, super grateful to have you join us, and, again, thank you so much for the service you did at the beginning of your career, being a school teacher. I just think that speaks volumes about your character, and what kinda guy you are, and why we love doing business with you. Thanks for joining us, and look forward to seeing you in the marketplace, buddy.
Haynes: Thank you, Raymond, I really appreciate the opportunity. And the only thing I’d add is, if you have not been to South Dallas, to check out the new Compass powered shell and the campus they’re building down there, it is really cool. It’s worth a COVID-free trip to Texas next time you can get down here. Worth checking out.
Raymond: Hey, we appreciate that, buddy.
Haynes: Yeah, absolutely.
Raymond: Thanks, man. Appreciate it, Haynes.
Haynes: Okay. See you.
Raymond: Be good. Bye now.
