Site selection can be a relatively simple process when selecting a turnkey solution like a collocated space for a disaster recovery site. Alternatively, the process can be terribly difficult when tackling a complex project like building a new data center from the ground up. In either case, you have to decide if you want to handle all the research and work in house or if hiring a consultant is the best approach.
Handling the process internally saves time and money when the site selection process is simple. Hiring a site selection consultant is almost silly when just selecting colocation space. But a consultant is essential for projects that are more complex like buying a new space, converting a space, or building fresh. Outsourcing a complicated site selection process like a nationwide search for site will also save time and money.
|Figure 1. U.S. residential electricity prices, courtesy of the National Renewable Energy Laboratory.|
“There are a variety of reasons” to hire a site selection consultant, according to Bob Hess, managing principal at Newmark Grubb Knight Frank. A “key one is for data integrity/expertise and confidentiality. Complex mission critical [projects like] Tier 4 data centers look at multiple states if not regions across the world. It’s rare that a company wants to come out of the box divulging who they are. They want to maintain anonymity until they have approved a project with the board and their team can engage with their own due diligence protocol. Another reason is building consensus. If some of these larger data centers involve CAPX requests above $100 million, 100+ acres, 10 MW of power, etc. then the CFO and COO want a third opinion and validation.”
There are as many approaches to a site selection methodology as there are consulting companies. For instance, Greyhill Advisors provides site selection consulting services throughout North America and Western Europe. They break their process into three phases: community evaluation, site search and analysis, and negotiation and final selection.
Daniel Kah, partner at Greyhill Advisors, said, “Site selection is quite complicated and typically involves assessing infrastructure and demographics, detailed financial modeling, negotiating incentives, and securing real estate. Hiring a firm with expertise in the field will secure the best outcome in a timely manner.”
Regardless of how you slice up the process, the evaluation criteria fall into the following big buckets:
- Quality of life
- Real estate
- Taxes and incentives
Companies talk a lot about going green. Having an environmentally sustainable approach makes for good public relations that potentially translates into more business. There is a warm and fuzzy desire to love the earth and have a zero carbon footprint, but that general desire to do no harm is almost always trumped by financial concerns. Environmental issues are rarely key factors in most site selection decisions.
The cost of utilities is one of the main financial drivers for selecting a data center site, especially when it comes to the cost of electrical service. According to the U.S. Energy Information Administration, power generated from nuclear reactors only costs 10.8 cents/kilowatt hour (kWh), which makes it cost competitive against coal generated power in many markets. Companies that feel strongly about using green and renewable resources can still locate their data centers in places where hydroelectric power is abundant and save money in the process since hydroelectric power costs 3 to 5 cents/kWh according to research done by the Worldwatch Institute.
Going green is just one of the many factors that go into a site selection decision. According to Hess, “These location decisions are special events, complex and time consuming and the companies need extra capacity and hands to get it done. There would be at least 20 to 30 variables that vary by location, both cost and non-cost, and everyone struggles with data sources and how to make “apples to apples” comparison and recommendations.
Access to high speed networks is just as important as access to low cost power. Locating a data center in a remote location will ensure that land costs are inexpensive, but a location close to a metropolitan area provides access to high speed networks and redundant power grids.
Ease of accessibility is a moderate factor when selecting a data center site. Proximity to a highway or location on a busy corner are key criteria for high traffic business like sports stadiums or a McDonalds. However, the same accessibility can be detrimental to data centers because of the common desire to have the data centers incognito.
Accessibility is moderately important when customers select a collocation site. Customers tend to install their equipment and then access the equipment remotely. Easy access to main transportation routes is more important for attracting labor and for receiving equipment service from equipment suppliers. Proximity to a major market is also needed get access to reliable utility services.
Labor cost is the number one factor for site selection. Managing a data center requires a limited number of highly paid staff members. Managing labor costs has a direct impact on the bottom line. A salary difference of just a few dollars per hour can add up hundreds of thousands of dollars in costs annually.
Access to a large skilled labor pool is critical if you want to have reasonable operational costs for labor. In areas where the labor pool is tight, companies have to either pay high salaries, pay to develop their own talent, or pay salaries that are substantial enough to induce people to relocate. The average city has 37.8% of their adults 25 to 34 with college degrees. Washington D.C. tops the country with 63.5% with college degrees. Locating a data center in reasonable proximity to universities and training centers is critical to maintaining a skilled workforce.
An additional factor to consider is if your targeted location is in a right-to-work state or if the state is union friendly. In New York City, the cost of labor can be double that of other states because of the unions. A strong union presence is not very important as a direct criterion for site selection, but effect of union efforts to maintain high labor costs can be significant.
QUALITY OF LIFE
Quality of life is a loose and somewhat intangible factor that can affect the ability to attract labor. A low cost of living, a low crime rate, and a pleasant climate doesn’t do much for attracting customers, but it is significant for attracting the necessary labor to run the business. The top three places to live according to CNN Money’s “Best Places to Live 2012” survey are Carmel, IN; McKinney, TX; and Eden Prairie, MN.
It is effectively impossible to not use a consultant or agent when securing real estate. Securing land for a new build is difficult in a major metropolitan area like New York or Chicago since there are relatively few shovel ready sites. National real estate brokers like Jones Lang LaSalle are necessary partners when securing metropolitan space for data centers. The cost of construction is much higher in major metropolitan areas because building a data center inevitably involves demolishing an existing building or converting an existing space.
An approach that many data center providers take is to secure green space in areas in proximity to major cities since costs for land and construction are high in major metropolitan areas. DimensionMFC took this approach by building the Austin Technology Park in Pflugerville, TX, a suburb situated just 18 miles northeast of downtown Austin. Duggan LLC took the same approach by building a 16,529-sq-ft data center in La Mirada, CA in Los Angeles County.
TAXES AND INCENTIVES
Taxes and incentives are important to the development process and probably gets the most press. Every state and many cities have their own economic development group. According to Hess, “Texas legislation for data centers recently passed — excellent result — sales tax exemption on M&E for data center is a big expense on the P&L.”
In the right case, incentives can make or break the development deal. Incentives include property tax abatements, labor training funds, sales tax rebates, tax increment financing, and other negotiated incentives. According to Kah, “Greyhill has secured multi-decade property tax abatements of between 80% to 100%, sales tax abatements for the data center equipment and software, income tax credits, and large upfront cash payments. Data centers are aggressively recruited and companies can expect strong incentive offers.”
THE FINAL WORD
Knowing when to engage a consultant and knowing when to roll your own solution has a time and cost impact. Choosing the right consultant is critical if you chose to outsource the selection process. One of the most important things to consider when hiring a site selection consultant according to Hess is, “Seasoned judgment, with the asset type itself, and demonstrated experience on how to translate corporate objectives and goals into a ‘managed process of elimination.’ Also creativity and working with multiple geographies and stakeholders, from state, community, utilities, real estate owners. Companies can expect tremendous value out of a consultant who knows how to communicate, represent the intent of the project and align all stakeholders toward a common goal. That comes from experience and is hard to see on a RFP response.”
Kah recommends companies “hire a firm that focuses on site selection vs. a company whose main business line is real estate, accounting, or construction. Don’t agree to commission structures that align the consultant’s incentives with anything other than success as you define it. Many site selection firms will take percentage of negotiated incentives, which provides a financial motivation to take clients to incentive rich locations vs. the best option for the client.”