PHOENIX—As more global companies move data and information to the cloud, the cloud itself is actually moving closer to them. Phoenix and other North American data center markets have emerged as hotspots as operators and cloud providers follow affordable utility rates, tax incentives and a demand for expanded service offerings, according to JLL's annual data center outlook. For an industry expected to see revenue grow by 14% during the next two years, footprint flexibility has proven to be a key driver in data center locations.

Mark Bauer, managing director and Western lead for JLL's Data Center Solutions Group, tells GlobeSt.com: "Arizona is a natural fit for data centers, with a low incidence of natural disasters, a good mix of affordable power options and a range of data center deployment options. One of the most compelling advantages may be our favorable data center tax structure that passed legislation in 2013. This bill benefits everything from large data center development projects to colocation customers. This tax structure continues to be a leading driver, helping Arizona to win new business and assist existing companies to grow."

In Phoenix, utility costs hover around 6.2 cents per kWh thanks to Arizona's diverse fuel supply mix. This is an attractive rate compared to the national average of 7.4 cents per kWh of the markets JLL surveyed. In Phoenix, it has spurred demand from several key industries: technology, retail and e-commerce, and banking and finance (together making up 80% of the market). The remaining activity comes from telecom, healthcare and insurance users.

According to the JLL report, this includes ushering in a more competitive pricing matrix and flexibility, and providing a window of opportunity for new players to deliver modern inventory and fill timely requirements. This includes CyrusOne, which continues to expand its local footprint, as well as Aligned Data Centers, the first pay-for-use data center provider to offer consumption-based pricing to enterprises, service providers and governments looking for greater control of data centers and faster time-to-market.

In Phoenix, partnerships with local utilities are helping these data center leaders to work more efficiently by securing easier access to transmission subs. However, other factors such as construction costs and infrastructure investment remain high. For example, infrastructure investment for new data centers can be as much as two to three times the amount to build, another reason why M&A has surged as small providers combine with larger ones to seek sources of capital. The expense is greater for enterprise users that have increasingly shifted from owned facilities to the third party market to offset cost and maintain flexibility through colocation.

"For every penny a data center provider can save in Kilowatt hours (kwH), there is the potential to save millions in operations," said Jon Meisel, East region lead for JLL's data center. "So our clients have to be very strategic with their footprints. It's still about locating near infrastructure-robust metropolitan areas, but it's also about finding ways to be efficient with their locations. If that means placing some part of their footprint in regions with more flexible utility costs, incentives packages or lower taxes, providers will expand into those areas."

Both Aligned Data Centers and CyrusOne are delivering new data center space to accommodate demand. Aligned is in the process of retrofitting a 550,000-square-foot project at 2500 W. Union Hills Dr. in the Deer Valley/North Phoenix submarket. Aligned's $150-plus million retrofit will re-introduce a property that has been vacant for nearly eight years and will also reposition the building to follow the company's platform, allowing users to buy capacity and scale incrementally as compared to traditional colocation providers which operate on fixed contracts.

Skyrocketing demand, low risk of natural disasters and proximity to fiber play key roles in choosing where to locate a data center. Many providers are turning to mergers and acquisitions to keep pace, such as Digital Realty, which recently purchased Telx for $1.9 billion, nearly doubling the provider's footprint and adding substantial services offerings for the company.

"We are seeing clear demand for a complete range of data center solutions," said Matt Miszewski, senior vice president of sales and marketing at Digital Realty. "This acquisition was a strategic move for us, and reflective of what we see in the marketplace. Customers need the reach and support that we are now uniquely positioned to provide in the form of the right service offerings and global footprint."

Added Bo Bond, central region lead for JLL data centers: "We've seen a large acquisition spree take place in the sector which has included many of the publicly traded data center REITs. They're buying to increase their footprint, but also to be able to provide solutions, cloud security and connectivity. This gives companies with larger platforms access to offer more services with a larger geographic footprint. In the end, that's going to benefit the user and increase the reach for those providers."

While local demand has been modest during the first half of 2015, Phoenix is on track for a promising fourth quarter of absorption, comparable to the significant activity achieved in fourth quarter 2014. In preparation for the RealShare Phoenix conference next month, session speaker Will Strong, senior vice president, Cushman & Wakefield, tells GlobeSt.com: "Overall market fundamentals continue to improve in the Phoenix industrial sector. What today's modern users are looking for, build-to-suits over developing spec, where the capital wants to be, and how housing impacts Phoenix all continue to be major topics of conversation."