Harrison Street, AREP Bring $1B Data Center Project to NoVa

Data centers continue to grow in strength as an asset class, a trajectory widely expected to continue given the introduction of the 5G network this year, autonomous vehicles soon to come and the ongoing, increasing demand from the work-from-home crowd.

American Real Estate Partners (AREP), an institutional fund manager and operating partner focused on data center, office, and residential/mixed-use development, and Harrison Street this week announced a $1 billion joint venture commitment to develop six powered shell data centers.

The properties represent 2.1 million square feet of data center space in Data Center Alley, the world’s largest and most connected data center submarket, located in Ashburn and Arcola, Va.

The data center campuses can accommodate six buildings that will range from 265,000 to 440,000 square feet in size and includes the site of the former AOL headquarters, currently operated by Yahoo, located on Pacific Boulevard in Ashburn. 

AREP to Deliver 300mw of Electrical Power Capacity

Once complete, the Ashburn campus will consist of four powered shell data centers developed in a build-to-suit model for hyperscale tenants and deliver 300 MW of electrical power capacity. 

The Arcola campus is located on Arcola Boulevard, directly across the street from Google’s new development, and near Dulles International Airport. The Arcola development will include two modern powered shell build-to-suit data centers with approximately 100 to 125 MW of capacity.

The JV has already broken ground on its first development, ABX-1 at Beaumeade, a 265,000 square foot two-story powered shell located directly on Loudoun County Parkway, directly on top of the Ashburn Fiber Ring. AREP and Harrison Street acquired the site in January 2021.

“The demand for more data centers is simply based on our society’s move to an even more integral life with technology,” said Doug Fleit, AREP’s CEO. “As demand for data centers continues to far outstrip current capacity, AREP is focused on developing assets that expand data availability and connectivity.”

The Northern Virginia data center submarket features a robust fiber network, low energy costs for tenants and landlords, and local incentives for organizations investing capital and creating jobs and is home to the largest concentration of data centers in the world. 

It has also been the fastest growing data center market for the past five years with increasing demand due to available power and one of the most connected markets in the US.

Data Centers No Longer ‘Single-Purpose’ Buildings

By Cartmell, Senior Director, Walker & Dunlop Capital Markets, tells GlobeSt.com that as recently as five to seven years ago, data centers were looked on by the lending industry as single-purpose buildings. 

“As such, the typical loan was only 30% to 40% of its economic value,” Cartmell said, “primarily because the rents they paid were two to three times higher than normal industrial rental rates. They are basically hotels for technology companies. 

“To get a permanent loan, they had to underwrite at vanilla industrial rental rates. Key drivers for tenant demand were access to cheap power sources and redundant, fiber optic cable lines – very different demand factors than typical industrial/office tenants. While lenders still prefer vanilla warehouse and distribution usage, they no longer force you to use those distribution rental rates to determine loan terms.”

For example, One Wilshire, a 660,000 square foot, 30-story, converted office building, data center in the middle of downtown Los Angeles just arranged a $389 million, 10-year, full-term interest only payments loan. 

“That is a loan of nearly $600 per foot,” Cartmell said. “The net operating income from One Wilshire is about twice what it would be as a vanilla office tower.”

N.Va. All the ‘Rage’ for Data Centers

Tony Marquez, Senior Executive Vice President and President Commercial Banking at EagleBank, based in Bethesda, Md., tells GlobeSt.com that data center acquisition and construction activity has been raging for several years in the Northern Virginia area.

“Our outlook for the sector is quite positive as demand is continuing to expand at an almost geometric clip,” Marquez said. “As a lender, the end users and tenants in the data center space have often been of such a high credit quality that it makes these transactions quite attractive on a risk adjusted return basis for a bank like ours.

“All banks are fighting for good loans at a time when all the banks have been through a period of lower demand and loan production during the pandemic. Due to a variety of factors including the sector itself, the credit profile quality of end users/tenants, and increasing demand for capacity, the data center sector is increasingly attractive to us.”

Harrison Street Invested in Data Center Cross-Verticals

Since 2018, Harrison Street has invested approximately $2.4 billion in digital assets including powered shells, carrier hotels, strategic colocations and dark fiber. 

In July 2021, Harrison Street acquired a significant minority interest in Summit Infrastructure Group, the leading dark fiber network solutions and bandwidth infrastructure provider for carriers, content providers, data center operators, large enterprises and government agencies, with more than 600 miles of 100% underground, newly constructed metro and regional dark fiber infrastructure in Northern Virginia.

AREP has had a number of high-profile successes in the Ashburn market including the 1.8 million square foot acquisition of Quantum Park and the development of a 445,000 square foot headquarters for the U.S. Customs and Border Patrol Agency.

“Speed to market is a key factor that attracts the most demanding hyper scale tenants today,” said Greg Rowles, AREP’s Managing Director of Development.

Construction Project Timing is Critical

Barry Wurzel, president of Wurzel Builders, tells GlobeSt.com that just like any project, there’s a budget and timeline to be mindful of but the approach should look different for large-scale projects such as data centers. 

“Recently, COVID has caused many delays within the process, causing major setbacks for a plan to be reviewed, approved and then implemented on time,” Wurzel said. “Rather than meeting with city officials in person, general contractors are navigating a new territory with remote and hybrid options being available. 

“With the workplace continuing to shift to support these new structures, it’s imperative that general contractors think of the timing of their projects and when doing so, heavily consider the potential delays they may experience when it comes to receiving approvals.”