Demand for data center demand is rapidly rising around the globe, and Western US cities are among the top markets. A new report from JLL calls data center demand “insatiable” and lists Phoenix, Las Vegas and Los Angeles as the top markets for data center absorption in 2018. In fact, Phoenix ranked third in the world for absorption, behind Northern Virginia and London. The market had 51 megawatts in absorption activity last year.

“Data center demand in Phoenix is still fueled by all of the benefits that made it a top tier market in the first place—low cost of power, lack of natural disasters and cheap dirt compared to other primary data center destinations like Virginia and Northern California,” Mark Bauer, managing director at JLL, tells GlobeSt.com. “This is enhanced by the Arizona Computer Data Center program, which abates sales and transaction privilege taxes for qualifying data center operators, developers and end user customers. It is one of the most attractive data center-centric programs in the country.”

Las Vegas has a similar story, with rising demand for data centers and similar market drivers to Phoenix. On the JLL report, Las Vegas was also among the top markets in the world for data center absorption last year, with 37 megawatts in absorption. “Las Vegas has a lot of advantages that make it attractive for data centers, including its close proximity to California, renewable energy options and available capacity and low cost of power,” Bauer says. “This will only continue to grow the local data center environment, particularly as a major network hub for media and entertainment. The tax incentives and special utility pricing that Las Vegas offers is also very appealing to large-scale deployments.”

These two market are strong data center performers, compared to Los Angeles. While the city also made the top-activity markets in the JLL report, there was only 2 megawatts of absorption in the market last year. I would not say that there is an insatiable demand for space in the LA market. “L.A. has been relatively flat over the last year and the outlook remains the same for 2019,” Darren Eades, EVP at JLL, tells GlobeSt.com. “We are definitely seeing some of the larger cloud service providers expand into the market, while others still continue to search for the right location. However we are not seeing other larger users enter the market due to high electrical and business costs.”

Los Angeles has seen slow activity as the result of consolidation and relocation of users to adjacent markets, like Phoenix and Las Vegas. “L.A. has seen some recent success with a couple of larger transactions but also lost momentum due to consolidation, reduction in footprint, relocation and failed businesses,” adds Eades. “The market is still driven by numerous small transactions that support local users and the ever-expanding Asian market in the U.S.”

Las Vegas and Phoenix have benefitted from this outward migration trend, as well as new organic growth from within the market. “In addition to all of the new operators coming to metro Phoenix, we are also seeing a major wave of interest from cloud and hyperscale users. Interestingly, cloud and hyperscale only accounted for 20% of Phoenix’s net data center absorption in 2018,” says Bauer. “Based on the high volume of interest that we know is still out in the market, we feel confident that there is a lot more cloud and hyperscale activity to come.”

In the Las Vegas/Reno market, retail growth has also helped to fuel data center demand. “These cities have only three major providers, of which data center operator Switch dominates activity in both markets,” says Bauer. “Switch recently reported that nearly 40% of its client base is interested in small deployments that come with retail services. We expect to see continued demand from retail clients in both of these cities, which in turn will spur on their data center market. Las Vegas and Reno also offer a very competitive total cost of occupancy compared to Silicon Valley, making them attractive markets.”

Bauer says that activity in Phoenix and Las Vegas is only beginning. He expects strong activity again in 2019 for both market, and in Phoenix in particular. “I expect the balance of 2019 to bring an increase in hyperscale and cloud deployments in Phoenix, most taking advantage of the new product coming online. There also appears to be no slowdown in operators’ desire to find new locations that allow them to enter or expand in the Phoenix market,” he says. “This has data center operators in growth mode, focused on meeting the demands of the enterprise, cloud and hyperscale activity that is currently present in the market. Collectively, these factors will continue to make Phoenix a hot place for everything data center.”

Los Angeles should also have a similar year. “We don’t expect 2019 to be a major needle mover, unless a larger cloud provider decides to plant a flag or dramatically increase their footprint to better support the growing Southern California economy,” says Eades. “There are still plenty of options for users to consider and the constant rate compression has kept LA a very competitive market.  LA operators are not only competing with each other but also cheaper nearby locations like Las Vegas, Reno and Phoenix.”