Chaska: A datacenter hot spot in cool Minnesota

Among secondary American datacenter markets, the Twin Cities have caught the eye of providers large and small. This buzz, driven first by the region's wealth of healthy businesses, has been harnessed by Minnesotan politicians at the state and municipal levels, incentivizing this inflow. Chaska, a relatively small city west of Minneapolis, has leveraged this trend and rapidly grown its datacenter footprint. Now home to four datacenters, with more in the pipeline, this small town just south of Lake Minnetonka has leveraged its proximity to the city and surrounding residential areas to attract an unlikely crop. Fairly unique to suburbs of non-top-five markets, Chaska has driven a strong mix of retail and wholesale opportunities since 2010. Having recently approved another 66-acre plot for development by Dallas-based Stream Data Centers, Chaska is reinforcing its position among neighboring suburbs with datacenters, including Shakopee and Eden Prairie.

The 451 Take

As more state governments pass legislated datacenter incentives, it is becoming increasingly important for individual cities to differentiate themselves by offering additional incentives, typically on a case-by-case basis. While incentives are not everything in the site-selection process, they certainly play a role within a market, and Chaska's willingness to support the growing industry is likely to pay off as more companies consider Minneapolis as a datacenter destination. While the Minneapolis market as a whole has seen an increase in providers for both retail and wholesale over the last five years, with most qualifying for state-level tax abatements, Chaska is home to just one of each. With additional tax breaks to further reduce operational costs, these providers could have a slight advantage in the price competition.

Context
A Minnesota city marked by the sacred mounds of Native American tribes built hundreds of years prior to the state's discovery by European explorers, Chaska has a rich history and a proud past. Over the last five years, this town located south of Lake Minnetonka and west of the Twin Cities has found a new settler: data. Keeping pace with other westerly suburbs of Minneapolis, Chaska has ushered in datacenter providers large and small, bringing in a business with long-term viability and potential tax revenue. Retail (Peak 10 + ViaWest), wholesale (Stream Data Centers) and enterprise (UnitedHealth Group) datacenters have all sprung up within the city limits since 2010. This boom has been part of a greater datacenter revolution in this part of the state – towns like Shakopee, Eden Prairie and Edina each have contributed to the surge.

Incentives
With relatively high utility rates ($0.0813 per kilowatt hour) and middle-of-the-road sales taxes (averaging 7.19% state and local), Minnesota leans heavily on incentive packages to drive datacenter growth. At the municipal level, town and city incentives vary widely with the Twin Cities' western suburbs, which are generally more eager to offer tax breaks. Chaska, in particular, offers a 20-year sales tax abatement totaling three times the annual total of new property taxes generated, ranging from $50,000 to $3,000,000. In the case of Stream's US Bancorp deal, the provider qualified for $548,000 in local tax abatement. This town- and city-level tax easing has certainly helped state-level measures to thrust the metro into the forefront of national and international providers' minds.

At a state level, the 2011 state legislature passed a two-pronged sales tax incentives bill aimed at spurring growth and revitalization in the market. Targeting both new builds and refurbishment projects, the bill grants qualifying parties 20 years of sales tax exemptions. In the case of new builds, datacenter providers must develop at least 25,000 square feet in gross operational space and invest a minimum of $30m over the first four years. Refurbishment projects must also result in 25,000 gross square feet, but require $50m over only two years. In both cases, a combination of provider, partner and tenant capex qualifies under the legislation. Several major colocation and in-house company-specific facilities developed since 2012 have qualified for the tax exemption, perhaps lessening the ability to differentiate based on qualification and reducing the competitive advantage within the market. Once an end user chooses, qualification within the program is generally expected. Outside of sales tax, Minnesota also does not tax personal property, inventories, utilities, internet access, information services or custom-created software. The state's business-friendly tax code, paired with targeted datacenter exemptions, makes the greater Minneapolis area a compelling competitor against other Midwest geographies.

Market drivers
The Twin Cities serve as the financial hub of the upper Midwest, with seven banks based in Minneapolis. Additionally, the headquarters of the Ninth Federal Reserve District Bank is located in the city. Local banks, venture capital concerns and insurance companies play a major role in the cities' economics, and high-tech industries are also integral parts of the economy. With the University of Minnesota and other colleges providing applied research, as well as scientists and engineers, the metro has a high concentration of technology firms, with more than 1,300 in the Twin Cities.

The Twin Cities are located in Seismic Zone 0 and have little risk of earthquakes. This gives local providers a small leg up in deals against Detroit and Chicago providers, particularly in DRaaS deployments. The area, like much of the US, faces some risk of tornados. MTDCs with fortified roofs mitigate that risk for enterprise customers that must protect critical systems and data. The area benefits from cooler weather most of the year that reduces cooling costs and ongoing operational costs. Air economization would benefit datacenters most of the year; however, hot, humid summers require supplemental mechanical cooling from June through August.

Retail
At the time of this writing, Peak 10 + ViaWest is the sole retail provider operating in Chaska proper. Its facility, located outside of the datacenter-dense West Creek Corporate Center, opened in 2014. Prior to the site's purchase in 2013, the space had been used as the headquarters of semiconductor manufacturer Entegris. The company moved its headquarters to Massachusetts in 2009. The majority of Peak 10 + ViaWest's retail competition comes from the neighboring towns of Eden Prairie, Shakopee and Edina – Cyxtera, OneNeck and DataBank each own facilities.

The Chaska facility stands at 42,000 square feet of raised floor space. Leaning toward the healthcare and financial services industries, which make up a large bulk of the Twin Cities market, the facility also appeals to retail and SaaS clientele. Peak 10 + ViaWest plans on nearly doubling the facility, adding an additional 30,000 operational square feet over the next few years. Sitting at 50% occupancy with a steady pipeline, staggered expansion plans and capacity are crucial to winning deals in this highly competitive market.

Wholesale
In the wholesale space, Dallas-based Stream Data Centers has established its northern base in Chaska. The company opened its first non-Dallas datacenter there in 2013 within the West Creek Corporate Center. Sitting just across the road from UnitedHealth Group's primary enterprise datacenter, Stream's facility stands at 75,675 square feet and is broken into three data halls. Following this initial build, Stream broke ground on its adjacent $250m MN2 facility. Securing Twin Cities-based US Bancorp as the facility's anchor tenant, the 52,350-gross-square-foot building is set to open in Q1 2018.

Most recently, Stream has secured a second, larger plot just north of its initial builds. Receiving approval for four additional structures on 66 acres, the company will have the capacity and running room to more than double its supply there. Feeding off of strong interest from Minnesota Fortune 500 companies, and benefiting from local and state tax incentives, the company feels it has a bright future in Chaska. Despite the majority of the town embracing the incoming industry, some residents have shown apprehension to the tech-savvy newcomers. Final approval hangs on conversations with local residents addressing concerns.

MN2 will feature over 10,000 square feet of US Bancorp office space. The bank also plans to expand into a second 51,000-square-foot facility housing two data halls down the road.

Local competition
Retail colocation competition in the Twin Cities Metropolitan Area has been fierce. A dynamic pricing battle has arisen from the western suburbs, including Chaska, Edina, Eden Prairie and Shakopee. With Peak 10 + ViaWest, DataBank, OneNeck IT Solutions and Cyxtera all located across these four suburbs, and each recently introducing additional supply, local SMBs and small enterprises have several choices for their data infrastructure. Over the next five years, this pricing struggle should stabilize as the market begins to mature.

For wholesale providers such as Stream, local competition is less of a concern. With the Twin Cities not generally perceived as a hot wholesale market due to higher energy costs and a slightly smaller pool of large corporations compared with other central US geographies, the Dallas-based provider has created somewhat of a niche in Chaska. Taking advantage of herd mentality, two separate power sources and strong relative fiber infrastructure, the West Creek Technology Center looks appealing to additional Minnesota enterprises that feel more comfortable following in the footsteps of local UnitedHealth Group and US Bancorp. Despite the region's relatively slow enterprise migration to colocation, this trend looks to continue over the next five years.

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