Hillsboro’s hottest new neighborhood borders the rolling fields and farms on the metro area’s scenic western edge. Construction workers are busily putting the final touches on sprawling, gated developments.

These aren’t houses. They’re enormous data centers, hulking buildings stuffed with billions of dollars’ worth of computers that feed our insatiable thirst for digital ephemera.

Tech companies are drawn here by readily available land, power and water — and tax incentives unmatched almost anywhere. Commercial real estate broker Cushman & Wakefield places Hillsboro atop its rankings for the hottest data center markets on the planet.

While Oregon frantically searches for new industrial land to build semiconductor factories, data centers have already locked up hundreds of acres along a prime transportation corridor.

Hardly anyone works inside these cavernous structures. Computers do all the labor.

Twitter employs just 18 at its Hillsboro data center, according to Washington County records. Elon Musk’s social media company collected $5.6 million in local property tax breaks last year, incentives worth more than $300,000 per employee.

Data centers already occupy more than 300 acres in Hillsboro, according to an analysis by The Oregonian/OregonLive, and developers are banking property for more growth. As Hillsboro runs out of land, data center operators are looking west to the small town of Forest Grove as a new frontier with nearly 100 acres set for new projects.

Data centers provide real economic benefits, especially during construction, when hundreds of electricians and other tradespeople build and equip the vast structures — jobs not counted in the government tally of data centers’ direct employment. And after the five-year tax breaks expire, the data centers could provide a significant boost to the local tax base.

The economic dividends from data centers are much smaller than what chipmakers and other top Oregon industries provide, though, because of the relatively tiny workforce.

So tax watchdogs are pitching a bill before the Oregon Legislature that would make data centers in urban and suburban markets ineligible for a popular incentive program.

Dirk Knudsen, who grew up in the 1960s and ‘70s playing in some of the same Hillsboro fields the data centers now dominate, has become an outspoken critic of the industry.

“There’s no end to the appetite these guys have,” said Knudsen, a real estate broker. “If they could get all the land that there is in Hillsboro, they would.”

By encouraging the data centers to grow, Knudsen said the region has sacrificed scarce land that could have been used by local businesses or industries that would employ far more people than the server farms.

“I never have seen any real benefit from them, other than (to) folks outside Oregon,” he said. “They’re ugly as all getout.”

Hillsboro’s data district

Data centers are mammoth structures crammed with rows upon rows of high-end computers. The machines hum steadily in the dark, crunching numbers, storing photos or serving up songs and movies to people all over the world.

Hillsboro has a few data centers operated by well-known technology companies, among them Adobe Systems, LinkedIn and Twitter. But most are run by companies little known outside the industry, who buy the land, build the data centers and then lease out space inside to store their clients’ data or host their computers.

“It’s crazy what it’s done to land prices out there,” said Haakon Weinstein, industrial real estate adviser at the commercial real estate firm CBRE. He said the Portland area is still relatively inexpensive compared to other West Coast markets, but that the growing data center market has sharply increased the value of the land — and given farmers and landowners a big incentive to sell out.

“If you’ve been living there for a long time, you have to make a really tough decision,” Weinstein said.

Some of Hillsboro’s data centers look from the outside like office parks, ringed with black fencing for security. Others look like immense commercial warehouses.

A Kansas company called QTS Data Centers is building out a data center on nearly 100 acres just south of U.S. 26 that will offer 1 million square feet of space — a complex with a footprint equivalent to seven typical Costco stores. QTS plans to host data for Facebook, also known as Meta, which also operates its own data centers in the tiny central Oregon community of Prineville.

Hillsboro, Portland’s largest western suburb with about 106,000 residents, is attractive because of its proximity to the big tech markets in Seattle and the Bay Area — even electrons take time to travel from place to place, and milliseconds can add up. It’s also close to transpacific fiber-optic cables that land on the Oregon coast, linking Hillsboro’s data hubs to digital outposts around the globe.

Washington County has ready access to water and power, though constraints in electricity transmission lines threaten to constrain data center growth, at least temporarily, within a few years.

Above all, Oregon’s tax structure is uniquely well suited for the industry.

The state has no sales tax and readily exempts data centers from property taxes on their equipment. Since it costs hundreds of millions of dollars to equip a large data center, or billions of dollars for a top-end site, those savings get big in a hurry.

Oregon established a program of tax breaks in the 1980s to lure small manufacturers to distressed communities in designated “enterprise zones.” Lawmakers steadily expanded the program, though, and emerging industries quickly recognized the opportunity that Oregon’s enterprise zones offered.

The data center industry — a sector no one conceived of 40 years ago when Oregon created the tax incentives — now dominates the enterprise zone program, collecting three-quarters of all the savings, according to an analysis last year by The Oregonian/OregonLive.

Cushman & Wakefield rates Hillsboro’s tax environment for data centers as No. 2 in the world, trailing only Hong Kong.

Statewide, data centers saved more than $180 million in local property taxes last year. Most of those savings were for big installations in rural parts of the state, but eight major Hillsboro data centers recorded $16 million in tax breaks.

Those eight employed 116 people altogether, according to Washington County records, which pencils out to $138,000 in tax breaks per employee.

Oregon’s statute says enterprise zones are designed to attract business in all areas of the state, “but especially in those communities at the center of or outside major metropolitan areas for which geography may act as an economic hindrance.”

Hillsboro’s geography is no hinderance. The city is at the geographic center of Oregon’s economy. Intel has more than 20,000 employees at campuses just up the road from the city’s data center corridor, where industrial land is at a premium.

“Why are these big buildings with few jobs being built not only on good farmland, but with great access to Sunset Highway, with new off ramps and streets, where high-employment facilities should be built?” asks Jody Wiser with the advocacy group Tax Fairness Oregon.

Oregon’s enterprise zone incentives sunset in two years. Lawmakers in Salem are debating this spring how and whether to renew the incentives.

City and county leaders from around the state want a straightforward extension, on the principle that local governments know best what kind of incentives are appropriate for their communities.

Advocates for the semiconductor industry have made extending the enterprise zone program a top priority, too, hoping the incentives will draw chipmakers. But Oregon’s enterprise zones have been singularly ineffective in attracting semiconductor manufacturing.

Almost none of last year’s enterprise zone tax savings went to the chip industry. Aside from Intel, which saved more than $200 million last year through a different state incentive program, no company has built a semiconductor factory in Oregon since the 1990s.

In practice, then, the enterprise zone program has done the opposite of what chip industry boosters say they want: It has drawn data centers that gobbled up scarce industrial land while utterly failing to lure semiconductor businesses.

Democratic leaders who control the Legislature appear to be giving serious consideration to changes proposed in House Bill 3011, which aim to modernize the program and restore its focus on attracting job-intensive industries.

Among other reforms, the bill would effectively make data centers ineligible for enterprise zone exemptions if they operate in urban and suburban areas. It would leave the incentives tax breaks in place for data centers in rural parts of eastern and central Oregon, but possibly for a shorter period.

It would also exclude warehouses, like a big distribution center Amazon just built across the street from QTS’ new data center, from enterprise zone incentives. Local governments in the Portland area award millions of dollars in incentives to warehouses annually, even though officials acknowledge the warehouses can’t go anywhere else because they need to be close to their customers.

Land squeeze

The tax talks are playing out in the wake of contentious debate over the Oregon CHIPS Act, which passed earlier this month and gave Gov. Tina Kotek temporary authority to designate rural land for industrial development. That bill aims to make more land available to large semiconductor manufacturers, should they approach state economic development officials with plans for a computer chip factory.

Oregon land conservationists and some farmers were incensed by the legislation, which they say opens the door to further encroachment on the state’s agricultural reserves. After data centers gobbled up hundreds of acres of Hillsboro industrial land, they watched with dismay as economic development officials then pleaded for access to rural property for chip factories.

“A data center is not a good trade for farmland, in my opinion,” said Aaron Nichols, who farms property in Helvetia, north of Hillsboro.

None of Hillsboro’s data centers occupy as much land as a major semiconductor factory, which are typically several hundred acres. But some properties in Hillsboro could have hosted a smaller plant, a chip industry supplier or a big research center if data centers hadn’t gotten there first.

NTT Global Data Centers operates a 1-million-square-foot server farm in the former SolarWorld factory in Hillsboro, built in the 1990s by Komatsu Silicon America as a chip factory that never opened.

The Oregon CHIPS Act restricts development in newly designated industrial land to the semiconductor industry. But Nichols and others maintain that the state wouldn’t need to look beyond Hillsboro’s urban growth boundary if the data centers hadn’t consumed so much land within it.

“It just feels like we’re making ourselves a problem here, from lack of good planning,” Nichols said.

Hillsboro leaders reject that, maintaining that they’ve worked for years to keep data centers from crowding out other economic opportunities.

“We have started to limit data centers, in a couple of different ways over the past few years, with land-use policy,” said Dan Dias, Hillsboro’s economic and community development director.

In two new, large industrial developments, Dias said the city enacted rules that limit data centers’ ability to operate. In one area on Hillsboro’s northern edge, data centers aren’t allowed unless they support another operation on site. In another, a 550-acre area north of the Hillsboro Airport, data centers are allowed to occupy no more than 83 acres altogether.

“That was a reflection of our attempt to balance various industries,” Dias said.

And in 2016, following reports in The Oregonian/OregonLive about how Hillsboro data centers were capitalizing on enterprise zone tax breaks, the city began limiting the size of those incentives by requiring projects with fewer employees to pay a portion of their savings to local workforce training programs and other economic development initiatives.

The pace of data center development only accelerated after those changes, prompting this year’s push to exclude server farms from the enterprise zone program in Oregon’s urban and suburban markets. Dias said the city opposes that effort and wants to maintain the authority to make its own decisions about who benefits from tax breaks.

“We believe that our community has benefited from the way the enterprise zone (program) has been set up,” he said. “We recognize the importance that many data centers play to the 21st century economy and where, especially, a technology-based economy is going.”

Expansion assured, but where?

There’s little doubt the data center industry will continue growing, and that the pace of development is unlikely to slow. The emerging field of artificial intelligence requires immense computing power, usually centralized in large data centers.

The industry’s footprint in Hillsboro has the potential to roughly double, according to commercial real estate firms and other observers, with some developers banking industrial land in anticipation of future growth. The ongoing construction has hundreds of people working cranes, putting up walls and wiring the big new buildings for high-octane computing.

Contractor Rosendin Electric has about 500 electricians working in Hillsboro, about half of them on data centers, according to Brett Strohlein, who leads mission-critical projects for the firm.

“It’s a huge economic driver, in our opinion,” Strohlein said, estimating that data centers produce up to $1 billion a year in local investment. He said his electricians working on data centers are typically earning $100,000 or more annually and most are hired from within this market, rather than brought in from out of state.

“Yeah, we may not have a direct job creation that is acknowledged as being significant, but it enables all that other indirect job creation,” Strohlein said.

The work won’t continue forever. When construction eventually winds down, Strohlein said the number of electricians working on Hillsboro data centers will inevitably decline. But he said there could be 100 or more working to maintain data centers indefinitely.

While Strohlein has a measure of ambivalence about the industry’s concentration in Hillsboro — “Tax breaks are always touchy” — he said the enterprise zone program has been instrumental in keeping that work in the Portland area instead of moving to other parts of the state, or perhaps into central Washington.

“Without the enterprise zone, maybe we’d lose half,” Strohlein estimates. “That’s four or five-hundred jobs. That’s a big number, to me.”

As Hillsboro runs out of industrial land, data centers are already looking elsewhere in the region. Two companies have locked up 95 acres in enterprise zones about 10 miles west in Forest Grove for future development.

Neither of those projects have been built and Forest Grove, with just 26,000 residents, is still working out what to make of the industry’s approach.

Bryan Pohl, Forest Grove’s community development director, said the city has had some industrial properties sitting fallow for decades and so any development represents a good opportunity.

But he said he’s cautious about how quickly the sector might grow.

“It would be correct to say we’ve had this limited interest in our industrial lands, but we also recognize that we’re 10 miles from Hillsboro, and do we want all of our industrial land to be eaten up with data centers?” Pohl asked. “I think that’s a question for us to be looking at going forward.”

Correction: The enterprise zone reforms before the Legislature are in House Bill 3011, not House Bill 3015 as this article originally indicated.

— Mike Rogoway | mrogoway@oregonian.com | 503-294-7699

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