Data storage sites are moving out of Silicon Valley—at the state’s expense.

Earlier this summer, Apple (AAPL) settled on a site for a mammoth, $1billion data storage center, which industry analysts suggest will be the hub of a huge cloud-computing initiative. At 500,000 square-feet, it's five times larger than Apple's current data warehouse, which points to the growing role of cloud computing in commercial and communication developments. Equally symbolic is the location: Maiden, N.C., about 2,600 miles from Apple's Cupertino, Calif., headquarters. It's not as outlandish as Google's 2008 patent filing to build an offshore server farm powered by hydroelectricity, but it's just as telling.

Developers of IT storage facilities are pressing pause on Silicon Valley. As recently as mid-2008, the area was being called the "hottest data center market," but now companies are canceling or mothballing plans for new sites in the area. Companies that are big enough to build their own server farms are also decamping. In addition to Apple's foray into North Carolina, both Google (GOOG) and Microsoft (MSFT) plan to build facilities in Iowa. With corporations cutting expenses as the federal government boosts spending, the nation's capital is shaping up to be a new data Mecca. The shift could lead to shortages of data-storage space in the near term, and it will certainly reshape Silicon Valley even after the economy rebounds.

But companies aren't putting the brakes on Silicon Valley because of lack of demand. Space in these vast, climate-controlled warehouses crammed with servers is more of a hot commodity than ever, thanks to the proliferation of social networking and cloud computing. Tech companies, social networking platforms, and even the government have been embracing the cloud concept—in which data is stored on a distant server farm instead of on your hard drive—which creates a huge demand for data-storage centers to warehouse all that stuff. According to market research firm IDC, the 487 billion gigabytes of data created in 2008 is on pace to quintuple by 2012, and all those bytes have to go somewhere.

The reason Silicon Valley is losing out is a mortgage problem. Lenders can't or won't make the loans that data-storage companies need to build. Commercial real estate around the country is getting hammered these days; its collective value is down 36 percent from October 2007 and the National Association of Realtors says the market will remain in the gutter until mid-2010. Keep in mind, that's with the aid of the government's TALF financing for commercial loans, which it just extended until next year.

For California in particular, a state facing a budget crisis so severe it was reduced to paying its bills with IOUs, these postponed projects hurt its bottom line. According to Mark Wetzel, CFO of data-storage center developer Dupont Fabros Technology, an average facility costs about $260 million to build. While they're not labor-intensive once they're up and running, 40 percent of that $260 million goes to pay carpenters, engineers, and other laborers. In other words, that's a little more than $100 million per project that's not going to be paid to workers and taxed by the state.

This high construction cost also contributes to the demand as companies opt to lease space over building their own. Constructing a data center from scratch costs between $1,200 and $1,300 per square foot, according to Chris Lucas of investment firm Robert W. Baird & Company. Tech firms today would rather lease space and let someone else worry about wrangling financing and keeping the equipment up-to-date than do it themselves.