Carrier hotels set real estate markets buzzing

Copyright: David Lawson /Financial Times  June 2000

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Every decade or so, a new kind of demand emerges from nowhere to re-invigorate the real estate market. Shopping malls, business parks, retail warehousing and factory outlets each carved new niches: now it could be the turn of   communications centres.

  Five years ago, specialised buildings began to emerge in major cities like New York and San Francisco to handle soaring  demand for telecommunication links between businesses. A change in the law enabled firms to bypass the cost and congestion of local telephone exchanges. Instead,  they were served by rack upon rack of computers packed into these mysterious new centres.

   Today, they are a global phenomena, nurtured by the wholesale shift of business onto the internet. The world's biggest firms including Microsoft, BT, AT&T and Morgan Stanley are planning to spend freely on a sector  JP Morgan analysts estimate will be worth almost 20bn dollars within two years. In Europe alone,  the sector will grow to almost 5.5bn dollars in that time, according to a study published last month by The  Phillips Group.

 Yet only a handful of real estate investors would recognize they exist, let alone be aware of the potential.  Perhaps that is not surprising, as  no-one has yet pinned down a name for these new beasts. They are  variously called carrier hotels, telehotels, switch centres, web hosts, server farms,  data centres and - the ultimate jaw-breaker - neutral co-location fulfilment facilities.

  In simplistic terms, these are the bricks and mortar junction boxes for a global communications network. They are packed from floor to ceiling with  computers which may belong to telecom companies sharing space, businesses that have outsourced their web servers, or perhaps internet service providers. Another reason investors may be in the dark is that they can be almost invisible.  Security measures to protect these vital nodes are so extreme that they often have no sign outside, while entry is controlled by batteries of video cameras.

  Some are more obvious. Telehouse, in London's Docklands, has loomed over the skyline for much of the Nineties since  a group of financial institutions,  Japanese international carrier Kokusai Denshin Denwa  and BT spent 30m pounds in anticipation of   the communications revolution and formed the home for more than 20 UK internet carriers.

 Others are less so. The former FT Printworks nearby looks little different from the days when this newspaper ran from the presses but is now awash with electronics. Global Switch, a  new company established by Midlands developer Andy Ruhan, made the transformation and has already attracted TrizecHahahn and Chelsfield to  invest more than 250m pounds. Space is in such demand that it is already planning a 600,000 sq ft extension.

  There are dozens of conversions within walking distance of  Wall Street and  the City of London which are even more invisible. Demand is so intense that conventional office buildings are being retro-fitted to meet the demands of this fast-growing sector. This is where the trend becomes exciting for real estate investors dogged by fears of obsolescence, loss of  demand through home-working, competition from business parks and rejection of  congested city centres.

  High-technology users might seem the last potential   occupiers, particularly when these communication nodes demand hefty floor-loading,  24-hour access and extreme levels of air-conditioning to pamper the electronics.  But when firms will pay around 10,000 pounds to accommodate a single computer,  co-location operators are willing to fork out millions to convert.

  Rents also run into hefty premiums for the right locations. An urban legend has  emerged that the pavements of every major city are plagued with strollers noting the names on inspection covers. They are looking for the names of fibre-optic cable operators. Carrier hotels cannot function without them: in fact  'neutral' centres must link with several, to offer a choice. But competition is cut-throat, so comprehensive cable maps are hard to acquire. Hence the reading of manholes.

 Four were discovered running along the Bath Road near  London's Heathrow Airport  and  agents Rogers Chapman were suddenly offered 14 pounds/sq ft for a standard new warehouse called Airport Gate being developed by Allied Commercial, Kingswood Commercial and National Mutual. The asking rent had been only 11 pounds/sq ft but  IX Europe,  had discovered the hidden asset and was willing to pay extra. This was peanuts compared with the 3m pounds it committed to fitting out the building.

   More obvious examples abound in US cities.  Two former warehouses in central Chicago, the Lakeside Press building and Montgomery Ward Catalog Distribution Centre loom to around 1.2m sq ft, while 111 8th Avenue in Manhattan is more than twice that size.  Consultants Carter & Burgess are  renovating a five-acre site  in central Boston as a 425,000 sq ft telecom center.

 Morgan Stanley, MetroNexus and Global Gateway are buying wholesale after launching two new companies worth more than 1.25bn dollars to tap into this market. The alliance has already acquired property in Seattle, New York and Montreal and is tying up deals in 14 cities across the world with a combined space of more than 8.5m sq ft. Powerful partnerships like Microsoft/ Compaq and AT&T/BT are in the same hunt to create global networks.

 The potential demand has hardly been tapped, however. Crispin Topping of UK real estate consultant Fuller Peiser admits that figures for take-up in London are still modest. 'There is an estimated  1m sq ft of demand in the pipeline, which will not exactly dominate the office market,' he says.  But this should soar as more business pours onto the Internet.

  Names like Redbus, Telecity and Qwest are emerging almost daily with plans for carrier hotels in European centers like Frankfurt, Amsterdam and Paris. Level 3 let more than 1m sq ft of 'gateway' facilities in less than a year and plans some 6.5m sq ft  across the US and Europe.

  At the other extreme,  IX Europe's hub is an anonymous 800 sq metres hidden in an anonymous office block in the City of London. 'What is right for one is not necessarily so for another,' says David Vale of real estate consultant GVA Grimley.  The crucial factors are facilities such as the capacity for huge power loads and backup systems in case the public supply goes down.

  Cities are not the only targets, says Peter Honey of  consultant Jones Lang LaSalle. He guided Intel into an old office building  in the UK's Thames Valley, where the US group is spending around 90m pounds creating what it calls a 'web farm' .  Intel could have located anywhere between London and Cornwall along the line of the transatlantic cable trunks but it also needed the right space close enough to draw potential customers.

   Quickly-available space is crucial as these carriers scramble to be first into the market. Cable & Wireless is creating 1m sq ft of web hosting centers around the world and needed a  European HQ fast, so it jumped at the 132,000 sq ft Galileo building in Swindon, Wiltshire, which had the right space, power supplies and was near trunk cables.

   This scramble has barely started. The challenge for the real estate industry is whether it can   react quickly and feed this frenzy.