Copyright: David Lawson - first published in The City magazine Summer 2000Home page
A clumsy mule began an economics lesson more than a century ago that still escapes many of today's investors. Stumbling over a rock, the beast revealed a gleaming vein that led to the biggest gold rush in history - the Klondike. But who made a fortune from the subsequent hysteria? A handful of prospectors went from rags to riches but the real winners were saloon keepers, victuallers, shippers and hoteliers.
Today's techno-gold rush is no different. Beneath the froth and bubble generated by hundreds of dot.com companies swim the suppliers on which they rely. You can't explore cyberspace without phone lines and computers, and most companies are quickly learning that they cannot rely on the technology they have been using for the last couple of years. They need high-speed connections and specialist back-up - and this is where the real prospects for long-term gains will emerge.
Very quietly, London is becoming one of the world's premier 'wired' cities and some of the biggest company names are staking claims. Next time you are walking along the pavement, enjoying the sunshine and thinking about lunch, keep an eye out for one of those loonies counting manholes and scribbling secretively into a notebook. Don't try and escape across the road. Sidle up and crib his notes. You could be a millionaire by next week. Giant companies which link businesses into the global network of computers via mysterious data centres search for locations by tracing cables hidden under the streets.
'There are no easily-available, comprehensive maps,' says one agent, who keeps his own researches locked in a desk. 'You just go out and check the names on manholes.'
BT and AT&T recently announced a partnership which will spend £1.25bn building an international network of these buildings. Compaq and Microsoft have linked with former One-to-One chief executive Tim Samples to build a European chain. International real estate giant TrizecHahn is selling billions of dollars worth of office blocks in North America to buy into high-tech and one of its deals involves a London landmark.
In partnership with UK developer Chelsfield, it has paid £260m for a stake in Global Switch. This is one of those companies which has grown out of nowhere in the last couple of years, along the way quietly acquiring the distinctive former FT printworks at the northern mouth of the Blackwall Tunnel. The presses are have been replaced by wall-to-wall racks of computers which suck in data from businesses across the capital and farm it out across the global Internet.
Almost unnoticed, Docklands has become a global centre for this kind of service. Long before the Internet became a hot topic, Telehouse was an early investment by Japanese investors when everyone else was sniggering about the very idea of building among derelict warehouses. For more than a decade it has been carrying the bulk of the UK's Internet traffic. Now it is doubling in size.
These hubs of electronic commerce are rarely as obvious, however. Manholes often reveal the fibre-optic cables necessary to carry these huge flows of data under the most unusual pavements. One operator, IX Europe, has a hub in an anonymous 800 sq metres somewhere near Finsbury Square. Crucially, it is expandable to 2,500 sq metres to take the tripling of business it expects from City firms. Another, Globix, is hidden on New Oxford Street.
The variety is even wider around the UK. IX Europe has taken an anonymous warehouse near Heathrow; Intel a former office block near Reading and Cable & Wireless a massive headquarters building abandoned by a US ticketing company near Swindon. They vary partly because operators are desperate to get whatever is available to catch this sudden boom. They also vary in the kind of services provided.
This is reflected in the names being adopted in a whole new techno-vocabulary. Some are 'co-location providers', renting out computers or offering companies space to store their own machines. Because these are vital conduits to the world, they cannot afford to fail. Each has back-up power supplies - often sufficient for days. They are air-conditioned and constantly serviced around the clock. Security is as tight as Fort Knox, involving video cameras, fences and thumbprint entry locks. Many do not even have a sign outside, which is why you can walk past without realising the millions of pounds worth of machinery within some average-looking building.
Another service is 'web hosting', where all the services a company offers on the World Wide Web are maintained. Compaq and Microsoft call their centres 'solution hotels'. In effect they are all hotels, but instead rooms, they rent out space for computers along with skilled, 24-hour support.
This new infrastructure is based on two principles. Firstly, so much business is set to flow over the internet that it requires more than ordinary phone lines. Billions are being spent laying ultra-fast fibre-optic cables across the world to carry this information. They link via these data centres.
Projected earnings are as breathtaking as the billions being spent. Tarifica, a telecoms consultant, estimates a host of independent co-location specialists like Global Switch, Redbus Interhouse and Telecity will be bringing in European revenues of almost £6bn by next year.
Telehouse Docklands shows the idea is not new, but deregulation of European telephone services, new transAtlantic cables and the migration of business to the Internet have sparked an explosion of activity, and London has become one of the global centres. A dozen or so telecommunications services are available in the City and West End while the country as a whole has 400 licence holders.
Finding the secretive data centres out in the sticks is less problematic. They can't locate too far away from trunk cables, which tend to run along motorway verges, canals and railway lines, then loop out to draw in surrounding areas via what are termed metropolitan area networks (MANs). But they rarely make the headlines. Intel's 'server farm' near Reading was set up last year but did not leak into the Financial Times until the spring.
Cable & Wireless could hardly avoid being noticed when taking the vacant Galileo building outside Swindon, while IX Europe was guaranteed to grab attention by paying 14 pounds/sq ft for a building near Heathrow - 27% more than the asking price.
But these are merely a hint of what could come, according to Paul Brown of property consultant CB Hillier Parker. 'In the US there are telehotels renting out Internet connections in every major city,' he says.
In London alone, demand from IT users was running at more than 800,000 sq ft in the first quarter of the year, over three times the total take-up for the whole of 1999, according to research published in May by DTZ Debenham Tie Leung. The capital has become a focus of activity because of its cable links, skilled workforce and booming Internet business, says the report.
The market for Internet 'hosting' in Europe is expected to reach almost 1bn pounds by 2004, according to Sir Anthony Cleaver, chairman of IX Europe. Yet Intel has estimated that only 5% of the servers needed to meet likely global demand by that time is currently in place.
Property investors and development agencies are desperate to grab a slice of this booming business, but first they must figure out what the operaters want. High-speed optic trunk cables are the best clue. No-one realised that four of these ran along Bath Road, Heathrow, until strange new names came knocking at Airport Gate, a warehouse developed by Allied Commercial, Kingswood Commercial and National Mutual.
IX Europe is so new that it was sent away with a flea in its ear while better covenants were canvassed. MCI Worldcom stepped in but a bidding war eventually saw IX paying 14 pounds/sq ft for space that had been on offer for 11 pounds, says Christina Banbury of agents Rogers Chapman. IX is a 'neutral co-location facility provider'. In other words, it not only offers a safe home for computers connecting into the Internet, but a choice of telecom carriers - a crucial element allowing customers to choose their own service.
Mark Peach, a telecoms specialist at FPD Savills, estimates that 'housing and hosting' firms took almost 1.5m sq ft of this kind of warehousing last year and a 'significant amount' is under offer.
New operators are involved in mind-numbing amounts of space. Level 3, which is constructing an international cable network leased more than 1m sq ft of 'gateway' facilities in less than a year and plans some 6.5m sq ft across the US and Euro. Most of these newcomers are racing the clock. 'They want space yesterday,' says Banbury. It is not worth spotting a vacant site and offering a pre-let.
Then the problem of cultural differences rears. These fast-growing, US-owned, companies often have poor covenants and demand flexible leases. This gives British fund managers palpitations.
'The importance of using advisers versed in UK and US cultures cannot be underestimated,' says Paul Brown, who has been working with Michael Bronstein of CB Richard Ellis in Philadelphia to educate each side on the other's needs.
Brits need to appreciate how fast these operators work. They, in turn, must realise that the structural changes required to turn simple industrial and office buildings into high-tech complexes will frighten landlords. They need a credible team of consultants, designers and managers in place to give some credibility.
Money can talk very loudly, however. Rents are often a minuscule part of the equation, says Peter Honey of Jones Lang LaSalle, who guided Intel into Winnersh. The US group is spending around £90m turning the old Hewlett Packard building into an international node. The premium rent also palls beside a £3m pound fit-out by IX Europe at Heathrow.
Picking the right building can throw agents into confusion, as takeup has ranged so widely. Intel's Winnersh centre is a 15-year-old mix of office and warehousing; Global Switch took the futuristic FT printworks; Globix moved into a former Ministry of Defence office in New Oxford Street.
'What is right for one is not necessarily so for another,' says David Vale of GVA Grimley, which put Cable & Wireless into its Swindon centre, another former office building.
Telehotels like Globix offer space for customers to house their own equipment, so they must be near enough for staff to visit, says Fuller Peiser's Topping. It is no coincidence that others are in London or around Edinburgh, while the search for for further possibilities is going on in major provincial cities.
Intel could have located anywhere between London and Cornwall along the line of the transatlantic cable trunks but it also needed to draw potential customers and impress them with its imposing 'command centre', looking down on a network of flashing lights and screens. That meant concentrating on areas like Docklands, Park Royal and the Thames Valley.
Cable & Wireless has ambitions beyond its former cable-laying role to create a million sq feet of web hosting space around the world. A 5,000-server unit in the US capable of receiving 700m web visits a day is the first of 20 data and host centres. The company has bought several Internet service providers in Europe and signed up with Compaq to provide computers. C&W needed a European HQ quickly and plumped for the 132,000 sq ft Galileo building at Swindon. It had space, power supplies and was near trunk cables. But most importantly, it was available quickly.
Water, weight, power and security are common factors among the choices. The theoretical ideal is a desert-dry box, with a minimum 10,000 sq ft floor capable of high loading, a basement, massive power back-up, 10-metre eaves (or 4.5-metre slab-to-slab) and enough room for a double perimeter fence.
The ideal is just that, however. Such buildings rarely, if ever, exist within the time frame operators require. Keeping out water is critical with so much circuitry around. Some operators create false internal roofs to be sure. Keeping out undesirables is just as important. Every operator promises to seal their buildings against tampering, sabotage or information theft.
Hosting centres can consume 10 to 15 times the power needed by a standard warehouse, says Mark Peach of FPD Savills. Computers eat a lot of electricity, as do the cooling systems necessary to keep systems running.
Operators guarantee continuous connections, which demands dual power input for each computer rack, says Crispin Topping of Fuller Peiser. That means batteries to cope with short supply breaks, emphasising the need for high floor-loading capacity already strained by the weight of these racks, adds Peter Honey of JLL. Standby generators cope with longer breaks.
Developers can find themselves persuading electricity suppliers to boost circuits, freeholders to allow tenants to hack into floors and planners to accept potential disturbance from generators.