Reprinted from: Wall Street Journal – New York
By Ray A. Smith
June 20, 2001
Over the past few years, real-estate developers rushed to put up or renovate building to house the high-tech equipment that would power the exploding telecommunications industry. These so-called telecom hotels-windowless buildings with reinforced floors, super electrical feeds and wiring to the max-sprung up all across the nation�s landscape. Little did the developers know that telecommunications and the Internet would tumble and telecom tenants wouldn�t be checking in.
So what�s to be done with these vacant or near-empty, ugly, people-unfriendly properties? Some are getting touch-ups and other complete makeovers to attract nontelecom tenants. In some cases, developers who were putting up telecom hotels are switching gears in midconstruction.
Like in Boston, where some telecom-hotel developers are looking to cash in on what they see as the next hot trend: biotech facilities. Cabot, Cabot & Forbes of New England Inc. is now marketing a site that originally was supposed to be a telecom hotel for a research laboratory or drug-manufacturing facility.
Though the developer has only completed construction of the steel “skeleton” of the building, the company anticipates spending more than $100 million on the project. If it winds up being used as a research lab, the developer will construct a 950-space underground parking garage and an atrium in an effort to make the property more appealing to people who work in the research field. Cabot, Cabot and Forbes is also leaving room open through out the facility to install windows.
“There is intense competition in Boston for researchers so companies have to have nicer buildings,” says Jay Doherty, president of the Boston-based developer. “People here pay attention to how the buildings are laid out, not just for efficiency, but for the quality-of-life amenity.”
Some developers are hoping to broaden their prospective tenant mix to include banks, insurance firms and other companies that need places to store computer data. The developers are even willing to pay for all the infrastructure the companies need for their operations.
T-Rex Technology Centers, LLC plans to woo prospective tenants by offering space fully equipped with fiber optic cables, backup poser systems, routers, servers, and even software. “This gives them the ability to walk in on Day One and run their business without having to build and deploy infrastructure,” says Clifford Preminger, president of T-Rex, which has offices in New York, Washington, and Boca Raton, Fla. He says installing that infrastructure can cost $500 to $1000 a square foot. Not it�s a cost the developer and its partners will incur. “We�ll take that headache away from them.”
Such is the fall out of a familiar story in real-estate industry. A property type suddenly gets hot and every developer wants to cash in.
“It goes back to the guy who opens a gas station that does well and pretty soon you have four gas stations all on the same intersection,” says Bradely Olson, director or the real-estate program at Cornell University. “There is more information in terms of supply and demand statistics so there is less tendency to overbuild that in the past. But it doesn�t mean from time to time you don�t get a phenomenon like this.”
There is about 77 million square feet of total telecommunications real-estate capacity, according to a recent study by Lehman Brothers Inc. and Cushman & Wakefield Inc. Of that total, only 43 million square feet is “truly active or available for lease,” says Harry E. Blount, senior vice president, Internet infrastructure services, at Lehman.
In response to the slowdown in demand Mr. Blount says many hosting companies and carriers have cut capital expenditure budgets. Meanwhile, developers have chosen to delay additional building of speculative projects, or properties constructed before tenants are signed up to move in.
Some companies such as Level 3 communications Inc., which announced Monday plans to lay off as much as 24% of its work force, among other cost-cutting moves, are holding on to their properties in the hopes that the telecommunications industry will rebound. Level 3 has been building one floor at a time at a telecom hotel site in New York City, constructing new floors only when there is enough demand, rather than letting the property go. So far, five of 11 planned floors have been completed.
“We think it�s prudent no to commit all the capital to build a floor,” says Carlos Lopes-Abadia, senior vice president of global gateway services, at the Broomfield Colo., company. Level 3�s portfolio total three million square feet, comprising 68 facilities in 65 markets world-wide.
Other developers are trying to sell building, most likely at a loss. “We ask ourselves if it is better to hold the property or better to take the loss and get out of the building and wait until things come back to be active again,” say Young Woo principal of Young Woo and Associates, a developer of carrier hotels. The New York based company has developed 2.8 million square feet of carrier-hotel space over the past 3 1/2 years, mainly in Boston, New York and Connecticut.
In downtown Phoenix, Sterling Capital Ltd. Spent about $20 million and six months to convert the old headquarters building for the Arizona Republic newspaper into a telecom hotel with three floors above ground and two below. A year later, the facility sits half empty. New, the Chicago-based company is trying to “broaden the user base,” beyond its existing telecom tenants, says Tony Wagner, a partner at Stearling Capital. He says his firm is investing “a good deal of money” into sprucing up the overall appearance of the facility, now that more people will be passing through. “We will make it look like a Class A building,” he says.
The makeover includes polishing up the lobby, upgrading elevator cabs, adding landscaping that will feature palm trees, and reserving space to install windows. “The idea is to warm it up a little,” he says. “Make it a place for people and equipment. Make it more people friendly.”