Focus is on practical strategies for weathering the downturn
By Rich Miller
CarrierHotels News Staff
July 26, 2001 (SAN FRANCISCO) — There were no rose-colored glasses in sight as carrier hotel and Internet data center operators gathered here today for IMN’s summer conference.
In numerous panels, the focus was on managing through adversity, rather than being rescued by a rebound in the market.
Most of the 300 developers, investors and service providers who gathered at The Palace hotel say they still believe in the future of carrier hotels and data centers. They hope for a recovery, but are hunkering down for a lengthy downturn.
“The pessimism we feel in the telecom sector is simply not being sure where the difficulty ends,” said Jeff Burges, the COO of Yale Properties, which owns six carrier hotels.
“How long will it last? No one knows, but I think it’s probably longer than any of us here would like to admit,” said Stephen Kelly, president of Kelly Consullting Group.
“In the last month or two we’ve heard questions emerge about some large players,” Kelly added. “I suspect six months from now we’ll see doubts about even bigger players.”
The conference – IMN’s second event devoted to carrier hotels – opened on a day in which Exodus Communications said it will have just $200 million left by the end of the year, and Level 3 said it intends to swap some of its high-yield debt for common stock in order to conserve cash.
“Having Exodus as a tenant, it’s a huge concern for us,” said Hossein Fateh, principal in Du Pont Fabros Development.
“When we started out, their market capitalization was $50 billion. Now it’s $600 million.”
Those lofty valuations of days gone by make today’s difficulties harder, panelists said.
“Someone once told me ʻthe better the party, the bigger the hangover,'” said Tony Wanger of Sterling Capital.
“This (downturn) was three to five years in the making. We don’t think it’s going to turn around in nine months.”
“There are still tremendous losses to be taken in this field,” agreed Jim Lavin, vice chairman of Switch & Data.
The agenda reflected the challenges of operating in a troubled market. The usual sessions on investment strategies and supply and demand were supplemented by panels on consolidation, loan workouts, and ways for landlords to protect themselves when tenants file for bankruptcy.
One thing was clear – the shakeout in the telecom facilities sector has a ways to go, and presents both risks and opportunities, particularly for companies in position to acquire struggling competitors.
“The downturn will accelerate the need for consolidation,” said Clifford Preminger, the president of T-Rex, a carrier hotel developer.
“There’s certainly a lot of buying opportunity for people who’ve got money and can stand a little short-term adversity,” said Michael Alter, president of The Alter Group and managing director of its Ground Zero telecom hotel unit.
Several panelists noted the recent auction of the assets of colocation provider COLO.COM. The 25-facility network of data centers – which COLO.COM spent nearly $400 million to build – fetched a top bid of $55 million, sources said.
Those kind of values will be attractive to companies still expanding their data center networks, like Sprint.
“It’s hard for me to believe they’re going to go out and build 100,000 square foot properties when there’s so much product on the market,” said Wanger. “If it’s available at 10 cents on the dollar, there’s no reason to go out and spend $1.05.”