Wired for the Future
High-Tech Properties Offer More Amenities to Attract Diverse Tenants.
When the so-called Internet economy emerged in the late 1990s, a new and lucrative market for technology-intensive real estate opened up for property developers. The companies that were the driving force behind the dot-com revolution demanded extensive office and co-location space in which to locate their computers, switches, and other high-technology equipment.
Yet space alone was not sufficient. The equipment these companies relied upon — essentially bulky electrical and electronic apparatus — required very specific facilities to guarantee efficient and reliable operation. These “wired” locations had to offer an entire range of features above and beyond what is normally found in traditional office space, from connections to multiple telecommunications systems and providers to extensive redundancy in critical systems.
The commercial real estate industry responded to this demand by developing a new sector, telcom hotels. With extravagant claims that demand for Internet products and services would grow forever, commercial real estate companies had little difficulty securing financing to develop extensive portfolios of telcom hotels and finding tenants to fill them.
However, the bursting of the stock market's technology bubble reversed the expansion of the Internet and telecommunications sectors. The consequences for the commercial real estate industry have been significant. The telcom hotel sector was savagely hit, with once-full properties now almost vacant. Many in the industry have concluded that the future for such facilities is bleak.
Although demand for wired properties is less strong than it was a year ago, a market does exist. A large number of industries have come to depend on bandwidth-intensive voice and data communications for daily business operations: call centers, credit card companies, medical records agencies, payroll processing firms, and software development enterprises, for example. They require a guaranteed 24-7 communications capacity that cannot be delivered by many traditional office properties.
However, these tenants rarely will be satisfied with buildings that cater to the needs of equipment alone. The telcom hotels that many of the dot-com companies occupied often are machine-centric facilities that generally fall short of satisfying the needs of the people who work alongside the machines.
The challenge for commercial real estate professionals is attaining an accurate understanding of the property needs of this broader technology-intensive group of companies. To find and retain tenants, industry professionals must understand the location, technological, and human needs that this market segment demands.
A tenant seeking wired space expects the property to offer an environment where its business can perform efficiently and profitably.
Location is critically important for one reason: connectivity. One of the basic functions provided by most bandwidth-intensive systems is rapid, high-capacity communications with people and machines located around the world.
To provide such communications, a building must have access to the fiber-optic telecommunications backbones that crisscross the nation and the world. Commercial real estate properties close to individual backbones are valuable, but even more valuable are properties where multiple backbones coincide, because they provide choice, flexibility, and reliability of connection. The number of U.S. cities that provide multiple fiber-optic backbones has increased, and that is where future demand for wired real estate will be most intense.
The reliability of computing and switching equipment also depends heavily on the quality and quantity of available electrical supply. This raises consequences for locations experiencing ongoing supply problems and will affect the siting patterns of bandwidth-intensive operations. Locations that have abundant electrical capacity, such as Dallas/Fort Worth, Denver, south Florida, Houston, northern New Jersey, Los Angeles, Philadelphia, Washington, D.C., and northern Virginia, seem well placed to take advantage of the rolling blackout woes of other parts of the country.
Internal Technological Features
The future for wired property appears to be concentrated in the aforementioned metropolitan locations that enjoy an abundance of electricity and easy access to fiber-optic networks.
Within these particular cities, multiple potential wired properties will compete for tenants requiring bandwidth-intensive operations. The challenge for developers and property managers is to position their properties as the most desirable. This is of much greater importance now than it was during the tech boom when demand far outweighed supply.
One sought-after feature is the ability to guarantee that a company's equipment will not be compromised by the failure of any service or utility delivered by the building. Telecommunications is a 24-hours-a-day operation; the shortest of downtimes can be catastrophic.
A reliable electrical supply is essential. Property owners and developers must consider redundancy protection such as multiple connections to different power substations if they wish to attract tenants. However, unavoidable circumstances still exist in which such redundancy is insufficient, such as a general citywide power failure or a natural disaster.
To maintain power in these situations, buildings must be equipped not only with short-term uninterruptible supply systems, but also with backup generators. It even may be necessary to provide multiple generators to guard against failure. Or, individual tenants may require extra space to install their own generators. While such provisions will be costly, many tenants are willing to pay for the guarantee of constant power.
Tenants also will pay for the provision of abundant power. The machines they install may require more than 10 times as much power as traditional office equipment, and the entire electrical infrastructure of a building must be designed accordingly. Moreover, the quality of the power supply also impacts the efficiency of sensitive electronic circuitry, necessitating the installation of filters and other systems to protect against surges and fluctuations.
This range of requirements for electricity supply is matched in almost every other aspect of building specifications. For example, the heating, ventilation, and air conditioning system demands in wired properties far exceed those in normal office space. Computers and switching apparatus are exceptionally sensitive to heat and only operate within very specific temperature and humidity conditions. Beyond these limits, the equipment may not only malfunction but may suffer irreparable damage. As with electricity supply, buildings must be equipped not only with a far greater supply of cooling than is normal, but must be able to guarantee the delivery of that cooling.
Beyond electrical and cooling capacity, a whole range of other enhancements is essential in today's wired properties. The size and weight of the telecommunications and computer installations require both raised ceiling heights and strengthened floor loadings. Similarly, the increased use of radio and satellite communications requires strengthened roof loadings, as well as easy access to roof space and sufficient riser access to rooftop levels. Riser access throughout the building always is an issue in wired properties, given the vast amounts of cabling likely to be installed.
The Human Factor
The future for wired real estate lies in property attributes that stretch far beyond the technical requirements necessary to attract bandwidth-intensive tenants. The companies that will provide the future market for wired properties are not dependent simply on their machines; their people are an equal, if not more important, source of their revenue. It often makes economic sense for the two groups — people and machines — to co-locate, but a building dedicated to machines alone usually will be an austere environment not well-suited to the humans who run them.
Just as a company's machines are location sensitive, so are the employees. A pleasing locale with leisure amenities or affordable, good-quality housing may be as important to companies as the availability of fiber-optic connections.
Security is another requirement that wired properties must satisfy. The integrity of data stored on computers in these buildings must be protected against unauthorized access. Yet on the other hand, employees must have access when necessary without excessive interference. Satisfying these potentially conflicting needs requires installing highly sophisticated and well-planned security systems and employing highly trained security staff to implement the necessary procedures.
Given the complexities of wired properties and the poor experiences of those who developed telcom hotels, one may wonder whether the sector really is worth the extra effort. The market for pure machine space appears limited and is unlikely to experience any rapid expansion in the foreseeable future. Yet more businesses and industries are demanding ever-faster telecommunications and computing facilities as part of their normal operations. Some will be satisfied with traditional office space, but others will want the advantages of genuine wired space. The future for wired property lies in this market, and the buildings that satisfy such potential tenants clearly will be a form of hybrid. They will have the ability to deliver around-the-clock guaranteed operation, but will have most of the traditional office features as well.
This broadening of function offers a greater potential market for property developers. It represents more of a challenge and will require a host of compromises in building construction, but the rewards appear lucrative. After all, the installation of expensive computing and telecommunications equipment is a costly and difficult process; and wired buildings can cost an additional 20 percent to 30 percent to construct or renovate depending on tenant requirements. Given this, bandwidth-dependent tenants are far more likely to enter long-term occupancy agreements than other businesses, even if rental rates reflect the higher cost basis and the market is in equilibrium. A profitable future for wired real estate exists, the challenge is creating the type of wired property that tenants truly want.