Posted: 02/2000
Carrier Hotels Turn "Telco Concierge"
By Ken Branson
When CO Space Inc. (www.cospace.com) announced late last year four venture capital companies have provided it $28 million to fund its expansion, it marked a new phase in the evolution of telco hotels--places where telecom and other carriers lease space for their equipment, or even space on other carriers' equipment.
In a few years, that evolution has moved from classic telco hotels to carrier-owned data centers inside such hotels, to a new crop of "concierge floors" inside those hotels, operated by companies like CO Space, Equinix Inc. (www.equinix.com) and Switch and Data Facilities Co. (www.switchfacilities.com). All three stages of this evolution exist side by side.
What might be called the Ur telco hotels are buildings whose owners found themselves in the right place (in a big city, near a lot of optical fiber) at the right time (after deregulation) with the right building (high ceilings, reinforced floors, lots of empty space, big freight elevators). Often, the buildings' owners didn't know anything about telecommunications.
In New York, 60 Hudson St., the former Western Union Building, is one of the original telco hotels; 1 Wilshire Blvd. in Los Angeles is another.
A demand remains for someplace to park switches, and Telecom Real Estate Services Inc. (www.telecomrealestate.com) claims to have carried the idea to its highest development. Kevin Keating, the company's president, says he has all the work he can handle.
Telecom Real Estate Services' property at 600 W. 7th St., in Los Angeles is called Carrier Center Los Angeles. It is around the corner from 530 W. 6th St., where the company leased and renovated 100,000 square feet of space last year. Both buildings are next to the Wilshire address, which is the Ur telco hotel for the West Coast, which, like 60 Hudson St., is filled to the rafters with carriers and full conduits.
Keating says that half the space in the new telco hotel is just that--space. He hopes larger carriers will take leases and "do their own thing," to fill that space.
The other half of the telco hotel is filled with many bells and whistles: redundant systems for water, fire suppression, air conditioning and a full generator system.
Carrier Center Los Angeles, Keating says, is two-thirds leased. Carrier Center Dallas, the former U.S. Federal Reserve Bank, is about half leased at press time, he adds.
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| The Classic telco hotels have evolved to include carrier-owned data centers and a new crop of "concierge floors" offering carriers design, provisioning, network management, upgrades, service turn-ups and more. |
Keating and his colleagues obviously think money can be made for the foreseeable future in this business. Most of the tenants are "data guys" of various stripes. They include carriers who need to park their switch, carriers who need to park whole data centers, and everything in between. Equinix, for example, is a tenant in Los Angeles.
James Lavin, vice chairman and co-founder of Switch and Data Facilities, also thinks money can be made in building or renovating telco hotels, but, he says, "It takes so long."
Lavin wants to do business with data, voice, applications service and every other kind of communications guys, all of whom, he says, have no time. The future is now; in fact, the future was an hour ago. The thought of building fresh or rehabilitating an entire building makes him wince.
"We take a floor, say 20,000 square feet, build out a full infrastructure, and then sublease a smaller subset of that space," he says.
His pet project currently is 65 Broadway, the former Standard and Poors Building, not far from the Hudson Street address. The owner, Paul Wasserman, is renovating the entire building for high-technology clients, and Switch and Data Facilities is renovating 5,000 square feet on one floor.
Lavin and his competitors at CO Space and Equinix repeat two main selling points. The first is carrier-neutrality. The second is all the bells and whistles are already at the facility, Locate at their telco hotel, and you needn't worry about a thing, they say.
Still, a carrier or applications service provider that wants to park its equipment and outsource the running of its network might go to a carrier-owned data center, like the ones Global Crossing Ltd. (www.globalcrossing.com) operates.
Global Crossing acquired a national network of such data centers when it bought the former Frontier Corp. last year. Concierge operators contend, however, that a carrier that operates a data center still will want to get its customers' traffic on its own network. That, they say, is what carriers do.
CO Space, Switch and Data Facilities, Equinix and others make carrier-neutrality their key selling point. Jay Adelson, chief technology officer at Equinix, waxes almost lyrical on the subject.
"Our theory is, in the neutral environment, two businesses could physically connect to each other with infinite bandwidth," he says. "By taking that [bandwidth)]ceiling off, we allow them to grow. Content provider, carrier, ISP--it doesn't matter. All those businesses we enable through our infrastructure."
CO Space will outsource a customer's operation as well, according to Gabe Cole, the company's chief technology officer. "We do designing, provisioning, managing network, upgrades, service turn-ups, everything they need."
It turns out there is no shortage of suitable venues, which is why it makes more sense to rehabilitate existing buildings than to build new ones. Such jobs are technically and physically challenging.
Take 65 Broadway, for example. The good news is that it is built like a fortress: 14 stories high, with a third-floor setback on which to put the all-important cooling fans.
The bad news is a crane has to be used to lift the fans, which means that Liberty Place, at the rear of the building, has to be closed. So to get the fans in place, the work has to be done on Sunday, which means serious overtime pay.
This, shall we say, is no trivial task. However, not an uncommon one, according to Ed Herbst, partner in Herbst Musciano, Switch and Data Facility's architectural firm.
"Over the years, we've learned that no amount of power and air conditioning is too much for more than an instant," he says. "People said, 'When the equipment is more powerful, we'll need less space.' But we're building out more space than ever because of e-commerce. So, watt densities are getting higher. There is more heat produced by current equipment. The challenge is getting rid of it [the heat] and supplying enough power to handle the equipment."
Money is another challenge. Ray Dutton, CEO of iaxis Ltd. (www.iaxis.com), says the developing cost of such a property is 10 times the cost of acquisition. That's why iaxis has formed a joint venture with two financial services companies--Providence Equity Partners Inc. and The Carlyle Group (www.thecarlylegroup.com)--to build telco hotels in Europe, where space is at a premium.
Iaxis originally intended to act on its own, Dutton says, but it would have had to raise money on its own to do so. "We were going to have to do it very slowly."
The opportunity wouldn't wait; hence, the as yet unnamed joint venture will build 25 hotels during the next two years, with iaxis as the anchor tenant.
"If I have to go out in the high-yield market to raise money, well, frankly, I'd rather spend it on the network than on property," Dutton says.
The physical and financial challenges have not fazed the Rudin Management Co. (www.55broadst.com), a New York commercial real estate firm that has converted several of that city's older buildings into what its officials call "hybrid telco hotels." In these locations, content and bandwidth are brought together. The latest Rudin acquisition is 32 Ave. of the Americas, just around the corner from the Hudson Street location. Rudin has purchased the building from AT&T Corp. (www.att.com) for what a company official describes as "a lot of money." The 29-story building has 1.15 million square feet of space. It was built between 1912 and 1914 as a switching center for the former New York Telephone Co. The former AT&T Long Lines used it the same way, before it became an office building to house part of AT&T's sales force and some of its network management people. AT&T will lease back the first eight floors of the building.
Gilbert says 350,000 square feet of the building already is rented at press time, though the space won't be ready for occupation until the middle of this year.
Ken Branson is business and finance editor for PHONE+ magazine.
