The multimillion dollar renovations that turned Chicago’s Lakeside Press building and the former Wards catalog facility into “telecom hotels” seemed a perfect way to put the city’s grand–but defunct–old buildings back to work.
The “telecom hotel” or “carrier hotel” concept that guided their reconstruction brings multiple major telecommunication and Internet providers into a building with heavy-duty power, to consolidate major traffic and network access points for corporate clients. Just one floor of these buildings can move countless gigabytes of voice and data traffic in a day, and can eat enough power to light nearly 10,000 Chicago homes.
The model that guided the launch of the Lakeside Technology Center and E-port was poised to explode across the city.
“In the dot-com frenzy, there was extraordinary demand for the kind of space that’s been built out,” said Courtney Quinn, senior analyst with the Yankee Group of Boston. Real estate investors were attracted to the solid construction and easy access to large, underutilized buildings in a number of major cities.
The rush was on to build for a market that seemed to have limitless growth. Yet the April 2000 technology collapse sent the market for outsourced corporate Internet services plummeting, and the failure of countless free-spending telecommunication start-ups has curtailed enthusiasm for new projects even a fraction of the size of the downtown renovations.
Dan Lyne, director of technology development for the advocacy group World Business Chicago, said that his tracking map for proposed or potential project sites “looks like a 90 percent downturn” from the height of enthusiasm last year.
William Voller, general manager of ComEd’s energy services organization, said that the utility’s more selective list of existing or potential Chicago-area telecom hotel sites is down from a peak of 31 to just 17, and seven of those projects are not yet under construction.
The tech collapse radically changed the business case for telecom hotel operators.
“Once the bottom fell out of the market, there weren’t [potential tenants] with enough capital,” said Quinn. In many buildings, particularly those that did not close many leases before the telecom market shrank, that has translated to falling future revenue.
“The situation now is that a lot of these assets are available for pennies on the dollar,” Quinn said. “The money that’s being charged is so much less than what they’re actually worth or what it cost to put them together.”
Others have had to reinvent midstream.
Instead of becoming part of E-port, more than 500,000 square feet of the former Wards building is partitioned off for the Domain 900 condominium development, opening next spring.
“The demand for space from the telecom tenants has slowed dramatically, but the other dynamic is that mainstream companies are looking for data recovery centers,” said Charles Bendit, principal and co-founder of New York City-based Taconic Investment Partners LLC, one of the partners in E-port.
E-port is trying to court traditional office users and ride the wave of renewed interest in data recovery management since the events of Sept. 11.
E-port’s first tenants moved in during late winter 2001, but only half of the building’s 1.2 million square feet are leased.
Telecom 1 Chicago, 1001 S. Clinton St., under development since December 1999, has just one tenant signed–for less than 15 percent of the building’s 210,000 square feet of space.
Missed market
“We probably missed the market [peak] by six months, to our detriment,” said Scott Goodman, principal at managing partner Sterling Bay.
Vacant telecom hotel space is easy to find, and even occupied space is coming back into play. Broadwing Technology Solutions, a unit of Austin, Texas-based Broadwing Communications, will soon shut down its 18,000-square-foot data center within E-port as part of a nationwide consolidation.
“We don’t need data center operations in nearly as many locations as we did in the market we were targeting to go after [before the dot-com collapse],” said Jeff Lackey, president. “We have space we don’t necessarily feel the need to utilize, and [may] sublease or sell. We are investigating a variety of options.”
Steve Bersell, director at real estate firm Cushman & Wakefield, is overseeing the attempted sublease of 120,000 square feet held by Level 3 Communications at E-port, and estimates that as much as one-quarter of Lakeside Technology Center may be on the market as well.
A representative of Lakeside’s owner, Houston-based El Paso Global Networks, said the building is more than 90 percent leased and disavowed knowledge of subleasing activity by its tenants except to say that no tenant has asked it to approve a sublease deal.
Lakeside anchor tenant Equinix Inc., based in Mountain View, Calif., said it was not looking to shed or renegotiate the terms of its 20-year lease of 170,000 square feet at Lakeside. “We were so early in the game that our terms were always favorable,” said Jay Adelson, Equinix chief technology officer. “We have had a good relationship with both landlords, and we have high [customer] occupancy.”
Lakeside was sold to El Paso Global Networks in April. Terms remain undisclosed, but commercial real estate magazine GRID reported the value of the deal at more than $200 million.
Oak Brook’s Looking Glass Networks has not yet finished readying its 30,000 square feet of space in E-port for operation, but it feels it is still in the right place at the right time.
“[E-port] is a major data integration point in the city of Chicago. Being outside the Loop offers certain advantages in terms of redundancy and protection we feel are important to us and our customers,” said John Valentine, director of real estate for the firm.
Valentine said he has neither looked to dispose of space on the sublease market nor has been approached by other E-port tenants to add space. While he said he has not pressured E-port landlord Taconic Investment Partners of New York to restructure the lease, “they have been cooperative not only on this building but other properties they own across the country” where Looking Glass locates its facilities.
Still, other real estate players say that telecom hotel landlords are feeling squeezed.
“In most of the major metropolitan areas, [tenants] over-guesstimated what they needed, and in most markets they’re taking 50 percent of the space they initially targeted,” Bersell said.
New telecom hotel projects also face another problem besides soft demand. ComEd, concerned over being burned by large infrastructure investments that might never be paid back in overall consumption, wants more stringent criteria for would-be telecom hotel operators. With telecom clients often requesting greater than 100 watts per square foot, and typical office buildings equipped for less than 10 watts, the utility requires developers to put down a deposit, potentially refundable over a three-year period, to guarantee enough consumption to cover ComEd’s increased infrastructure costs.
“They are using probably close to what a small steel mill would use,” said ComEd’s Voller. E-port’s management said the building is equipped for 56 megawatts of power, slightly more than a jet engine on a Boeing 777 produces.
Large spaces
Telecom hotel management teams still want to lease large spaces to tenants (such as one floor at a time) despite the new challenges, rather than parcel their enormous spaces into smaller pieces. Quinn said that is unlikely in the near term because such facilities proved impractical for many firms.
“Investors loved to see data centers built in the 100,000- to 200,000-square-foot range, then realized that the customers aren’t there to provide return on investment,” Quinn said.
Hopes are high that relief will come from traditional offsite corporate data centers, as well as financial institutions looking for seamless disaster recovery facilities.
“People are looking in the market, which is encouraging because it means there is still a market,” said Ned Franke, senior vice president of commercial real estate firm Grubb & Ellis in Rosemont, which markets the still-unleased CyberFortress in Elk Grove Village. “The question is, how deep is the corporate market? Not many deals have been completed, and we need the other shoe to drop.”
