Carrier Hotels Turn "Telco Concierge"

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.

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.