Telecom Real Estate Market May Be Slow

June 14, 2002
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NORTHBROOK, Ill. — Grubb & Ellis says that although the market is saturated with telecom facilities, the long-term outlook for the telecom-related real estate market seems healthy.

G&E, one of the nation’s largest real estate companies, made the statement recently based on findings from its second quarterly study of the real estate market.

The firm said that the study includes statistical analysis concerning total market size, vacancy rates and rental rates.

The executive vice-president for G&E’s Telecom Group said that, “Although the market is currently saturated with telecom facilities — our data show a 39 percent vacancy rate nationwide — the long-term outlook for the telecom-related real estate market is far from bleak.”

Mike Gerard also added, “Landlords and tenants that can gauge supply and demand characteristics and stay on top of this market today will be well positioned to play a key role in this sector over the long term.”

He said the G&E research team conducts its research in this market area to provide key industry information to telecom and real estate clients and improve its own understanding of the telecom market segment.

An executive summary of the quarterly research is available at the G&E Telecom Group Web site, telecom.grubb-ellis.com.

For its study, the firm’s research arm defined telecommunications real estate facilities as buildings in excess of 20,000 square feet with at least 75 percent of their space allocated for telecom, data center, carrier hotel or co-location facility usage.

The firm’s market database tracks 56 million square feet of commercial space devoted to telecommunications, most of which either was constructed or converted within the last four years.

Among other findings, the research project showed:

  •  Telecom vacancy levels dropped to 38.9 percent in the second quarter from 44.6 percent in the first. Vacancy rates exceed 30 percent in most major markets, indicating a large surplus of inventory is yet to be absorbed. By contrast, the nation’s office and industrial vacancy rates were 11.5 percent and 6.7 percent respectively during the same quarter.
  •  An additional 5.4 million feet of telecom space is under construction, with only 18.5 percent of it pre-leased.
  •  Another 6.4 million feet is planned, but will be difficult to rationalize unless metropolitan vacancy rates fall below 10 percent.
  •  Substantial amounts of sublease space were returned to market as many companies declared bankruptcy and others downsized and tried to sublet their space to conserve cash.

Although the decline in telecom vacancy levels during the second quarter might give cause for optimism, G&E analysts say it does not actually indicate improvement in current market demand.

Rather, the drop in vacancies reflects pre-lease tenants who moved into their spaces after the completion of construction or renovations.

For now the overbuilt market has shut down the development pipeline, and G&E feels it will be some time to come for the excess to be absorbed and for the market to reach equilibrium.

With the evaporation of venture capital and poorly capitalized businesses, Gerard said he believes it unlikely that demand for space will equal that of 1999 or 2000 any time soon.

But, he added, “over the long term, there is a strong potential for growth and big profits.

“Telecom companies are the utility companies of tomorrow. There will always be a demand for telecom services, especially as telecom products advance and grow.”

He noted that even amid last year’s and this year’s surge of bankruptcies, corporate layoffs and restructuring, experts all seem to agree that demand in the telecom industry will only continue to grow over the long term.

Also encouraging, Gerard said, is the recent opening of the Network Access Point (NAP) of the Americas in Miami, a 750,000-square-foot facility that houses 32 telecom, Internet and Web-hosting service providers.

Tenants, he said, include AOL, Time Warner, Qwest, Level 3 and Global Cross. He said the new NAP will ease the heavy traffic Internet access points in New York, Chicago and San Francisco, and facilitate the flow of traffic to South America.

Gerard said the outlook for well-capitalized companies also is positive.

“Telecoms backed by solid capital will continue to grow and take space, as evidenced by the continued strong performance of several blue chip companies.”

He noted that Spring, AT&T and Williams each completed significant leases in key markets during the second quarter.

“Government agencies and companies from other economic sectors — including energy, finance and insurance — will become players in the telecom market as they upgrade their technology infrastructure and integrate their operations.”

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