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Cautious Optimism About 2004

Carrier Hotels Staff Posted Mar 11, 2004

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If there's a consensus view on the near-term outlook for the data center business, it's cautious optimism.

A recent sampling of industry chief executives found growing confidence that the bankruptcies and scandals that have beset the telecom sector have run their course, leaving a field of lean-and-mean survivors poised to benefit from gains in technology spending.

On the real estate side, the recent sale of two prominent carrier hotels - 111 Eighth Avenue in New York and 151 Front Street in Toronto - demonstrates that exit strategies are available for choice assets.

"I believe we are finally beginning to see signs of the long awaited turnaround," said Robert Guller, president of Bandwidth Exchange, which operates two carrier hotels in St. Louis. "The customer base is finally budgeting for new capital expenditure, while the demand for hosting and managed services from the middle-market has steadily continued to grow, driving the demand for data center space from providers in this area."

"The industry has begun it's climb back from its descent of the past two-and-a-half years," said J.P. Balajadia, vice president of the 365 Main data center in San Francisco. "We definitely see a renewed interest in outsourcing data centers by companies of all sizes, and a new level of sophistication in the people shopping for it."

But make no mistake - the growth that lies ahead will be nothing like the helter-skelter expansion of the dot-com boom. Tenants and customers are shopping carefully, taking their time, and driving hard bargains in a buyer's market.

The telecom sector "appears to be out of intensive care, but is still recovering," said John Wilson, president and CEO of eXchange @ 200 Paul, which operates carrier hotels in San Francisco and Santa Clara. "We see more activity and an increased willingness to consider telecom commmitments in 2004. But capital expenditures are still a major obstacle, even when there is a confirmed revenue opportunity associated with the build-out."

Top-tier facilities and providers in major Internet markets are best positioned to benefit from increased activity. Among the likely growth drivers mentioned are VoIP, grid computing and storage.

But expectations often zoom ahead of actual spending. An example is the market for disaster recovery infrastructure, which was expected to grow rapidly after the Sept. 11 terrorist attacks. Corporate business continuity has proven to be a complex market, with decisions influenced by tight corporate IT budgets and uncertainty on regulatory guidance on backup facilities.

"The market is still slow and plodding," said Alex Twining, CEO of MetroNexus, a New York-based carrier hotel developer. "After all of the post-9/11 moves are completed in metro New York City, it should slow even more. Major financial institutions, while still functioning on band aids, and are not interested in spending money on IT unless they absolutely have to."

While landlords are seeking to fill vacant space, service providers are hoping to fill their existing data centers.

"I'm very bullish on how 2004 is shaping up for those of us in the managed hosting sector," said Rich Lee, CEO of Springboard Managed Hosting in the Research Triangle. "I think customers in general are starting to feel comfortable that data center operators left standing are in pretty good shape, and feel much more comfortable outsourcing mission critical services."

Perhaps most importantly, it's now possible for data center providers to raise financing, as demonstrated by public offerings by Equinix, NaviSite and Internap.

"The runup in stock prices of some of the players in our space also bodes well for everyone and providers that are generating positive cashflow will continue to do well," said Lee.