Is There Life Beyond 'Tier One'?
Some carrier hotel developers are targeting smaller cities

NEW YORK, Feb. 13, 2001 -- Silicon Valley, northern Virginia and New York are dotted with data centers and carrier hotels.
But what about Toledo, Ohio and Grand Rapids, Mich.?
While most developers and investors are seeking large facilities in major markets, other market players see opportunity rather than risk in these secondary markets.
"Everyone says they have a 'have to' list (of sites), and the second- and third-tier markets don't always make it," said Jim Pastreich, President of the Pinetree Group, Inc. "But these markets have the same needs."
"Everywhere throughout the U.S., people want high-speed bandwidth," agreed Peter Berns, President and CEO of Convergency Centers, LLC, a carrier hotel developer based in Grand Rapids, Mich." A small town in Michigan has the same needs and wants as New York City."
Pastreich and Berns spoke at a panel on so-called "second-tier" markets at this week's IMN Forum on Developing and Financing Carrier Hotels and Internet Data Centers, held at the Marriott Marquis hotel in New York.
"The way that we view carrier hotels is that we're a hub in a utility that will drive the new economy," Berns said. "What we will see in the future is videoconferencing between Grand Rapids and New York City. In order for videoconferencing or Napster to exist, each user of that technology needs access to high-speed bandwidth."
But are there enough customers in these smaller markets to justify the costs involved in buying and equipping a carrier hotel?
Recent funding challenges for telecoms may reinforce the bias towards "tier one" cities, as investors and lenders seek the reassurance of proven markets with an established customer base.
Not all secondary markets are created equal, according to Berns, who said developers must do their homework to identify cities that can support a high-tech facility. Convergency has used demographic research to target 147 markets around the country, ranking them by the number of Internet hookups, rather than population. The company already has agreements to acquire facilities in 20 of them.
"We spend a lot of time working with local officials on economic development," said Berns. "We feel it's our job to educate the community on the value of high-speed bandwidth. We try to get good sites for free."
In many cases, city officials eager to spur development in depressed urban areas are willing to offer substantial incentives, including deals on vacant industrial properties. These financial packages have traditionally been based upon the number of jobs a facility will create, a less than ideal criteria for carrier hotels and data centers.
But state and local governments are discovering the potential of "cyberdistricts" as an economic development tool, and looking to partner with utilities and technology companies. As a result, Pastreich said, it's easier for him to get the mayor on the phone in Albany than in New York City.
"(Local officials) understand that if they can't have this kind of facility, they'll watch the world as it passes them by," said Pastreich. "
Funding these projects isn't always easy, and usually involves regional banks rather than Wall Street financiers. That means coming up with a financial plan that makes sense with or without a telecom tenant base.
"The alternative use question is magnified in our situation," said Berns. "Our lenders are often local banks who don't understand the carrier hotels business very well. They're impacted by the fear of fallout from the dot-com business."
"It has to work as a straight real estate play on an economic basis," agreed Pastreich.
One of the major attractions for developers like Pinetree and Convergency is the opportunity to stake a claim in markets where the competition is less intense.
"There are very few people who deploy carrier hotels in Grand Rapids, Mich.," said Berns. "That's why I'm there. Most of the people on this panel don't touch these markets. They don't understand them, and they don't do business there."
Berns got no argument on that point from Jeff Echt, a senior vice president of finance for TrizecHahn Office Properties, Inc.
"He's right," said Echt. "We know nothing about Toledo. We will never know anything about Toledo. It's just not our strategy."