Panel: Market Recovery May Take 18 Months
Overhang of space hinges on 'last mile' broadband bottleneck

June 18, 2001 -- It will probably be a year to 18 months before the current overhang of vacant data center and carrier hotel space can be absorbed, according to panelists at the RealCOMM conference in Dallas.
"Twelve to 18 months in the high-tech world is a long time, but that's what we're facing right now," Michael Rareshide of Partners National told attendees at a session on carrier hotels last Thursday at RealCOMM, an event for real estate technology professionals. "I have a lot of clients who are hoarding cash."
Jon Forsyth of StratSoft LLC agreed with that general timetable, saying the overhang of space resulted from a combination of overbuilding and a dropoff in demand.
"We had a lot of (real estate companies) who three years ago were building shopping centers, who heard about carrier hotels and thought this was a way to print money," said Forsyth, whose firm provides research on the data center market. "They didn't really understand the demand going in, and now are trying to get out, and perhaps still not sure what the demand is.
"Consolidation has started to occur," Forsyth added. "Some of the weaker companies have facilities available at bargain prices. Finance companies are out shopping. It's the strong devouring the weak."
But in some instances, acquiring data center or colocation space may not make economic sense, according to several panelists.
"The big point is that the expected cost to convert data centers from these defunct companies may not be worth it," said Rareshide. "We're seeing that happen all over the place."
As the imbalance of space persists, panelsists said, prices for both square footage of shell space and colocation racks are headed lower.
"The price per rack is falling fast," said Dana Hicks of Lockwood Greene, a Charlotte-based design and construction firm that works with many data center customers.
"Leasing rates are trending downward to normalized office rates," said Rareshide.
So when will the slump end? What will be the signs of an improved market?
"Keep your eyes on broadband deployment on the last mile," said Robert Bell of the World Teleport Association, a New York-based trade group. "That will tell you when the Internet data center space will be absorbed.
"Just five percent of U.S. Internet users have broadband access," Bell added. "That has been much slower than expected just a couple years ago. That has been a major factor in messing up the business plans of Internet data centers, and the whole Internet industry."
All agreed that the long-term fundamentals of the market remain promising.
"The main driver is the Internet, and its not going away," said Forsyth.
"A year from now we may see 5 to 10 major players, and a handful of secondary players," said Hicks.
"Meaning it'll be an orderly market, where people can make money," concluded Bell.