Power-ful Partnerships
Telecom developers look to utilities to finance tenant buildouts

June 4, 2001 -- Carrier hotel developers are looking to a surprising new source to help cash-strapped tenants build out leased space - utility companies.
"When we sit down with a (prospective) tenant, the rent is the least important issue," said David Welsh of the Morgan Stanley Real Estate Fund, which develops carrier hotels under the MetroNexus and Global Gateway brands. "The most important thing is finding the money to build out their space. So one of the things we're doing is finding financing for tenants."
That search led Morgan Stanley into discussions with electric utilities.
"We're talking to these power providers who want to supply utility and bandwidth services, and we're forming partnerships with them," said Welsh. "They provide a loan to the tenant for the buildout. In return, they get the (electric power) business."
While Morgan Stanley's effort is in the discussion stages, the initiative illustrates the increasingly complex and symbiotic relationship between electric utilities and the Internet facilities that are their most prolific consumers of power.
Welsh, who spoke at a panel at the New Jersey Appraisal Institute's annual conference in Princeton, N.J., said utilities' interest in acquiring data center customers was a factor in the recent sale of a major Chicago carrier hotel, the Lakeside Technology Center.
El Paso Energy purchased the building from The Carlyle Group as part of a larger partnership in which the two companies will develop "meet-me rooms" supplying interconnections between customers in three other major carrier hotels - the Atlantic Telecom Center in New York, One Wilshire Boulevard in Los Angeles and Market Post Tower in San Jose.
"This was a way for (El Paso) to get a captive market," said Welsh.
El Paso is one of a number of utilities pursuing that have moved aggressively into the telecom arena, with others including Williams Energy and Florida Power & Light.
Welsh said that despite the sluggish market conditions, Morgan Stanley still believes in the carrier hotel business as a long-term investment, but has adjusted its short-term goals.
"The fundamentals for this business are still very strong," said Welsh, who cited projections that revenues from web hosting were projected to grow from $5 billion to $50 billion by 2005.
"Our business plan has changed over the last 12 months," he said, adding that MetroNexus had scaled back its ambitions for the European market, as well as its goal to acquire 30 to 40 facilities. "We are now very cautious on our new acquisitions."