Alternate Use As An Alternate Strategy
Non-telecom tenants can ensure cash flow during telecom slump

If there was a sign of the times at last week's IMN conference, it was surely the discussions of "alternate use," a topic discussed in numerous panels.
Not too long ago, the specialized nature of a telecom project was one of its most attractive features for potential investors. These properties offered entirely different financial math than your standard office or industrial space.
Sure, data centers and carrier hotel projects devoured huge amounts of capital investment on the front-end. But what excited developers was the potential return on that investment in higher lease rates for telecom and Internet-ready shell space.
As a result, many owners of industrial, warehouse and office space envisioned future riches by converting their aging but sturdy facilities into high-tech properties.
Now, as the market for data centers and colocation has cooled, an industry that formerly touted the unique nature of these telecom properties must instead hail their versatility and attractiveness to non-telecom tenants.
While leasing to alternate-use tenants sacrifices the higher returns of telecom space, panelists said, it may be a crucial strategy for filling buildings and keeping lenders happy during the current slowdown.
"Lenders are very focused on alternative-use value as a limiter on how much they're going to lend," explained Jeff Gronning, CFO of Global Real Estate at Morgan Stanley, at one of last week's panels.
"I think alternative use is critical," echoed Peter Lewis, Director-Real Estate at MIT. "We always look at the downside risk if things don't go right."
Some wondered aloud whether such talk was realistic.
"I've heard lots of people talking about alternate use," said Chris Haley, Director of Real Estate Securities Research at First Union Securities. "I never heard anyone say what the alternate use was."
Haley noted that in many cases prospective data centers can be windowless shells that are unattractive as office space.
But some panelists predicted that properties which can be adapted to office use may find a whole new breed of tenants seeking redundant power and fiber hookups, especially in light of the California power crisis.
"Office tenants in New York are very scared that the same thing that happened in California will happen to them," said David Brause, vice president of Brause Realty Inc in New York. "They all need redundant power situations.
Law firms and architects are now transmitting huge amounts of data, Brause noted, as are broadcasters and many health-care providers.
"They all seem to be very interested in locating in buildings where they know they'll have the same level of redundant fiber and redundant power as the telecom companies," Brause said.
Negotiating short-term leases with these alternate tenants may offer developers the chance to maintain the project's viability, while keeping open the option of converting the space back to telecom or colocation use when the market rebounds.
"We feel the key to survival is remaining flexible with your buildings," said Brause.

Rich Miller is editor of the CarrierHotels.com web site.