Telehousing operators have survived the dot.bomb crash and are preparing for a boom of e-based platform construction. Paul Strohm investigates
When many dot.coms turned into dot.bombs last year, one might have thought that the telehousing market, which in part serves the sector, was similarly dead in the water.
However, the investment being made by telehousing operators such as Global Switch appears to contradict that.
Global Switch, whose backers include TrizecHahn and Chelsfield, among others, opened its first facility in September 1999 in London’s Docklands and has just topped out a second building, Global Switch London 2, which is scheduled for completion in December. It will provide 63,110m2 (679,259 sq ft) of space, and together the two facilities will provide about 92,900m2 (1m sq ft).
Global Switch customers include telecoms companies, internet service providers and application service providers. The company also claims to be “the world’s leading carrier-neutral co-location company” – neutral in that it is not tied to any single carrier. The company operates in Europe, the Asia-Pacific region and the Americas and altogether has 12 large facilities either open or being developed, totalling 343,730m2 (3.7m sq ft).
There is a new breed of client coming in but, nevertheless, the fundamentals remain the same. Global Switch says that its customers’ key requirements are a guaranteed power supply, data back-ups in the event of equipment failure, multiple layers of security and access to many bandwidth suppliers.
Attitudes to ownership are changing too. Global Switch owns its buildings freehold and until recently the co-location centre operator always sought a freehold. This was supposedly because of the large amounts of capital expenditure required within the building and also because adequate capital was available to enable a freehold to be added to the shopping list.
There appears to be a historic preference for freeholds, according to Roger Saper of property consultant Saper Hall.
But he points out, however, that this was forced upon many companies because, in many cases, their covenants did not meet the institutional criteria that have to be satisfied in order to obtain a lease. While a freehold sidestepped the problem, there is now increasing pressure to take leases, as more and more of their capital is tied up in equipping the units they take.
Within the co-location centres, operators in turn generally try to create a range of lengths of tenure to promote churn and ensure that there is a healthy level of space turnover. Smaller space users will generally look for service agreements between one and three years while, for larger floors, agreements of 10-15 years are sought because of the larger capital investment required of the occupier.
Matthew Pullen of Insignia Richard Ellis, which advises Global Switch, says that competitive pricing has helped Global Switch to thrive and that “pricing is under pressure where people are focused on the small space market”.
He adds that there is a clear difference between the wholesale provider of space, such as Global Switch, and those aimed at smaller units who always provide fully fitted space.
Global Switch charges £640 per m2 (£59.50 per sq ft) for entire floors of about 4,645m2 (50,000 sq ft) finished to shell and core, including central mechanical and electrical facilities and fitted with ceilings and room cooling units. This compares with over £1,076 per m2 (£100 per sq ft) for smaller space, which is generally offered with a fuller specification including underfloor cable trays, uninterruptible power supplies and a facilities management system.
Little demand from web-hosts
The source of demand for co-location space is changing too. Pullen explains that demand from the web-hosting market is flat and consequently so is that from the telecoms carriers. Although he predicts a resurgence, in the meantime, demand from the corporate sector for data centres and for disaster recovery space is surging ahead. “Office rents are off the chart, which makes it crazy to have a data centre in your headquarters building,” says Pullen.
Saper agrees that corporate users will increase the demand for bandwidth from the growing use of facilities such as video conferencing. “The last thing the captains of industry should be doing is flying around the world on an aeroplane.”
Now the market is polarised towards building new facilities, says Pullen, but it is not enough to build near available optical fibre routes and power supplies. “It’s got to be truly sustainable,” he adds.
It is not simply enough, either, to be in London, it seems. Co-location centres have to be in the right part of London and the emphasis is firmly on Docklands.
Pullen says there is 104,977m2 (1.13m sq ft) of co-location space in London, the vacancy rate for which is 29%. However, the vacancy rate in Docklands and East London is closer to 10% but taking Docklands alone it is below 5%.
Global Switch may not be completely typical, but Joe Valente, director of DTZ Research, says the underlying picture of the market shows that there is still significant potential for growth, and that there is a Europe-wide under-provision of co-location space. London alone is looking at an extra 185,800m2 to 278,700m2 (2m-3m sq ft) in the next three years.
Smaller group of operators
“Having said that, what is driving it is a much smaller number of operators who have the covenant and financial strength to roll out those facilities,” Valente adds. Whereas the market comprised 100 or so players last year, now it is down to about 40.
“The others haven’t gone bust. They are just not going to do the roll-out originally envisaged,” says Valente.
Global Switch also believes there is long-term potential and that although the market is crowded and consolidation is likely, long-term demand is driven by corporates that are putting more and more of their core business functions onto an e-based platform.
Figures from research company Ovum also indicate worldwide growth of 30.5% pa with a value of $55.8bn by 2005, when, it says, there will be 10.5m m2 of co-location space world wide.
So there is still a co-location centre market out there. But Pullen says that the nature of that market has changed somewhat. There is a reduction, for instance, in the pressure to take an existing, compromise building and adapt it to suit. “The whole market has evolved and retrofitting was never ideal. It was only ever accepted because speed to market was dominant, and what else could you do?” he says.
But there is still the problem of time lag as the development industry gears up to provide new space. “In an ideal world, they would like a building designed for their needs, but current construction methods make this process too long,” says Saper.
