BORN IN 1999, BROADBAND Office was poised to become a global provider of network-based communications, ranging from basic telecom service to high-speed Internet connections. Hoping to cash in on the broadband boom, eight top REITs — including Washington, D.C.-based CarrAmerica — struck deals naming the telecom firm their preferred provider.
The companies exchanged access to their combined portfolio of about 300 million sq. ft. of space for shares of BroadBand Office stock, owning what amounted to 51% of the company. At its peak, the 700-employee BroadBand Office was valued at $1.5 billion.
But the REITs' hopes of cashing in on the broadband craze were dashed when BroadBand Office filed for bankruptcy in May 2001 — a victim of the tech wreck before it even reached its second birthday. Instead of counting profits, CarrAmerica and the other REITs were calling lawyers to untangle their relationship with the now-defunct BroadBand Office.
Broadband has ridden a roller coaster of acceptance with both tenants and landlords. “We are at the point where everyone is wondering what happens now,” says Bob Best, director of technology and information management for investor services at Chicago-based Jones Lang LaSalle Americas Inc. “The fact is the demand has not materialized as quickly as people thought.”
Tenants have been slow to sign up for broadband service for a variety of reasons. Some are analyzing connectivity requirements in order to purchase technology that will meet current and future needs. Others are wary of the cost. And then there are those companies that simply don't need high-speed connectivity to check e-mail and surf the Web.
Bandwidth priorities have shifted to finding cost-effective solutions and stable providers, says Jim Mosby, second vice president at St. Louis-based Colliers Turley Martin Tucker. Broadband firms need to clearly demonstrate how the greater connectivity will benefit an owner's business. “If tenants can get by on something less expensive, they will do it,” he says.
Nevertheless, experts predict that demand for broadband will return. The question is, how far in the future? “Everyone agrees that broadband as a concept is going to move forward and have greater applications,” says Mosby. “Some things that broadband is going to be used for haven't even been thought up yet.”
Defining the need
Each tenant's broadband needs are unique. “Less than 10% of the time a tenant will specifically ask about broadband, fiber or T-1 lines,” Mosby says. “Typically, a tenant will work with what the building has to offer.” In many cases, tenants are still trying to define their telecommunication needs and decide whether they want T-1, T-3 or another alternative such as a higher capacity fiber-optic line, he adds.
For tenants like St. Louis-based G.A. Sullivan, broadband is essential. The software development firm uses high-speed connections for tasks ranging from video conferencing to Web-based software demonstrations for clients. “We also are heavily reliant on connectivity between offices,” says Steve Hays, vice president of information systems for G.A. Sullivan, which employs about 300 people in seven locations across the United States.
Tenants also want a variety of telecom options, according to David Olsen, manager of telecom initiatives at the Chicago office of Toronto-based TrizecHahn Office Properties. “What we are doing differently is scrutinizing providers we allow in the portfolio,” he says.
In addition, TrizecHahn offers tenants telecom consulting services, from explaining broadband options to helping the tenant select a provider.
“What we have found is that tenants applaud this and they want our help,” Olsen says. He adds that TrizecHahn is researching telecom solutions that the firm can provide directly to tenants, including in-building wireless technology. This service provides infrastructure for uninterrupted cellular coverage at all locations of a multi-tenant office environment, including parking garages and elevators.
The price has to be right
Cost plays a significant part in a tenant's decision to use broadband. Firms are digging into more details as they determine how much bandwidth is really needed to run their networks. Most users are satisfied with moderate capacity such as T-1s and T-3s, says Jeff Hipschman, chief technology officer at New York-based Julien J. Studley Inc. “Tenants are looking at connectivity and broadband as a cost and finding the right mix of cost and performance,” Hipschman says.
Tenants must pay the accompanying subscriber fees, much like they pay their phone bill each month. Tenants also may incur costs of installing broadband service, if they take the initiative to bring broadband into a particular building.
CarrAmerica quadrupled the bandwidth capacity for its own offices in the past year by adding multiple T-1 lines. The firm needed the increased capacity to accommodate a growing use of Web-based Application Service Providers (ASPs), notes Barry Krell, vice president of telecommunications. The company has added 12 ASPs that provide a variety of Web-based software applications, such as electronic bill payment.
“If CarrAmerica is doing it — and we are a conservative company — then I believe other firms are doing the same thing,” Krell says.
The big problem landlords face is delivering telecom choice to tenants in the wake of telecom failings. Less choice means higher costs for both landlords and tenants, and regional broadband costs can vary widely. Pricing depends on competition and regulations in a particular area.
For example, a building might pay a $400 monthly fee for a T-1 circuit in California and $1,800 for the same circuit in Colorado, Krell notes. Factors such as speed, capacity and the number of users on the network also impact the bottom line.
The major selling point
Today's investment in broadband wiring may pay off tomorrow. Broadband capabilities can give wired buildings an edge over other downtown competitors. Owner TrizecHahn recently signed agreements to bring fiber and T-1 lines to Metropolitan Square and St. Louis Place, both major office buildings in downtown St. Louis. “That is something we use to market to tenants downtown,” says Mosby of Colliers, which handles the leasing of the properties.
In addition, as the economy improves, the high-tech infrastructure also may allow firms to charge higher rents in the future. “Right now, because everyone is trying to get any tenant they can, it is difficult to use technology to raise rents,” Mosby admits. “What it does give you is an added amenity in this market.”
Broadband is an essential amenity at One Financial Place in downtown Chicago. The building is home to the Chicago Stock Exchange and adjacent to the Chicago Board of Options Exchange. Nine different telecom firms service the building.
According to Mark Collins, general manager of One Financial Place and senior vice president at Jones Lang LaSalle, not only do some tenants use one and two providers, but some need three.
The firm even built a telecom room to house the providers' equipment, recouping that investment by charging the tech firms a license fee for building access.
The One Financial Place management team recognized the demand for greater connectivity and began contracting with various providers about a year ago. “We have created an à la carte menu where tenants have a choice of several providers,” Collins notes. “The only issue that we have is the viability of providers.”
For example, One Financial Place broadband provider Winstar Communications was one of many telecom casualties of the 2001 tech wreck that filed for Chapter 11 in 2001. However, the firm was later acquired by Newark, N.J.-based IDT Corp., and continues to service tenants despite its financial problems.
“When we look at a provider who is coming into the building, we look at whether it has the financial wherewithal to be a long-term provider,” Collins says. Although the landlord is not directly affected by a provider's bankruptcy, bringing in reputable firms is a way for owners to maintain seamless, quality service, thus keeping their tenants happy.
Down but not out
Initially, owners envisioned making a lot of money with broadband through revenue sharing with service providers or the ability to capture higher tenant rents, says Julie Middleton, vice president of real estate at Silver Spring, Md.-based CityNet Telecommunications Inc. CityNet is a broadband infrastructure company that bridges the last-mile divide by building fiber optic networks that connect directly into buildings. But when tech firms started going bankrupt, a lot of real estate people were afraid to touch broadband, she notes. “I'm not sure what it [the broadband landscape] is going to look like when everything is settled down, but broadband is not going to go away,” she says.
According to Middleton, tenants will require broadband connectivity in the future, so tech firms are focusing on re-educating the real estate industry on the value of the technology.
“Business does rely on the Internet, and if the Internet is going to be effective, you're going to have to have bandwidth sufficient in buildings for tenants to operate,” Middleton says.
Tenants are increasingly reliant on technology that requires high-speed connections such as video-conferencing, e-procurement, computer networking and Web-based software applications.
Focus on service
One of the big promises many telecom firms made initially was that landlords would share in significant revenues by providing broadband access. Now, the prospects of revenue generation have been replaced by a more pressing need. “We had to relearn that our job is basically to attract and retain tenants,” Best says.
According to Best, landlords can meet the needs of tenants by creating an open marketplace that offers several choices. “We constantly need to be reminded that we are in the business of providing effective workspace for tenants,” he says. “Our first job is to find out what tenants need in terms of connectivity, and then get it to them.”
Rather than going into the broadband business, landlords should focus on managing the broadband infrastructure, adds Hipschman. “Smart landlords are managing facilities and letting tenants do their own deals,” he says. “What landlords are doing is basically saying, ‘We want our buildings to be able to accommodate whatever our tenants need.’ ”
Beth Mattson-Teig is a Minneapolis-based writer.
Broadband satisfies industry's need for speed
BROADBAND'S ABILITY TO multi-task is its main attraction. Broadband networks are able to carry several services, such as text, graphics, audio and video at the same time, using two basic mediums: copper wiring — used for basic phone lines and cable TV — and fiber optics.
A basic dial-up analog phone line delivers a maximum speed of 56K or 56,000 bits of data per second. A T-1 line carries traffic at 1.5 megabits per second (Mbps) — the equivalent of 24 voice lines — while a T-3 line moves data at 45 Mbps by using more phone lines bundled together. A T-3 line or greater is necessary for services such as video conferencing.
A DSL connection transmits data from 300K to 1.5 Mbps.
The difference between fiber and T-1 or T-3 lines is the type of cable and the process by which data moves along that cable. Fiber-optic cable delivers greater capacity and speed because data is pushed along the cable by millions of pulses of light.
Fiber optical cable ranges from 155 Mbps, the equivalent of 2,000 voice lines, up to 10 gigabits per second, or 129,000 voice lines. “Fiber is definitely the future of data communications outside the building,” says Tom Gille, principal at San Francisco-based consulting firm REALSystems.
The Telecommunications Act of 1996 opened the door for competition among broadband providers. Essentially, the Act said that incumbent local exchange carriers — large telephone companies such as Qwest that provided local telephone service in the wake of the divestiture of the AT&T telephone monopoly in 1982 — had to make their networks available to competitive local exchange carriers like Bell Atlantic.
In the past, regional Bell operating companies had exclusive control of that infrastructure. “Companies started coming along in the 1990s, saying, ‘I can move that data for you cheaper than the phone company can,’” says Gille.
However, the Tauzin-Dingell Bill, or the Internet Freedom and Broadband Deployment Act, may reverse the 1996 act. The pending legislation would allow larger incumbent local phone companies to offer broadband Internet access without having to persuade state and federal regulators that their phone networks are open to competition.
First introduced in early 2001, the Tauzin-Dingell bill was passed by the House in February and is pending in the Senate. Critics say the bill would severely reduce competition for local service, while supporters say the real competition is from cable Internet services, which face fewer federal regulations and thus are able to deploy services less expensively.
— Beth Mattson-Teig
TELECOMMUNICATIONS TERMS FOR TECHIES
Alternate Service Provider (ASP): Any telecommunications service provider other than the Incumbent Local Exchange Carrier (ILEC).
Bandwidth: A measure of capacity of communications media. Greater bandwidth allows communication of more information in a given period of time. Bandwidth is generally described either in terms of analog signals in units of Hertz (Hz) or in units of bits per second.
Bit: A single unit of data, either a one or a zero, used in digital data communications. A megabit equals 1 million bits. A kilobit equals 1,000 bits.
Broadband: A term used for evolving digital technologies that provide consumers a signal switched facility offering integrated access to voice, high-speed data service, video-demand services and interactive delivery services.
Competitive Local Exchange Carrier (CLEC): Any provider of local, point-to-point telecommunications services other than the Incumbent Local Exchange Carrier, such as NextLink and Teligent.
DS-1: Capacity of 24 voice circuits communicating at 64 Kbps and at a physical transmission rate of 1.5 megabits per second. It can be configured for a variety of uses such as video conferencing, trunking and private data networks.
Digital Subscriber Line (DSL): A data communications technology that transmits information over the copper wires that make up the local loop of the public switched telephone network. It bypasses the circuit-switched lines that make up that network and yields much faster data transmission rates than analog modem technologies.
Incumbent Local Exchange Carrier (ILEC): A large telephone company that has been providing local telephone service in the U.S. since the divestiture of the AT&T telephone monopoly in 1982.
Integrated Services Digital Network (ISDN): A circuit-switched communication network that allows dial-up digital communication at speeds up to 128 kilobits per second.
Local Area Network (LAN): A network of computers and peripheral equipment that interact mainly with one another within a relatively small area.
Optical carrier 3 (OC-3): A fiber optic line carrying 155 megabits per second. Examples of OC levels include OC-1 at 51.8 Mbits/sec and OC-48 at 2.48 Gbits/sec.
Regional Bell Operating Company (RBOC): One of the seven local telephone companies formed upon the divestiture of AT&T in 1984. The original seven included NYNEX, Bell Atlantic, BellSouth, Southwestern Bell, US West, Ameritech and Pacific Telesis.
Riser: A vertical or horizontal space used for utility distribution within the building.
T-1: A dedicated digital communication link provided by a telephone company that offers 1.544 megabits per second of bandwidth, commonly used for carrying traffic to and from private business networks and Internet service providers.
T-3: A dedicated digital communication link provided by a telephone company that offers 44.75 megabits per second of bandwidth.
Wide Area Network (WAN): An integrated data network linking individual computer stations or local networks over common carrier facilities.
Sources: NAIOP, FCC and Pertlink Ltd.