Exciting Trends in the technology and commercial real estate world

Corporations Focused On Addressing Legacy Data Centers

By: Kelci Smesko

Techrealestatetrends.com

Over the past 15 years, a large number of corporations have spent significant corporate capital towards constructing and owning data centers throughout the United States to address their technology needs. A majority of these facilities were built as data fortresses at a cost of over $1,000 per square foot. For example, to build a data center of 100,000 sq. ft., a corporation could invest over $100 million. In the new era of corporations migrating to the cloud and colocation facilities, many of these properties have become underutilized with significant surplus space and power. Corporations today are looking for opportunities to optimize their data center footprint today and for the future. The current focus is to build flexibility for their future technology needs. The positive news is there is also a strong secondary market for these legacy enterprise sites with numerous operators, investors and lenders representing a healthy capital markets environment.

The result of this trend is that corporations are looking to strategically evaluate monetizing these assets to provide more flexibility in their technology portfolios. Jones Lang LaSalle (“JLL”) has emerged as an industry leader in providing corporations with valuable advisory services for data center assets globally.  James P. Quinn and Michael Hochanadel, both Managing Directors at JLL have combined to complete approximately 60 million sq. ft of transactions providing advisory services for firms such as IBM, Verizon, Delta, Digital Realty, Hines, Lonestar and Level 3 Communications. We recently interviewed Quinn and Hochanadel on this topic and addressed the following areas:

Techrealestatetrends.com: What are the important drivers for corporations today with emerging technology and their existing data center facilities?

Quinn: Corporations are struggling to keep up with their technology needs with their existing data center portfolios. The challenge is to build flexibility into their technology requirements by moving away from legacy assets where significant capital has already been deployed. There is a large number of sites that are underutilized that provide reduced flexibility due to the ownership structure and the high book values associated with these sites. Also the technology in these data centers is antiquated. As a result, we have been very active in advisory services for data center monetization and implementation projects.

Techrealestatetrends.com: Can you provide an overview of the market and trends for these data center assets?

Hochanadel: The data center investor universe has grown dramatically over the last ten years. As it has grown, it has also matured with several subcategories emerging. Large colocation operators are focusing on several core data center markets looking to build campus style deployments of significant scale. Passive investors such as non-traded REITs and pension fund advisors are looking for long term net leased data centers. While opportunistic investors are looking for structured corporate dispositions providing both cash flow and opportunity for upside.

Techrealestatetrends.com: Can you provide an overview of some recent market projects?

Hochanadel: We recently completed the sale of KOMO Plaza, a 293,727 square foot, Class A office and data center asset in Seattle. GI Partners purchased the two-building plaza for $276 million. KOMO Plaza is one of just three key telecommunications carrier hotels in the Northwest and one of just two purpose-built telecommunications centers in Seattle.

Techrealestatetrends.com: How are you helping corporations address evaluating their technology portfolios?

Quinn: We provide corporations with a comprehensive analysis of the financial metrics of optimizing their technology portfolio through various scenario analysis of data center monetization, colocation, cloud and network opportunities. We provide unsurpassed intellectual capital in understanding market pricing for each critical technology metric.

Hochanadel: In tandem, we provide market valuations of data center properties, sales/pricing intelligence, landscape of active buyers and sensitivity scenarios on leaseback strategies.

 

Potential Value Add by Employing an International Transaction Manager

By: Matthew Ruffing

Techrealestatetrends.com

United States based international transaction managers must weave through a myriad of potential pitfalls in order to successfully manage and complete foreign lease transactions. These challenges can be unique to each international transaction manager and depend upon the organization of the transaction manager’s firm, the client, and the country where the lease is being negotiated.  Technical skills typically required to complete U.S. transactions form a good base, but more managerial flexibility is required due to local business traditions.

In summary, there are several areas the international transaction manager needs to be conversant in when working internationally as compared to U.S. work. In broad terms these include:

• Project
• Legal
• Management/Outsourcing
• Practical issues

 

Project Issues

Project issues can be broken down into government mandates, local client customs, and landlord expectations. Each country’s governing entity is unique in what they expect the office environment to provide its workers.  For instance some countries maintain that certain density per employee standards are met.  Others require that a certain amount of daylight be made available to each employee.  An experienced international transactor should seek out local broker knowledge or consult with an architect and advise his client of local requirements.

Client occupancy traditions include how much private enclosed office workspace to provide vs open shared cubicle workspace. The location and quantity of private bathrooms can also be factor.  Attaining internal approvals from your clients may also vary dramatically from country to country depending upon established norms and traditions.  Also, how space is used within your clients U.S. offices may not be acceptable to within the same client’s international offices.

Landlord expectations also vary. Restoration/dilapidation issues and how the handover of space at lease expiration will occur will need to be negotiated in several international countries.  Tenant improvement allowances may not exist.  HVAC expectations that we are accustomed to in the U.S. will be different in other parts of the world.  Landlord services vary greatly and likely will not meet the same expectation standards as those in the U.S.

Your client is relying on you, the expert, to identify possible landmines before they explode. No transaction manager should be expected to identify all pitfalls in all countries.  However, a seasoned international transactor should work to mitigate unforeseen issues and seek local guidance and counsel from reliable resources.

Legal Issues

Every country has their own unique and at times puzzling legal system. Renewal rights, whether contained within a written lease or mandated by legal tradition within a country, can vary dramatically.  The legally binding nature of a proposal or even spoken word can have different meanings in different parts of the world.  Subordination and non-disturbance concepts may not be important.  The legal differences between countries are endless.  International transaction managers must understand these differences and focus on the important legal points typically associated with the country working within during their negotiations.

Typically, most countries do not negotiate leases as extensive as the U.S. and tend to use “form” leases prepared by the landlord. As a result clients may push back and not rely on the use of a professional outside real estate attorney.  Real estate attorneys may not be as prevalent as in the U.S. However, when used they can be expensive and there is a tendency for international clients not to use an attorney or to use an in-house attorney who may or may not have an expertise in real estate law.

International transactors should not be expected to understand all local laws, but international transactors should understand local legal traditions and advise their clients on the need for competent legal assistance if required. Recommendations on local legal resources should be made available to clients.

Management / Outsourcing Issues

The most important aspect of outsourcing is making sure you have the right local broker resource on your team, an outline of project scope for each party is defined, and expectations on fees and fee splits are understood by all parties including the client.

U.S. based international transactors need to develop relationships with foreign “country managers” within their own firm. Country managers typically assign a local broker resource.  The international transactor needs to understand the experience and skill level of the assigned broker.  If the broker does not have the necessary qualifications, the transactor needs to request a different resource from the country manager or seek an outside resource from a competitor.  The transaction manager needs to put the needs of the client first and use the best local resource available.

Second, the scope of work needs to be clearly defined on what the responsibilities of local broker and the transaction manager will be. Typically all local market surveys, tours, and negotiations are the responsibility of the local broker and the financial analysis and attaining internal client approvals lie with the transactor.  However, this can vary and needs to be defined.

Lastly, the amount of fees, fee splits, and who pays the fees must be understood. Although changing somewhat, outside of the U.S., most landlords do not pay commissions and fees are typically the responsibility of the client/tenant.  Typically international clients like their fees to be incentivized, meaning they will pay a higher amount for what would be considered a better outcome.  Fees are typically not as great as fees for similar leasing commission within the U.S.  Fee splits toward the local country broker within your firm may also be higher than fee splits within the U.S.

In summary, the international transactor needs to bring the right resource to the table for each client and define the scope of work and fees anticipated at the beginning of the project.

Practical Issues

Lastly, part of the role of international transactors is to make managing transactions easier for their clients. Several practical issues such as time zone, currency, language, and communication must be recognized and resolved.  Transactors must be flexible and be willing to address projects 24 hours 7 days a week.  The client team will appreciate not having to tackle these issues head-on.