When the Pinetree Group Inc., a New York-based real estate investment firm, purchased Albany's 11 North Pearl Street for $2 million in 1999, company president Jim Pastreich did not anticipate just how much demand existed for carrier hotels. After about $5.5 million in renovations, the building quickly found tenants who continue to rent more room. Telecom giant Qwest Communications International Inc. has three floors, its competitor Global Crossing Ltd. has two floors, while e-business service provider BiznessOnline.com has a pair of floors. Other tenants include Paging Network Inc. (PageNet) and TimeWarner Telecom Inc.
The demand for carrier hotels and the number of suitable older buildings around the U.S. has tempted large Wall Street investment firms to jump into the market. Earlier this year, Morgan Stanley Dean Witter, through its real estate investment fund, created two companies to acquire, develop, and manage carrier hotels around the world. MetroNexus, based in New York and Paris, will cover North America and Europe, while Global Gateway, based in Los Angeles and Hong Kong, will focus on the Pacific Rim.
"The key here is speed to market," says Alex Twining, president and COO, MetroNexus, North America. The quick growth of high-tech industries has created a demand that often exceeds the amount of space and electricity available. Fortunately, many older buildings, which may have sat empty for years, can be converted into carrier hotels in as little as three months' time, depending on their condition and amenities.
When the first carrier hotels were developed in the late 1980s, high-tech companies chose to keep the location of their equipment a secret to elude the competition and avoid possible attacks from vandals or terrorists. But today, high-tech companies prefer to join forces and house their equipment in the same location.
"A lot of these carriers interconnect with each other," says Joseph Suppers, president of Node Com Inc., a Princeton, New Jersey, firm that helps companies find space in carrier hotels. "They're trying to create a critical mass by being in one facility." Indeed, marketing materials for carrier hotels often list their tenants as well as nearby high-tech companies.
While part real estate and part high-tech venture, one of a carrier hotel's selling points is its location. In Albany, for example, 11 North Pearl Street sits near a large intersection of fiber-optic cables that connect New York, Montreal, Boston, and Buffalo. "Albany sits in the middle," Pastreich says. "That's what Albany's claim to fame was originally."