New Telecoms Race to Serve Smaller Tenants

Southern California office buildings have become a battleground in the quest to capture the millions of dollars per year in new revenue generated by explosive growth in tenants’ demand for telecommunications services.

Companies offering phone lines as well as high-speed data and Internet services are in the midst of installing millions of dollars’ worth of new telecom wiring in the region’s office buildings, often in alliances with landlords who stand to share in the telecom revenues in exchange for allowing the providers to wire the buildings.

In downtown Los Angeles, for example, both Citicorp Center and Two California Plaza are being wired for telecommunications by two relatively new providers that have identified office tenants as their chief target market.

The buildings still offer telecom services through traditional providers, but landlords say the new companies offer tenants a broader choice of providers while giving landlords a chance to share in revenues.

Landlords are jumping on the bandwidth bandwagon in hopes of reaping profits from the burgeoning demand for Internet access, high-speed data lines, traditional telephone service and such emerging technologies as video conferencing, according to Santa Monica-based real estate attorney Paul S. Rutter.

The broader range of providers offering these services ultimately should mean better service and lower prices for tenants, according to Bruce Asper, regional leasing director in Los Angeles for Jones Lang LaSalle, a brokerage and real estate services company.

The growth in the number of providers is especially advantageous to smaller tenants, said Carlos Sanson, general manager of Los Angeles operations for New York-based OnSite Access Inc., a privately held company formed in 1997.

OnSite is one of a handful of providers that focus on smaller tenants--defined roughly as those renting 25,000 square feet of space or less--because they believe those tenants have been underserved by conventional telecom providers.

Rutter, who wrote a report last year in the industry journal Real Estate Issues on the intersection of real estate and telecommunications, said the rush to sell services to tenants has prompted a growing number of building owners to form alliances with these new telecom providers.

Southern California’s biggest owner of office space, real estate investment trust Arden Realty Inc., has signed a deal with New York-based Eureka Broadband to wire 150 office buildings, or about 15 million square feet of Arden’s 19-million-square-foot Southern California portfolio, said Scott Lyle, manager of telecommunications services for Arden.

Eureka has wired about 50 of Arden’s buildings and is expected to finish wiring the remaining 100 by July, Lyle said. In exchange for permitting Eureka to wire the buildings, Arden received warrants in privately held Eureka and will also receive a share of the revenues Eureka captures in the buildings.

Such companies focus on smaller tenants because bigger tenants generally have been better able to obtain telecom services--partly because they tend to have on-staff technical departments and partly because they have more money to fund expenses such as special wiring.

“This is a whole industry that has just popped up in the last couple of years,” Lyle said, noting that competition among the new companies has greatly intensified in recent months as they vie to get their wiring into office buildings in major U.S. cities.

OnSite, for example, has wired 17 buildings in Southern California and has contracts to wire a total of 100 buildings comprising 25 million square feet, or an average of about 250,000 square feet per building, according to Sanson. Among the landlords with which it has contracts are Canadian firm TrizecHahn, for whom it is installing new copper and fiber-optic wiring at Citicorp Center in downtown Los Angeles, and Jamison Properties, owner of 5.3 million square feet of office space in 23 Koreatown properties.

Sanson said OnSite targets small to medium-size businesses as a big potential source of revenue because it believes traditional telecom companies have focused more on larger tenants.

Dallas-based Allied Riser targets similar businesses, according to Doug Morgan, the company’s vice president for real estate, who said the company was established in 1996 to capitalize on what it considers “a huge opportunity to bring a unique set of services to small and medium-sized office tenants.”

These smaller tenants account for almost half of the high-speed data business in the United States, Morgan said. He said most of these tenants are in a half-dozen business categories: accountants and financial services firms, lawyers, securities brokerages, insurance companies, engineering firms, and research and management firms.

Allied Riser is wiring Two California Plaza in downtown Los Angeles as part of a nationwide wiring contract for owner Equity Office Properties, Morgan said.

Morgan said Allied, like OnSite, is wiring buildings for TrizecHahn. He said it’s not unusual for landlords to allow more than one company to install its wiring in an office building to give tenants a choice of service providers.

Allied is focusing on fiber-optic cabling for high-speed Internet and data lines because that’s where it expects the most growth in demand, Morgan said. OnSite’s Sanson said his company installs both new copper wiring and fiber optics, focusing on voice and data lines. Both provide much more telecommunications capacity than is required today because tenants who don’t ask for high-speed lines today may want them in the future.

Allied and OnSite are among a handful of competitors nationally who are vying to wire the nation’s office buildings, according to Morgan and Sanson.

The chief reason more competitors haven’t joined the fray is that entry costs are high. Wiring an office building usually costs at least 50 cents per square foot--or about $100,000 for a 200,000-square-foot building, they said. Other companies, such as Winstar and Teligent, have been courting landlords to provide broadband service through wireless technology. Those companies pay landlords for the right to install rooftop antennas.

“More and more, telecommunications comes into play in lease negotiations,” said John Anthony, an office broker with Charles Dunn Co. “Tenants want to know if the building has high-speed data lines and Internet access. It isn’t just the Internet firms that want it, it’s all kinds of businesses.”

Attorney Rutter estimated that telecommunications revenue-sharing agreements generate about 25 cents per square foot per year of additional income for landlords--or about $2,500 per year for a tenant renting 10,000 square feet of space.

“It’s not a windfall, but it’s revenue that doesn’t cost the landlord because the telecom company bears the cost of installing the wiring and operating the system,” Rutter said.