Report Challenges Overcapacity 'Myth'
Lehman: About 43 million s.f. is active for telecom usage

June 20, 2001 -- Recent reports have overstated the amount of vacant space in the telecom real estate market, according to a new study from Lehman Brothers and Cushman & Wakefield.
The report, titled "Refuting The Overcapacity Myth," also said pricing is holding firm in many markets, and predicted a speedy recovery for the industry once the available carrier hotel space begins to be absorbed.
Although up to 77 million square feet of space has been targeted for telecom usage, only about 43 million square feet is "active and available for lease," according to Lehman analyst Harry Blount, who co-authored the study.
The remaining 33 million square feet "is unlikely to be put into telecom real estate use in the future, and has been incorrectly emphasized in other market studies," according to the report.
The new data follows by a month the release of a study by Grubb & Ellis citing a telecom vacancy rate of 44.6 percent. The real estate firm's telecom group said it had catalogued 46.5 million square feet of commercial space devoted to telecom, of which 20.7 million square feet was vacant.
"The most important question is not how much space is out there," said Blount. "We found a lot of real estate out there. But where is the space? How good is the space? Now that demand has slowed, do you have an operator who can market the property?"
Once those factors are weighed, the pool of competitive telecom real estate space is greatly reduced.
"The realistic oversupply is much smaller than people think," Blount added. "When demand does pick up, it will be absorbed faster than people expect. The ability to bring new capacity online is limited."
According to Lehman's data, the 43 million square feet of working telecom space is 72 percent leased. Leasing rates are above 80 percent in both New York and Atlanta, while Boston and Los Angeles trail with leasing rates of 60 and 56 percent, respectively.
When the additional 33 million square feet of non-working telecom space is included, the national vacancy rate reaches 60 percent - even higher than in the Grubb & Ellis study.
The data suggested that markets have seen substantial overbuilding. Chief among them is Boston, where Lehman found 2.8 million square feet of active telecom space, and nearly 4 million square feet of inactive or repurposed telecom space.
The top eight markets proved to be the most fertile territory for telecom projects. In those markets, nearly 60 percent of the space was classfied as "active," as opposed to just 46 percent in the rest of North America.
Blount said these secondary markets offered opportunity, but a limited opportunity. "You probably have room for one established data center player in each of these markets, and maybe two," he said. "But not three."
Blount also said that reports of broad erosion in leasing rates were not supported by the research. "In a lot of the established, more mature buildings, lease rates are holding steady," he said.