Telecommunications facilities are suffering as dramatic industry cutbacks have drastically reduced real estate demand.

At the close of the first quarter, vacancy rates for telecom facilities stood at nearly 45 percent, according to a study by the Grubb & Ellis Company (NYSE: GBE). Telecom facilities are defined as carrier hotels, co-location facilities and data/cyber centers more than 75 percent dedicated to these uses. The minimum size for facilities considered in the study was 20,000 square feet.

By comparison, the national office vacancy rate at the end of the first quarter was just 10.1 percent, while the industrial vacancy rate was a low 6 percent, according to the firm.

Regardless of the incredible glut of available telecom space, more is under construction or in the planning stages. About 5 million square feet of telecom facilities are now going up, with 3.7 million square feet yet to come.

In total, the Grubb & Ellis telecom market database tracks 46.5 million square feet of commercial space devoted to telecommunications functions. Construction of these telecom facilities began increasing exponentially with the Telecommunications Reform Act of 1996, which unleashed a flood of new communications carriers and service providers.

But the past 18 months has seen a radical restructuring of these companies, resulting in layoffs, office closings and scaled-down business plans.

"The long-term trend for these properties and this market is really quite favorable," said Mike Gerard, executive vice president and national director of the Grubb & Ellis Telecom Group. "These properties are well-positioned in an industry segment that is only in its infancy."

Demand for telecommunications services could very well pick up as high-speed broadband access becomes more available. Several real estate firms, in fact, are speeding along this process by forming coalitions to encourage adoption of broadband technologies.

"Demand for this space will be reinvigorated as broadband technologies become mainstream. Although external factors like the capital markets and the financial health of the telecom sector will impact how quickly new services will be rolled-out, there is no doubt that there will be a resurgence in the demand for telecom space," Gerard said.

Annual asking rents for telecom space covered in the Grubb & Ellis study ranged widely, from $5.25 per square foot to $45 per square foot. Rents for properties at the low end of the spectrum were industrial facilities that were obsolete previous to being reconfigured, but still have use issues with column and floor size.

"For owners and investors, however, there are considerations and choices to be made in light of the current soft market conditions," Gerard said. "Landlords who marketed their properties as telecom facilities prior to making significant tenant improvements may want to re-market their facilities for conventional uses. However, if the significant investment to reconfigure the facility has already been made, it may be necessary to give the market some time to settle out."

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Published: May 17, 2001

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