Do you believe in the old saying "it's always darkest before the dawn?" If so, you might be the optimistic owner of real estate fitted out for telecommunications companies, so-called server farms and telco hotels. These properties currently are in a struggle to survive while waiting for the recovery of telecom companies -- firms which, unfortunately, continue to downsize.

Telecom facilities currently have a vacancy rate of 39 percent nationwide, according to Grubb & Ellis Company's Telecom Group.

"Although the market is currently saturated with telecom facilities, the long-term outlook for the telecom-related real estate market is far from bleak," said Mike Gerard, executive vice president and national director for Grubb & Ellis Telecom.

"Landlords and tenants that can gauge supply and demand characteristics and stay on top of this market today will be well-positioned to play a key role in this sector over the long term."

Let's hope so. After all, landlords have invested millions to outfit properties for telecom operators. Grubb & Ellis found 56 million square feet of commercial space dedicated to telecom functions. Most of this property was either built or converted within the last four years.

There is some "good news." Vacancy levels for these properties are down significantly from the first quarter. In the second quarter, vacancies ran more than five points lower than the astonishing, depression-like, 44.6 percent posted in the first quarter.

The "good" news comes with a caveat: Although the decline in telecom vacancy levels during the second quarter looks good, Grubb & Ellis warns that it does not actually indicate an improvement in market demand. Rather, the drop reflects tenants who had pre-leased space in previous quarters and moved into their spaces after construction was completed or upgrades were made.

In most major markets, vacancies for telecom properties exceed 30 percent. In comparison, the nation's office and industrial vacancy rates were 11.5 and 6.7 percent respectively for the second quarter.

Amazingly the situation may get worse.

An additional 5.4 million feet of telecom space is under construction, with only 18.5 percent of it pre-leased -- which means 81.5 percent will have to be leased in a market already saturated with competing properties.

And astonishingly, another 6.4 million feet is planned, but will be difficult to rationalize unless metropolitan vacancy rates fall below 10 percent. Surely developers will get a clue before breaking ground and these properties will not be started for years to come.

The now overbuilt market has shut down the development pipeline. It will take a considerable amount of time -- years perhaps -- for the excess to be absorbed and the market to reach equilibrium. With the evaporation of venture capital and poorly capitalized telecom companies, it's unlikely that demand for space will equal that seen in 1999 and 2000 anytime soon.

Yet telecom industry insiders are optimistic for the future -- at least, for the distant future.

"Over the long term, there is strong potential for growth and big profits," Gerard said. "Telecom companies are the utility companies of tomorrow -- there will always be demand for telecom services, especially as telecom products advance and grow.

"Telecoms backed by solid capital will continue to grow and take space, as evidenced by the continued strong performance of several blue-chip companies," he added. "Government agencies and companies from other economic sectors, including energy, finance and insurance, will also become players in the telecom market, as they upgrade their technology infrastructure and integrate their operations."

Despite these positive comments, it's tough to take a 39-percent vacancy rate in stride. Savvy telecom real estate owners are already looking for lower-tech, alternative uses for their wired facilities. Unless, of course, they're willing to wait out an extremely-long lull in the telecommunications storm.

For more articles by Lesley Hensell, please press here.

Published: August 29, 2001

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Lesley Hensell covers commercial real estate and financial issues for Realty Times. Based outside of Dallas, Lesley works with high-tech and real estate clients as an independent marketing and public relations consultant. She also writes for several publications, including the Dallas Morning News. E-mail Lesley at: lhensell@earthlink.net