Among the most followed business stories of last week was the humbling admission from Apple that the iPhone 4g included a “totally wrong” formula for calculating the number of “reception bars”. Apparently the phone works, just not if you're holding it (something now known as the “grip of death”). The immediate, virulent, nerdy but surprisingly sophisticated response by iPhone consumers to the glitch – a youtube search reflects more than 400,000 videos posted about the three-week old product – is reflective of the enormous importance of wireless computing in our culture. Blackberrys, palms, iPads, iPhones, smartphones and netbooks are critical business tools for millions - and, as anyone that’s ever lost their Blackberry signal during a conference call can tell you - users’ expectations are for information access that is cheap, consistent and unlimited.
In the real estate market, this demand is manifesting itself through continued growth of data centers as a stable asset class for real estate developers, investors and lenders. Data centers are facilities used to house computer systems, servers and components. My IT guy tells me it's where the internet is actually located (sort of). Design necessities - including HVAC, fire suppression, security systems and (especially) power supply considerations – drive exceptionally high construction costs. Environmental concerns among image-conscious corporate tenants are driving builders to produce “green data centers” (i.e. low carbon, energy efficient) – one of the fastest growing sectors in this niche. But with reports of demand outpacing supply by 3-4 times, these properties are being built - and that requires capital.
Financing data centers presents some challenges to traditional real estate bankers – because the real economics often lie in the technical services and ability to turn a profit on power, data centers are not simple dirt to understand, underwrite or operate. The underlying leases are highly technical (how many megawatts in a terawatt?) - depending on service and power needs, rental rates can run into hundreds of dollars per square foot. Negotiation of subordination, non-disturbance, and attornment agreements ("SNDAs") can be volatile - tenants will not (can not) go without networking access for even an hour while a lender decides whether to cure a landlord default. Much of the core equipment (generators, for instance) is built per spec - often overseas. This can be headache for domestic lenders and requires an understanding and a good amount of know-how on foreign collateral issues. Attornment agreements with third-party service providers - the people that actually make sure the servers are up and running - need to be put in place. Confidentiality and security considerations may limit lenders' rights to access the property. Changing technology requires almost constant replacement, reconfiguring and innovation - making reserve requirements very difficult to underwrite.
But, in a world where Steve Jobs can sell 1.7 million in three days, exploding demand for information storage facilities will continue to present unique opportunities for lenders that can get these deals done.