Lack of connectivity is real estate's hidden time bomb

28 Mar Lack of connectivity is real estate's hidden time bomb

When it comes to real estate acquisitions, many smart investors have turned to taking their money from the stock market and have invested it into REITs (Real Estate Investment Trusts). Some of these groups have provided 20 to 50 percent returns to their investors. These are great returns on investment, but are there any hidden time bombs lurking behind the marble facades and talking elevators?
What many of these acquisition groups fail to look at are the technology issues associated with buildings. The due diligence and appraisal process are on the traditional side of real estate:
• Location, location, location.
• Occupancy rates.
• Financial models.
• Other generally accepted rules-of-thumb that have not really changed in the last 20 years.
Attending last week’s Building Automation Conference in Baltimore was not an eye-opener, it was a reaffirmation of technology infrastructure concepts learned throughout the last 20 years. These concepts were learned while working on the basic concepts of intelligent buildings as well as mission critical projects and large-scale lawsuits.
With real estate being touted to investors as the fourth asset class after equities, bonds, and cash, there needs to be some real due diligence performed on power and connectivity issues when evaluating real estate properties. If we put up a different yardstick that measures the capabilities of both power and connectivity, would we still have the same results of appraisals on buildings?
Antiquated power grids
There were some interesting points about power that should be mentioned. Almost all buildings are fed from a single power grid, which creates a single-point-of-failure issue. In terms of business disruption and continuity, the power grid is more of an issue than terrorism.
One of the presenters, Dr. Shalom Frank of Pareto Energy, Ltd., said the power grid in the United States is antiquated and that 94 percent of the power failures can be attributed to distribution. In one case in California, he said that a raccoon and a possum were the cause of power being cut to oil refineries that in turn disrupted refinery production that caused gasoline prices to jump seven cents a gallon.
The new approach for buildings as well as business campuses should be one which incorporates two or three power sources instead of one grid. This might cost more upfront but would create a much more valuable property as well as differentiate it from properties that have used the traditional approach, which is obsolete.
Pareto cited several issues that necessitate the need to innovate the power grid:
• No improvement delivered efficiency in 40 years.
• Little use of digital technology.
• Grid has no early warning system for disruption and cannot “self-heal.”
• Unacceptable environment and global climate impact.
• American high-tech companies have lost faith in grid power for digital-age commerce.
He went on to cite a 2006 study by the SteelEye Technology Business Continuity Index that said almost half of the American IT companies say power outages are likely to have a maximum impact on their businesses. By comparison, only one percent cited terrorism as a concern for IT downtime.
So a common local outage or power disruption is 50 times more critical to plan for, then that lone EMP bomb that some are trying to ensure they are insulated from.
Power, as well as connectivity, has become more of an upfront issue for master-planning instead of an afterthought once the tenant has moved in. Any new construction should have serious upfront consideration of power requirements and connectivity. These attributes should be addressed as part of the pre-built infrastructure.
As for commercial and industrial real estate that is already built, the need to review and assess these attributes is essential in appraisal processes because if they are overlooked, they can become huge detriments for the property owner and manager. New rules-of-thumb have to be created as well as adopted by all real estate professionals: property managers, leasing agents, site selection teams and everyone else.
What is the value of having feeds from two different power grids as a building amenity versus the liability of having a single power grid creating a single point-of-failure within a property? How do you adjust the leasing when amenities like this are lacking? How do you adjust the total value of the property?
Building cable and icebergs
Just like an iceberg, building cabling problems are 95 percent underneath the surface. You may see something wrong, but as they say, “it’s only the tip of the iceberg.” Just like with the power utility, the horse-and-buggy approach to network connectivity was one connection to the phone company’s one central office. Most developments still use this out-of-date rule, but it should be discarded.
In mission critical applications like the Chicago 911 Center or the Chicago Mercantile Exchange, connectivity to more than one central office is a given. But with all organizations so dependent on connectivity today, the new rule-of-thumb should be connectivity to at least two central offices, as well as multiple long-distance carriers.
It’s not overkill today as much as it is being compliant with mission critical objectives and business continuity. Again, have appraisals for buildings and campuses even reviewed this as a value attribute that determines the worth of the property?
At the conference, the focus of my presentation was that economic development equals broadband connectivity, and broadband connectivity equals jobs. With that being said, the design requirements of both connectivity as well as power must be pushed into the upfront planning process instead of being reviewed later when tenants are moving in.
Connectivity for stand-alone buildings as well as intelligent industrial parks and business campuses is skyrocketing to gigabit per second speeds. Organizations are looking for more and more speed as their business must compete globally and 10Gbps speeds are now starting to be upgraded to 40Gbps as a connectivity standard.
Real estate owners beware
If your property has DSL or T1 as the basic speed for connectivity, you probably are still driving a stagecoach. And if you aren’t now, that’s about all you’ll be able to afford to drive as tenants move to buildings offering higher speeds. Maybe you will decide to switch to a public storage facility as the market will pass you by.
There were studies made 20 years ago that buildings that did not keep up would become technologically obsolete. Some real estate people have not heeded that warning and are now scrambling for intelligent amenities that they do not have.
CARLINI-ISM: “Location, location, location” has given way to “location, location, connectivity.”
Copyright 2007 – James Carlini
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