Growing Pains for Cities Appear as New Economy Matures

Downtown office vacancy rates are at all-time lows, leasing rates are rising, and your city is increasingly a hub for business activity. Even the old, historic structures have been rehabbed and are at capacity. Sounds like dreams for most urban economic developers, right? For a growing number of communities, however, meeting these goals is leading to “New Economy ghost towns” devoid of the foot traffic, night life, and other human activity necessary for a thriving community. Retail, service and even private parking garages are complaining that the New Economy is killing their businesses.

During the past two years, buildings dedicated almost entirely to housing the telecommunications infrastructure critical for the New Economy have appeared everywhere. Commonly called “telco hotels,” these facilities serve as shared warehouses of fiber-optic cable and telephone wiring for co-locating telecommunications, data firms, Internet service providers, Internet incubators, and other dot coms.

Older, often-historic structures seem to be especially appealing sites for telco hotels because of their sturdy brick/concrete construction, high-ceilings, and central location in the heart of a region’s power grid. Closed shopping malls and movie theaters also seem to hold a special charm for being transformed into telcos because they can handle the heavy switching equipment. These same structures are present in large numbers in the urban core of most American cities and have been difficult for many urban economic developers to refill. As a result, the initial reaction of many local governments and media has been enthusiastic. Building owners are also thrilled because most telecom space rents at the same rates as prime class A office space and, although they are called telco hotels, most telecom tenants plan to stay for a very long time. Some examples of the growth:

• The City of Chicago contributed $8 million in tax-increment financing for a $36 million redevelopment project of a 280,000 sq. ft. building for a telco hotel, the Chicago Information Technology Exchange. 
• Among the several other telco projects underway in the city that are up for tax increment financing and other aid is a 1.2 million sq. ft. former Montgomery Ward catalog distribution facility just south of the loop. 
• Another 1.5 million-square-foot facility is being converted in a 23-acre neighborhood redevelopment district.
• PHTI, a private telecom company, has announced plans to develop telco hotels in 36 empowerment zones in 25 states plus the District of Columbia.
• One-third of a 34-story building in downtown Dallas has been converted to a telco hotel. Half of a neighboring 26-story building is dedicated to telecom equipment instead of offices.
• More than 2.5 million square feet of telco hotels are open or under development in Phoenix.

Because telco hotels require very few people, though, most problems arise when there are too many occupying prime downtown office space or clustered together into several blocks of “virtual wasteland.” Space occupied for telco hotels in Los Angeles has grown from 700,000 sq. feet in 1998 to 1.9 million in 1999 and nearly twice that figure estimated for 2000. Half of LA’s telcos are downtown, creating problems for the urban economic developers trying to increase foot traffic in the area to support restaurants, theaters, stores and services.

Some cities are beginning to respond with zoning and use restrictions. For example:

• The Sacramento City Council approved a new law requiring a special permit from the city’s planning director for all buildings in which 25 percent of the space is used for telco or switching operations. Arguments for the new ordinance were to maintain higher employment densities to support existing retail and service operations.
• In October, the planning director of the District of Columbia requested the council consider zoning changes to restrict telco development north of Union Station.
• City officials in Los Angeles proposed development of an interim ordinance restricting telco development to a special district and requiring ground floor space remain dedicated to retail and commercial use.
• Voters in San Francisco narrowly defeated a ballot measure that would have suspended high-tech office development in many neighborhoods and banned it altogether in others. The measure lost with 49.8 percent of the vote. Another measure doubling office space availability over the next year to deal with exploding lease rates but not dealing with the telco moratorium lost by a much larger margin.
• In August, it was report that the Oregon Historical Society was selling a historic 160,000 sq. ft. structure in Portland for $12 million to a developer for conversion to be a telco hotel, joining several other telco hotels in the area. According to reports, the building is one of the “last and most stately unredeveloped historic buildings” in the neighborhood. As a result, the Portland City Council held a working session on Tuesday night to develop a strategy to deal with neighborhood leaders cries for a moratorium on telco hotels or, at least, tighter rezoning and design controls.
• The Playhouse Square Foundation in Cleveland sold a 215,000 square foot building in the heart of the city’s theater district to become a telco hotel. The foundation required in the sale that the first floor of the building house an arts and education center and other people-oriented activities.

While a glut of telecom space is expected to occur eventually, the current market leaves real estate analysts seeing no near-term end to the explosive growth of telco hotels, meaning more local economic development officials across the country may be facing the same issues in the near future.