As America embraces digital business, connectivity is the ultimate long-term play. That’s why carrier hotels have become strategic assets in the data center industry, and the focus of investment and merger activity.
This trend was reflected in the recent deal, where Macquarie Infrastructure Partners (MIP) acquired a major stake in Netrality Data Centers. The former is an operator of carrier hotels that are multi-tenant data centers located in central business districts of major cities, serving as critical connectivity hubs. The deal closed on August 30, 2019, when the management of Netrality Data Centers partnered with Macquarie Infrastructure Fund IV to acquire the company from its previous owner Abrams Capital Management.
Carrier hotels were hot commodities in the early days of the data center business, providing facilities to tie networks together in the largest financial centers. During the rise of cloud computing, much of the industry’s focus shifted to huge server farms in remote areas offering economies of scale for massive server deployments.
The term ‘carrier hotel’ dates back to the Telecommunications Act of 1996, which paved the way for competitors in the telephone and Internet business to get access to the network by colocating infrastructure within the Bell companies’ facilities. A shortage of access and trust prompted a new strategy by newcomers: leasing space in buildings adjacent to the incumbents’ central offices in major cities. Dozens of carriers and network operators soon purchased space inside buildings like 60 Hudson Street in Manhattan and One Wilshire in Los Angeles, eventually coining the term ‘carrier hotel’.
Carrier hotels became the early cornerstones of the Internet economy, and also became some of the most successful properties in the colocation industry. A key piece of its business model is the meet-me room, a common area where providers can make connections between its networks. Interconnection facilities can be operated by building owners, non-profits, or commercial service providers.
Success in carrier hotels doesn’t hinge on new models or reinventing the wheel, but instead on the execution of known strategies that require time and investment. Netrality Data Centers, for example, focused on upgrading the infrastructure and connectivity within meet-me rooms to keep pace with advances in interconnection facilities at service providers. This propelled large infrastructure firms like MIP to hone in on the opportunity in carrier hotels.
The Netrality Data Centers deal builds on an active period of M&A and investments to expand capacity at carrier hotel properties, reinforcing the relevance of these assets. Here’s a recap of the recent developments:
- In April 2019, American Tower bought ColoATL, a colocation and meet-me room business in downtown Atlanta. They deemed the investment an opportunity to evaluate connected colocation as a future growth opportunity.
- Equinix acquired the Dallas Infomart for $800 million last year, and is investing an additional $138 million to incorporate a second building at the property. The company is also committing $60 million for an expansion of the NAP of the Americas in Miami—the primary carrier hotel in south Florida, which it acquired from Verizon in 2017.
- DataGryd has recently completed a new space within 60 Hudson Street, the most prominent carrier hotel in Manhattan.
- A 2018 renovation at One Wilshire, the leading carrier hotel in Los Angeles, brought infrastructure upgrades that will add up to 28 megawatts of power capacity for the 30-story building.
Cloud on-ramps are an early example of how urban network hubs will play a growing role in the future of the network. The movement to create ‘Smart Cities’ is a huge potential driver of data movement within major cities over the longer term, as is the emergence of autonomous vehicles. Smart cities integrate information technology into the fabric of city life by using analytics and sensors to better manage them and make urban life safer, more efficient and sustainable. Early adopters are already deploying networks of sensors and devices to lay the groundwork for more ambitious smart infrastructure ahead.
Data centers are expected to be major beneficiaries of the emergence of smart cities, which will require ample connectivity, data storage and compute power for analytics to crunch all that data. This demand will be augmented by autonomous vehicles, which are the equivalent of supercomputers rolling down the highway, generating and transmitting a mind-boggling amount of data—up to 4 terabytes per day, per car.
Carrier hotels will serve as the lynchpins of these urban data ecosystems, creating both a challenge and an opportunity. Many carrier hotels are old buildings that were originally designed as skyscrapers for office tenants, rather than purpose-built data centers. Since adding more power or cooling capacity in these buildings is difficult, some of these buildings have struggled to keep up with the evolution of data center workloads and interconnection.
New investments, however, can address this challenge and equip these buildings to serve a rich ecosystem of low-latency applications. And that’s Netrality Data Centers’ strategy—the firm expects to implement “a very ambitious expansion plan” with its new backing from Macquarie Infrastructure Partners.
In a similar fashion, American Tower describes its purchase of ColoATL as a beachhead in the interconnection business. The move has enabled the Boston-headquartered telecom tower specialist to evaluate the colocation market and the role it could play in the company’s expansion strategy.
With large investors targeting the carrier hotel opportunity, established data center operators are working towards ensuring long-term access to key infrastructure. In recent years, Equinix has acquired the Dallas Infomart and NAP of the Americas, two large carrier hotels that serve as gateways to Latin America.
Most analysts see the $800 million sum that Equinix paid for the Infomart acquisition as a rich valuation for an asset with $50 million in annual revenue. Equinix operates four major data centers within the building, and wanted to cement its position in the Dallas market.
All this activity narrates a clear story: Carrier hotels will continue to be key strategic assets in the future of the data center industry.