Why Verizon's 48 Data Center Portfolio Will Probably Be Broken Up

NEW YORK CITY—Last week Reuters reported that Verizon Communications was exploring the sale of a data center portfolio that could trade for more than $2.5 billion. The company reportedly has  tapped Citigroup to advise on the sale. Verizon itself wasn't commenting to confirm or deny the report, not to Reuters and not GlobeSt.com, when we followed up with inquiries.

Given that, it could be easy to dismiss the news especially as similar reports surfaced last year followed by…well, nothing.

But this time may well be different. Citigroup is apparently on the scene now. Also, that "expected" price of $2.5 billion cited in the article has all the earmarks of a company floating a prospective deal in the media to see what kind of reception it would get in the market.

Unfortunately for Verizon, it is not going to market with the best hand -- at least the hand as described in Reuters.

For starters, Verizon has many more data center assets than 48, Rick Drescher, managing director of Technical Services at Savills Studley, tells GlobeSt.com. Which ones it plans to include in the portfolio is an open question, he says. "Data centers can become obsolete very quickly. I would guess that most of the assets Verizon is planning to market are not the kind of assets that a company like, say, Digital Realty would want."

Also, the location of the data centers will be key in determining the value of the portfolio -- and that too is an unknown, Drescher says. Some markets do not have the same high level of demand as Northern Virginia, for example.  In other markets the demand may be high, but not necessarily by the right client base for a particular data center. That is how the Washington DC-based REIT DuPont Fabros Technology explained its recent decision to market its NJ1 data center, which is located in Piscataway, NJ.

NJ1's location is best suited for more retail-oriented operations, CEO Chris Eldredge said in a statement. The REIT plans to exit the New Jersey market when NJ1 sells, he said.

Also, owning a data center does not automatically mean a company will become a player in the burgeoning cloud and cloud services market, as Verizon itself can sadly attest. The company had high aspiration of making inroads in this market but for various reasons had to shelve those plans.

All that is to explain Drescher's prediction for the Verizon portfolio. It is very unlikely to be acquired in one piece, he says. Rather, it will be picked over and the best assets will be the ones to sell on an individual basis. These assets, like all commercial real estate assets, will be valued according to their net operating income and what the market says is the proper cap rate. The end.

This story line will not come as a surprise to Verizon as it had a similar experience a few years ago.

Verizon marketed a portfolio of 20 or so buildings it described as "fit for data centers", Drescher says. "It didn't move the entire portfolio but a few, the best assets, did sell."