CHICAGO-Developers who are shedding core assets to fund headlong pushes into booming telecom hotel development are embarking on an very risky strategy, says the senior vice president of investments at the city’s largest industrial developer, CenterPoint Properties REIT. As financing for fiber-optic network build outs and other investments dries up on Wall Street, CenterPoint is concentrating on expanding relationships with clients it feels will weather the storm.

“The Wall Street money spigot has been turned off for many of these telecommunications companies,” says Jim Clewlow. “Developers who are shedding core assets to move into telecom hotel development are embarking on a very risky strategy. Our models show us that these projects aren’t as attractive on a risk-adjusted basis as many seem to think.”

CenterPoint is focusing on expanding its relationship with core clients like web hosting giant Exodus Communications. “These guys will be one of the players left standing after the skakeout,” says Clewlow. CenterPoint leases half its 100,000-sf headquarters building to Exodus, which just leased an entire speculative warehouse project near O’Hare from CenterPoint. Clewlow says CenterPoint is scouting for sites to build up to 400,000-sf of additional space for Exodus in the Chicago area and has just obtained permits for a 60,000-sf expansion of Exodus’ space at the REIT’s headquarters building.

Over the past couple of years, telecom startups by the dozen have been raising billions in equity and junk bonds to fund major expansion pushes. Much of the money to pay for telecom hotel development, and the huge rents these developments support, has come from this unprecedented telecom financing boom. But starting this summer, many of these startups began missing optimistic revenue forecasts and some have had to seek bankruptcy protection. Many junk bonds in the sector are now trading at 60 cents to 70 cents on the dollar and the ability to fund further network expansion is now in serious doubt.

In one of the most high-profile pushes into telecom hotel development, Canadian developer TrizecHahn has recently announced it will be selling $1 billion worth of properties across the US in order to fund a huge telecommunications development effort. The US operations of TrizecHahn, whose executives were not immediately available for comment, are based here.

Clewlow worries that there will be an oversupply of facilities designed for something that is no longer needed. “This has happened before in high-tech development, where huge sums are invested in improvements that are no longer needed,” he says. “Some of these telecommunications companies are pouring as much as $400 per-sf to $500 per-sf in capital improvements into these buildings. We are talking about massive investments here.”

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