What the Sale of 111 Eighth Avenue Means to the Data Center Market

Much has been made of the news that 111 Eighth Avenue is on the market for sale and many of our clients have been asking what this means for the New York data center market.  First off,I would like to dispel some of the misinformation and myths  that are out there regarding the building,then I will touch on what I think this building means to the NY Metro data center market.

Myth #1:111 Eighth used to be a major “telco hotel,”but now it is primarily an office building know for its creative use tenants.

The Truth:111 Eighth is the premier office building in the Chelsea submarket,and one of the top office building in Midtown South.  Google is the largest and most prominent tenant in the building and is believed to have the right of first offer on nearly all of the available space in the building. The building is one of only 2-3 Class A office buildings in Chelsea and has developed a cache due to its proximity to the Meatpacking District and its hip tenants like Google,Deutsche and others.

However,111 Eighth is,and for the foreseeable future will remain,the premier “Carrier Hotel”and data center building in Manhattan.  About a quarter of the tenants in the building are data center tenants,and the ecosystem that exists in this building,providing interconnection between over 40 major carriers and many smaller carriers is without compare.

Myth #2: All financial data center users are moving to NJ to be closer to the exchanges,get cheaper rent and electricity,and have more room to grow.

The Truth:Yes,large financial data center users are moving their major facilities to NJ,but that does not mean that they don’t have a need to be part of the interconnection ecosystem that 111 Eighth offers.  A commenter on the DataCenter Knowledge website mentioned “Financial companies are moving their data centers out of 111th 8th as the main routes change (exchanges move) and more direct paths are available – namely between Mahwah (NYSE),Carteret (NASDAQ),Secaucus (ISE,Direct Edge,CBOE2,BOX),and Weehawken (BATS) – and also to/from Chicago. So for this reason alone,demand for data center space in 111 8th will continue to decline.” The truth is,that as he mentioned,these various exchanges are in different places,so if you want to connect to several of them your best bet is a facility like 111 Eighth Avenue where you can get to all of them.  In fact,in the case of the NYSE,there is no direct path to the facility (unless of-course you lease collocation space in the building itself for high-frequency trading). To connect to the NYSE,you must go through their SFTI network. And where do you connect to the NYSE’s SFTI network? In major carrier hotels like 111 Eighth,32 Avenue of the Americas,60 Hudson,165 Halsey,etc.

Myth 3: Given the cost of running a data center in Manhattan,and the risk in doing so,data centers in Manhattan are a dying breed.

The Truth:While we do not forecast a net increase in data center space in Manhattan,we do not expect that data centers in Manhattan will significantly decline.  In fact,demand for data center space in Manhattan is very strong,particularly for collocation space. Why? There are 3 main reasons,1) Some small users just want to be close to their servers,we affectionately call them “server huggers”2) latency issues and interconnectivity issues and 3) Because of a lack of supply of quality space.  Throughout the country data center users are replacing their old,low density,outdated facilities with brand spanking new data centers. However,this is not so easy in Manhattan.  The building stock is mostly very old,and tall buildings with lots of tenants on busy city streets are tough to upgrade.  Old data centers in NYC are subject to insurmountable building constraints,like poor floor loads,low ceilings heights,old power infrastructure,lack of room for generators and infrastructure equipment,lack of vault space,etc,etc. So what is the solution?  . . . survival of the fittest.  We expect that the buildings that cannot meet the needs of modern data center users will lose their tenants to the buildings that can.  If this proves to be true,111 Eighth (which has none of these drawbacks) will be a BIG winner.

So what does this all mean?

We believe that 111 Eighth Avenue is a great purchase opportunity for an experienced data center/carrier hotel owner/operator.  An astute purchaser will see the inherent value in great tenants with excellent credit (like Google),and data center tenants (with tenants of their own) and infrastructure that is nearly impossible to move.   This purchaser will take any opportunity that presents itself to bring in more power,offer up vacant space for data center users,increase rents and capitalize on the building’s unique infrastructure.  Tenants will be drawn from inferior buildings,and ultimately will be held captive in long term leases at high rates.  Of course,if all else fails,the building is in a fantastic location and will continue to be in high demand from creative office users looking for large floor plates in a quality building.

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