The Latest Real Estate Amenity: 1-G Internet Service
05.16.2017 | UrbanLand

The Latest Real Estate Amenity: 1-G Internet Service

The Record Plant in New York City was a cultural icon. A rock-and-roll recording studio in midtown Manhattan, it was where John Lennon’s Imagine and Bruce Springsteen’s Born to Run albums were recorded in the early 1970s. By this century, its glory days long past, the Record Plant was seldom used for recording, and it became just another outdated, semivacant ten-story office building. But today, it is again a symbol of a new generation—one marked by advanced technology.

Real estate investment firm East End Capital bought the 260,000-square-foot (24,000 sq m) building in 2012 and began modernizing the interiors to lure TAMI (technology, advertising, media, and information) tenants. Beyond open floor plans with glass walls and a glass-walled conference room located on the roof, one of the draws for tenants was installation of fiber-optic cable on every floor, providing internet bandwidth and connection speeds of one gigabit or more—a speed 40 times faster than standard broadband. Now the Plant, as it is called, is almost fully occupied and commands gross rents that are 50 percent higher than before the renovation.

The gigabit technology “definitely was a selling point,” says Jonathon Yormak, East End’s founder and managing principal. “It helps [with] getting firms in the building and retaining them. It’s one of those last little things that makes a difference.” The building was certified platinum by WiredScore.

Gigabit service is the next-generation advance in web browsing and data handling. Its widespread deployment in the United States only began this decade, so its availability is still limited to less than 15 percent of the population, according to industry surveys and the latest statistics from the U.S. Department of Commerce. But access is surging, with hundreds of companies now providing fiber connections, and availability of the “gig” is emerging as a development tool for cities and a competitive advantage for real estate properties offering it.

“This is an overnight revolution, a giant leap forward,” says Tom Reiman, president of the network planning and consulting firm Broadband Group and a member of ULI’s Community Development Council (Gold Flight). “For real estate, technology can become part of the culture of community development, and normally it has not been.”

Many Americans currently get internet service via telephone and cable wires, mostly copper, that have been in the ground for decades. Think of them as a pipe with a small diameter. But that pipe is not wide enough to accommodate the flow of today’s digital data, resulting in less-than-optimal internet service. The Federal Communications Commission’s standard for broadband downloading speed is 25 megabits per second, but fiber-optic networks that send data as pulses of light along strands of glass can accommodate multiple gigabits per second, with each gigabit equal to 1,000 megabits. Thus, one gigabit goes far beyond a marginal improvement in broadband in speed.

What does that mean? With the gig, web pages load instantly. Videos can be downloaded in ­seconds, not minutes. Giant business database files can be uploaded and shared in minutes rather than hours. Family members can watch internet TV, download a movie, play video games, and surf the web all at the same time on different devices with no slowdown. Offices can hold a single videoconference involving multiple locations without stop-and-start buffering. In short, gigabit service offers not just a faster speed, but also a much more reliable connection.

So the gig is generating buzz. It is the cool new thing—the latest “gotta have it” technology. Cities large and small are trying to boost their appeal with it. Real estate developers are making some project location decisions based on it. And managers of some commercial properties are adding it to improve retention rates.

When Mark Toro, a managing partner of North American Properties, was planning the mixed-use development that became Avalon in suburban Atlanta, he looked for ways to differentiate the residences, restaurants, retailers, and offices from the rest of suburbia. One way he chose was to create a walkable, dense urban-flavored commercial center. Another way was to make Avalon one of Atlanta’s first “fiberhoods” providing total one-gigabit service within the neighborhood. It cost in the “six figures” to do this, Toro says, but that is a fraction of the overall $600 million development cost.

As a result, Avalon’s first phase, which opened in fall 2014, has attracted companies that covet the gig. One is an architecture firm that often transfers its designs overseas: files that used to take hours at night to upload now take just minutes. Avalon, which was named 2015 Project of the Year by ULI Atlanta, now commands rents on multifamily housing that are one-third higher than those in the surrounding market and has retention rates that are higher than North American’s other U.S. communities, Toro says. He is now including one-gig fiber capabilities at all the company’s other Atlanta-area projects.

“I don’t think we’ll ever build anything else without it,” says Toro, the former Livable Communities Council chair for ULI Atlanta. “We are future-proofing our offering and differentiating ourselves in a new way.”

Growing Interest

Historically, every major advance in bandwidth has spawned innovation and improved convenience for web users. In the internet’s early days, even slow modems accelerated the growth of email systems. Faster dial-up service helped websites become more usable. Then early broadband rollout in the late 1990s permitted quicker sharing of relatively large MP3 music files, while later broadband advances allowed video streaming that gave rise to services such as YouTube and Netflix.

That helps explain the buzz about the gig. Internet network experts foresee the emerging gigabit standard creating a new generation of activities—an acceleration of virtual reality, telemedicine doctor visits via video, and applications that have not even been invented yet. As Kathryn Campbell, a partner with Los Angeles–based interactive marketing firm Primitive Spark, told the Pew Research Center for a 2014 report: “No question, bandwidth will play the same kind of transformational role in reshaping society that railroads and freeways played in our past.”

In the United States, though, internet speeds are still generally slow. The average U.S. internet connection speed has a data transfer rate of just 16 megabits per second, ranking 12th among 74 major countries across the globe, according to a third-quarter 2016 State of the Internet report by Akamai, a Massachusetts-based global network services provider. South Korea ranks first with 26 megabits per second.

Despite the need for faster speeds, the actual rollout of one-gigabit service is spotty across the United States. Telecommunications companies have offered packages for large commercial buildings, but gig prices for tenants that sometimes exceeded $1,000 per month limited its adoption. Then, beginning in 2012, Google Fiber disrupted the marketplace with one-gig service priced at less than $100 per month. This led to a flood of other new providers—some with exotic names like Monkey Brains in San Francisco and Wicked Fiber in Lawrence, Kansas—and also forced established telecom and cable providers such as AT&T and Comcast to make similar investments just to keep up.

Still, because the gig is not yet pervasive and prevalent, only a few studies have been conducted examining its impacts on a community or real estate values. However, some economic figures are available.

A 2014 report conducted for the Fiber to the Home (FTTH) Council Americas compared the economic growth of cities with gigabit service to that of comparable cities without it. The study, by the San Francisco–based Analysis Group, found that communities where at least half the households had access to the gig experienced 1.1 percent additional growth in gross domestic product because of additional investments, job gains, labor productivity, and other efficiencies.

Researchers at the University of Colorado and Carnegie Mellon University in 2015 explored whether residential gigabit availability boosted housing prices. Analyzing thousands of home sales in census blocks with gigabit service and those with 25-megabit-per-second broadband speed, the study found that single-family homes with gigabit service had a 6 to 7 percent higher value than comparable homes without it.

Meanwhile, surveys have been conducted to determine where advanced high-speed internet ranks in importance among housing and office amenities.

RVA, a Tulsa, Oklahoma–based telecom market research firm, last year surveyed online more than 4,000 residents of single- and multifamily housing for the FTTH Council Americas. Among apartment renters, “very high speed” and reliable broadband ranked as the most important amenity, above an in-unit washer/dryer, covered parking, and a swimming pool, among other things.

Similarly, WiredScore, a New York–based company that offers certifications of internet connectivity for commercial buildings, conducted an online survey in 2015 of 440 office site selectors and tenants in a variety of businesses. It found that for office workers, connectivity was by far the most important factor influencing their office experiences, above such factors as transportation and dining options.

“There’s a noticeable shift in the marketplace as tenants are demanding the fastest level of service,” says John Meko, WiredScore’s director of engineering. “The gig is becoming a necessity for commercial offices.”

Yet, these surveys also suggest that internet connectivity is not well marketed or explained to prospective tenants and residents.

“Some owners/operators don’t yet fully appreciate the importance of advanced broadband to consumers and don’t place enough priority on marketing this amenity,” RVA president Michael Render concluded in his survey analysis.

Economic Development

Some municipalities—even several small towns—have been ahead of the curve on gigabit service. Rather than wait for telecom or cable companies to reach them with ultra-high-speed broadband, these cities developed their own fiber networks with gigabit capabilities in order to boost their economic development prospects. And in many cases, it worked.

In Wilson, North Carolina, about 50 miles (80 km) outside Raleigh, a company named Exodus FX created a movie special effects studio in the city because of its one-gig network. In Morristown, Tennessee, contract furniture manufacturer Oddello Industries added 228 jobs, with the company’s chief executive citing “reliable utilities” from the municipal gigabit network as part of the reason for the expansion. And Lafayette, Louisiana, earned the nickname Silicon Bayou after its municipal gigabit network began attracting company expansions such as digital consulting firm Perficient’s software development center.

But two larger cities in particular—Chattanooga, Tennessee, and metropolitan Kansas City, Kansas/Missouri—represent the vanguard of what the gigabit revolution can mean for early adopters.

In Chattanooga, the municipal electric utility EPB built a citywide fiber-optic network with one-gig speeds as part of a smart-grid investment to modernize and increase the reliability of its power system. With the network’s completion in 2010, Chattanooga was dubbed the original Gig City and became an instant hotbed for entrepreneurs and data-oriented corporations, ranging from an Uber-like on-demand moving service to a Spanish auto parts manufacturer. Downtown Chattanooga now has a 140-acre (57 ha) Innovation District that houses startups and business accelerators that did not exist a decade ago, along with a real estate development firm Lamp Post Properties, which is focused on tech companies and their employees.

Lamp Post Properties, part of a venture capital group, has taken on six building renovation projects in the Innovation District during the past year and a half, providing offices for advanced startup companies and even 39 micro-unit apartments for people employed by startups. All the projects, totaling 300,000 square feet (28,000 sq m), are scheduled to be completed by this summer, says chief executive officer Tiffanie Robinson.

“We’re a small southern city—we’re not New York or San Francisco—so having something like the gig helps level the playing field and gets us noticed more than we would otherwise,” says Charles Wood, vice president of economic development for the Chattanooga Area Chamber of Commerce.

Meanwhile, the same year that Chattanooga completed its network, Google challenged U.S. cities to enter a competition to become the site of the company’s first one-gigabit fiber-to-the-home service. From 1,100 applicants, Google chose metropolitan Kansas City, made up of two cities split by the Kansas/Missouri state line. Google was drawn to the cities’ mixture of older and newer neighborhoods, along with the city governments’ willingness to streamline permit approval processes.

In the years since, Google Fiber has expanded to just about every urban neighborhood in metro Kansas City. The area has attracted startups and tech innovations ranging from a cloud-gaming platform developer to the Cisco Systems Smart+Connected Communities initiative, which will build out data-tracking public sensors. Rick Usher, assistant city manager for entrepreneurship and small business for Kansas City, Missouri, has counted more than 120 companies that moved to Kansas City primarily because of Google Fiber, and at the end of 2016, metro Kansas City topped the nation in one ranking of business growth, published by Philadelphia-based consulting firm Wendover Corporation.

When West Coast multifamily housing development veteran Scott Richardson and a partner established their own company, they wanted to start their first project somewhere in the central United States. They settled on Kansas City, Missouri, in 2014 because of its downtown arts district, a downtown streetcar line then under construction, and Google Fiber. Last summer, Richardson’s Linden Street Partners opened its first project—a five-story, 44-unit concrete-framed downtown apartment building. It is located near the streetcar line, and every tenant signed up for gigabit service.

“It was a big selling point that differentiated us from older buildings,” Richardson says of the gig.

Challenges Ahead

Despite its growing popularity, gigabit service still is in the proving stage regarding whether the cost is really worth it to the tenant or resident. After all, it is doubtful that most people can notice the split-second difference between opening a typical web page at one gigabit rather than 50 megabits per second.

When Brookfield Residential opened its New Haven single-family residential development outside Los Angeles last fall, it was one of the few new-home communities in the metro area offering gigabit service. But Brookfield officials found it was not a determining factor in purchasing decisions.

“Prospective buyers aren’t distinguishing between cities or residential communities because of the gigabit,” says Derek Barbour, Brookfield director of land entitlement and New Haven project manager.

In the future, though, one-gig service will be increasingly important in order to keep up with upcoming technology advances, such as 4K television and video content, which requires five times the bandwidth of high-definition TV, and fifth-­generation (5G) wireless networks, which are expected to have speeds about ten times faster than those of 4G devices. So Google Fiber’s announcement last fall that it was temporarily halting its nationwide expansion is considered by many industry analysts to be just a pothole in the road to widespread gigabit deployment. Some industry analysts already see major providers shifting to become private operators of municipal broadband networks (as is happening with Google in Huntsville, Alabama) or to step up to high-grade wireless delivery instead of buried fiber. AT&T, for one, expects to triple the number of households it reaches with its gigabit fiber offering by 2020, spanning 67 metro areas.

Still, new tech innovations always have their challenges and pitfalls. Just last year, for instance, a Google startup called Sidewalk Labs led a partnership to begin replacing old payphones in New York City with information kiosks that provided charging stations and a free one-gigabit internet browser, but the project cut off the browsing after discovering it was being used in some cases to view pornography.

For nationwide one-gig deployment, the challenge is more salient: how long will one gig last as the speed standard before becoming obsolete? Ten-gigabit service is already popping up in spots across the country, such as at corporate business parks in Pleasanton and Fremont, California. The extra bandwidth is seen as especially useful for such processes as 3-D printing, film production, and university research.

Nevertheless, Eric Small, AT&T’s vice president of commercial and connected communities solutions, says, “A gigabit will be the standard for a while.”

Going forward, therefore, more real estate developers and property managers see gigabit service as a looming investment decision. That is the case with Chicago-based Waterton, which has a portfolio of 55 multifamily residential communities across the country. The company is adding one-gig capability at its Presidential Towers high-rises in Chicago and at another property in Houston this year. Barney Pullam, Waterton’s vice president of business process, insists that the gig is an investment that must be made to keep properties up-to-date.

“We as property owners need to offer services that stay ahead of the curve,” Pullam says. “The gig is going to be the standard. People are going to want a gig and expect a gig, and you better have it.”