Silicon Valley REIT Mulls $1.8B Deal

Mission West Properties (MSW), a real estate investment trust that operates more than 100 research and development properties in Silicon Valley, is in talks to be acquired by a private equity fund for about $1.8 billion. The company’s largest tenants include Microsoft Corp. (MSFT), Apple (AAPL) and NEC Electronics America. Mission West manages 107 properties totaling about 7.7 million rentable square feet. If the deal goes through, it would be the largest commercial property sale in Silicon Valley history, as measured by square footage.

Mission West announced the negotiations in a press release Saturday, but did not name the potential acquirer. But media reports identify the bidder as Starwood Capital Group, a Connecticut-based real estate investment firm. Under terms of the deal, holders of Mission West common stock could receive $13.55 per share in cash, which is below Friday’s closing price of $13.69, as well as the $14 to $15 range for the company’s shares between February and June. Any acquisition would be subject to a due diligence review and regulatory and shareholder approval.

While Mission West’s focus is on R&D properties, the deal could also have implications for the data center market in Silicon Valley. Retrofits of existing industrial properties are the fastest way to bring new data center space online. In recent months there have been a series of deals in Santa Clara involving projects to convert existing industrial or R&D sites into data centers to meet the strong demand, with buyers including CRG West, Behringer Harvard and Pelio & Associates. Mission West also owns several parcels of vacant land in the Valley that might be of interest for building new “greenfield” data center projects.

Three Santa Clara Data Centers Sold

Real estate investment firm Behringer Harvard has acquired the Santa Clara Tech Center, a three-building complex on 22.8 acres in Santa Clara. Behringer Harvard paid $70 million for the property, which it called “one of the most desirable locations for data centers in the Silicon Valley.” The complex includes facilities located at 700, 750 and 800 Central Expressway, which total 456,000 square feet of space.

The deal reflects real estate investors’ growing interest in the data center sector, and especially the opportunities provided by conversions of existing industrial properties into premier data centers.

Two of the buildings at Santa Clara Tech Center are leased to Hitachi Data Systems, Japan’s largest electronics company. Behringer Harvard plans to convert the third building, 800 Central Expressway, into a data center to capitalize on strong demand for data centers in Silicon Valley. A previous tenant made “extensive interior and exterior improvements” that will aid the conversion process, the company said.

Data Center Market Strong in Bay Area

The strength of the data center real estate market in Silicon Valley has caught the attention of the San Jose Mercury News, which used CRG West’s recent acquisition of a development property in Milpitas has an opportunity to explore the broader data center recovery. The former MCI data center at 1656 McCarthy Boulevard stood empty for six years before being bought by CRG in December. An excerpt:

“This (demand for data centers) is a reaffirmation that Silicon Valley will remain at the heart of technology growth in California,” said Jameson Agraz, a CRG vice president, who is marketing the Milpitas center. It’s a lucrative place to be. While prime office space in downtown San Jose is about $2 per square foot per month, Dunn said space in a data center rents from $15 to $30 per square foot per month. Even at that price, it took just nine months for CRG to fully lease its newly opened 16th floor data center at Market Post Tower in downtown San Jose last year. “Do we think this is a gamble? Absolutely not. The forecast for the next 24 months shows demand is rising,” Agraz said.

Data center deals in the Valley are becoming more competitive. One potential buyer said last week that they’ve been looking at opportunities in the Valley, but have been outbid several times in recent months.

Some ISPs Spurn 10 GigE Video Peering

Some ISPs are turning away paid high-speed transit traffic from video companies, citing the cost of the equipment needed to upgrade to 10 gigabit Ethernet connections. These ISPs are sticking with slower connections, even though the growing volume of video traffic could create periodic capacity challenges. This trend was noted earlier this month by Bill Norton, a founder of Equinix and leading researcher on Internet peering, who predicts that the surging popularity of online video will bring “a new wave of disruption that potentially dwarfs currently peered Internet traffic.”

“This has become a significant issue NOW because a few of the largest US ISPs are turning away these n*10G Internet video transit customers,” Norton said in a post in the North American Network Operators Group (NANOG), which prompted a lengthy discussion of online video’s impact on network capacity. The topic has become even more relevant in light of the potentially disruptive impact of the peer-to-peer IPTV app Joost (The Venice Project) and NetFlix’ announcement that it will stream full-length feature films.

Several providers, including Equinix, say video growth is driving strong demand for 10 gigabit Ethernet connections, high-capacity pipes that enable providers to move enormous volumes of traffic. But the volume of traffic generated by online video is altering the economics of these connections. In some cases, the financial benefits of big-pipe peering don’t offset the short-term expense of network upgrades needed to support 10 gigabit Ethernet equipment. While the parties can continue to peer over existing connections, the growing volume of video traffic could stress networks and affect performance.

365 Main Unveils Further Expansion

365 Main Inc. continues to expand its network of data centers, adding two facilities in California markets where existing centers are nearing capacity. The San Francisco-based company today announced the acquisition of a facility in Oakland, Calif. and plans to construct a new data center in Vernon, Calif. (Los Angeles market) to meet continuing strong demand for data center space. The announcement comes as the company has sold out its flagship facility in San Francisco and as its El Segundo, Calif. data center, which opened in June 2006, is nearing capacity.

On Tuesday 365 Main closed on the acquisition of an 111,000 square-foot Oakland data center near Jack London Square, which includes 80,000 square feet of technical space with a 30-inch raised floor. Metro PCS Wireless Inc. and T-Mobile USA are existing tenants in the property, which was built in 2001. 365 Main is investing in additional infrastructure for power, cooling, connectivity and security at the property, which is less than 10 miles from 365 Main’s original San Francisco data center. 365 Main says demand for the remaining space in Oakland is significant, and the first lease for a private colocation room has already been signed by GNi, a California-based managed services provider that provides support services for 365 Main tenants and leases space at most of its facilities.

“The demand for high-quality data center space in the San Francisco Bay Area is the greatest in the country, and we’ve simply run out of room at our San Francisco facility,” said Chris Dolan, chief executive officer of 365 Main. “Expanding to Oakland fits all our criteria: existing demand, existing tenants, good location, well-defined pipeline. It’s a strategic move that makes sense for our business, and we look forward to becoming part of the Oakland community.”

Terremark Gets $27M for Expansion

Terremark Worldwide, Inc. (TWW) has obtained $27.25 million in financing from Credit Suisse to buy data centers in Silicon Valley and the Washington, D.C. market and complete the build-out of its current Silicon Valley facility, the company announced today. Under terms of the deal, Credit Suisse will purchase the two properties and lease them to Terremark, while providing the company with a $13.25 in financing in the form of a lease commitment. Terremark will later have the option to buy the properties from Credit Suisse at the original purchase price plus accrued interest.

“We are excited to have this financing in place, which will allow us to move forward with our expansion strategy and leverage the significant customer demand we are seeing in these two markets,” said Manuel D. Medina, Chairman and CEO of Terremark Worldwide, Inc. “With this funding we can begin contracting with both new and current customers for the two facilities, which will provide a solid foundation to lower our cost of capital as we secure the balance of the financing.”

Savvis Will Build 4 New Data Centers

Savvis (SVVS) today announced plans to develop four new data centers to help meet customer demand for its managed hosting and colocation services. The new facilities will be located in Atlanta, New York, Washington, DC and Santa Clara, Calif., and should be open to customers in the fourth quarter of 2007.

The announcement comes on the same day that Savvis announced the sale of its content distribution network to Level 3 for $135 million, which provides Savvis with a financial warchest to invest in new data centers. Savvis said it anticipates spending approximately $200 million in 2007 to fully develop the four centers, and said it has executed lease agreements for each of the sites, one of which is contingent upon certain conditions expected to be met in January 2007.

“SAVVIS is focused on delivering IT infrastructure as a service and we’re committed to being a leader in this space,” said Phil Koen, SAVVIS’ Chief Executive Officer. “Our new data center facilities, opening in the fourth quarter 2007, will provide customers with state-of-the-art managed hosting and colocation services, including our industry-leading virtualized utility services.”

DataPipe buys San Jose Data Center

Managed hosting provider DataPipe has bought a data center in San Jose, Calif. from AboveNet, the two companies said today. The deal is similar in concept to AboveNet’s recent deal to sell three data centers to Digital Realty Trust, with AboveNet selling the facility while continuing to provider services to the customers. DataPipe and AboveNet said they have developed “a comprehensive transition plan” to ensure that customers experience no interruption in service.

“Our customers will have two experienced companies working together to meet their needs,” said Bill LaPerch, President and CEO of AboveNet. “Customers will continue to work with AboveNet to meet their networking requirements for private optical networks and IP services utilizing AboveNet’s vast fiber optic network and extensive solutions experience.”

“From a strategic perspective, this transaction is consistent with the continuing evolution of AboveNet as a company with a laser focus on fiber-based connectivity solutions,” LaPerch added. “This includes our new data center to data center service, dcXchange, that delivers high performance connections between prime data center locations in both these markets.”