Telecom Ramblings article by Rob Powell.
Undertaking a large development in any major city is daunting, especially when the development is as complex as a data center. However, complicated doesn’t mean impossible, and a new entrant with local real estate expertise thinks they have found a unique way to crack it. Metro Edge Development Partners (Metro Edge) is preparing to kick off the buildout of IMD1, an exclusive five-story data center to be located within the Illinois Medical District, just two miles west of the central business district of Chicago. With us today to talk about the project’s past, present and future is Metro Edge Co-Founder and CEO Craig Huffman.
TR: What’s your background and how did you get involved with Metro Edge?
CH: I was born and raised on the south side of Chicago, the son of two educators. By the time I was 27 I realized I wanted to own a little something, and I went to business school. I have been an entrepreneur for 20 years. I started my career in commercial real estate and for the last 15 years with private equity. For one of those funds, I had bought a 100,000-square-foot flex industrial building in Schaumburg, IL that happened to have a small data center in it. Because we also oversaw operations and all of the tenant communication, over time it became clear that this was one of our better tenants because they were very self-sufficient. It really planted a seed for me. After I sold my last business in 2020, I wondered what was going to be next. I had some people approach me about different ideas, Metro Edge being one of those ideas, and I jumped in.
TR: What opportunity did you see?
CH: There was a group of tech guys that were trying to start a containerized edge data center company. The real estate part was where they were weak, and they appreciated that I had experience on the data center side. Initially, I was just an adviser, and before I knew it, I was a partner. As I realized the company was heading in the wrong direction, I began looking for new opportunities, and the Illinois Medical District emerged as a site. We met a CIO at a hospital, who began walking me through the district, and I realized that a traditional data center in the medical district could be interesting. So, I began looking for all the things that have to be present: is there a site to build on, is there power, is there fiber? It was 2020 when we were all stuck in our houses due to COVID, so I was doing a lot of this from a desktop analysis. When one of the partners asked me to take over as CEO, I made the decision to launch a new company focused on the traditional data center, which is now Metro Edge Development Partners, and leads our $250M development project in the Illinois Medical District.
TR: So, tell me about IMD1. What is it you envision building?
CH: IMD1 will be a newly constructed 20 MW+ data center that is vertical in design. Once we concluded that there was power, fiber, and space we started the process of evaluating where the customers would be. Because healthcare has undergone tremendous transformation on the digital side, it really just all kind of lined up. The site itself came from a meeting with the Illinois Medical District. And it was their opinion that if we were going to allow a data center, this location is where they would want to see it. We evaluated the feasibility, and then we began a plan to execute a lease. Simultaneously we were also having conversations with prospective customers. Hospitals and other healthcare institutions confirmed that an on-premise data center would certainly be interesting, because many of the larger hospitals were running data centers on-prem and they weren’t doing the best job of it. And because of the latest push for AI, sometimes it’s better to be lucky than good because our design lends itself to AI business plans.
TR: Why a vertical design?
CH: Traditionally, hyperscalers and other data center operators have looked at suburban footprints. Urban is historically more expensive because you don’t really have the land to go horizontally. In our case we have less than two acres, so we have no choice but to go vertical in the design. But now with AI, the vertical design is actually more advantageous. Latency is a component due to the fiber runs. The overly simple reason is that there’s a shorter run from floor to floor when it’s vertical versus when it’s horizontal.
TR: What is it like building in Chicago and the surrounding metro area? What are the regulatory hurdles like?
CH: It’s very challenging in Chicago to do new construction development. The best way I can say it is that it’s not the friendliest. You really must have an understanding of the local politics and the priorities of the mayor’s office. When we started, the city of Chicago wasn’t sure if they wanted to support a data center because they weren’t sure data centers would create enough jobs. Our counter was to inquire how many jobs are being created by the vacant land that exists there now. Our entitlement process took over a year and cost us $3.2M. We had to get signed off by a lot of different city departments. That in and of itself is a barrier to entry and is another reason why a lot of firms have looked suburban. Particularly in cities like Chicago, even after receiving approval and commencing construction, there are instances where groups might become involved, requesting employment or other incidents that might not be prevalent in suburban areas.
TR: So where are you on getting the other key items like space, power and fiber lined up?
CH: Fiber was easy. There is plenty of diversity on the fiber network side, and so that was a box we could check early on. Power was key. You have to get confirmation on that before you even start. We had to pay a large fee to ComEd to confirm the power and begin engineering the vaults necessary to deliver the power. We initially thought there was a substation in the footprint of the IMD, but it was actually slightly outside. We also negotiated a 100-year ground lease, which is a slightly different structure than a lot of real estate developers will pursue. Ground leases are often deemed to be less attractive than fee simple ownership. The perception is you have more control of your destiny with fee simple ownership than if you structure a ground lease. When you’re putting $250 million into a site, the idea of not owning the land initially is hard to stomach, and so what you have to negotiate if you are going to do a ground lease is a sufficient term length. The Illinois Medical District will still own the land 100 years from now, but 100 years is enough for investors to be comfortable with the repayment time. We also negotiated things like exclusivity for building a data center inside the Illinois Medical District.
TR: What types of customers do you foresee targeting?
CH: We’re in active negotiations with two prospective anchor tenants. We had an anchor tenant, but they are suffering through a tough time right now, and we had to back away from them in December of last year. Healthcare customers are certainly logical. We have over 40 healthcare institutions within a mile of our site. But as of the last two months, we’ve been approached by a hyperscaler that is interested in our site for an AI business plan. From our standpoint, we see two paths as viable from an anchor tenant: an AI business plan where a hyperscale group takes the entire deal, and also more of a cation or managed service provider taking a substantial portion of our building and really targeting all of the healthcare institutions. Many of them are running on-prem data centers. I know of one that is using tarps to keep leaking pipes from dripping into the servers. Healthcare needs new data centers, but they haven’t been able to prioritize the investment in running world-class facilities on-prem because of the limited resources. Your average hospital has a profit margin of less than 5%. It’s tough for them to dedicate those resources to the tech side if you need basic operating supplies like beds, gowns, and other things that board members and employees expect the hospital to prioritize.
TR: Have you had much success in talking with healthcare institutions?
CH: Yes, we’ve had several of the larger hospitals sign up. The problem has been that they need a hybrid approach. Certain applications can run in the cloud, and certain applications are better suited to run on-prem. Until recently, we didn’t have a fully-fledged solution on the cloud side of our business model; we had a model that would offer services inside of our building.
TR: So, what is the timeline for IMD1?
CH: Our plan is to break ground this year. We’re currently negotiating with two viable anchor tenants. The best offer will likely win. I would say that 60 or so days after that, shovels will be in the ground. After that, you can put a core and shell up in less than 12 months, but to do a full build out of a first phase the schedule is going to depend on who your customer is. Our floors are 4.6 MW per floor. We have four floors of data hall and one floor of common space. If someone needs 10 MW on day 1, that’s going to front load our build in ways that it might not for someone who wants 2 MW on day 1 and then the rest of the floor a year later. The phasing is very important when you’re building a data center because you don’t want your new capital to get too far out in front of your revenue.
TR: Looking beyond IMD-1, do you foresee being able to replicate this project in other markets?
CH: Yes, we would like to look at other markets. I think it’s important to understand the characteristics that have supported our success to date. I think our location was passed over by some of the larger groups. They viewed it as the west side of Chicago and dismissed it. Chicago is perceived as a high risk market due to its urban environment.
But one of the things I did was to negotiate an option to develop on the 2-acre site next to ours. In real estate our philosophy is that it’s better to have options than not. Here in Chicago, Wrigley Field is in a residential neighborhood. When the late Sam Zell bought the Cubs along with the Tribune, the first thing he asked was “Who’s the [bleeping] idiot that didn’t tie up all the land adjacent to this [bleep] ballpark? You should have known real estate is about the options.” Sam Zell was a real estate guy. Instead, people could go watch the games from the rooftops across the street. The owner of the Cubs had to spend millions to buy those so he could control his destiny.
TR: In the longer term, what segment of the overall data center market do you envision Metro Edge focusing on?
CH: We are merchant developers. Actually operating a data center carries a lot of risk and offers a much lower return. If you can build it where they want it, there’s a tremendous amount of profit that can be realized by designing it, building it, and selling it when it still has that new car smell. A group that doesn’t want to have to take the risk of arm wrestling with the city of Chicago to get entitlements would look at a group like ours and see that they can cut the line by a year. We want to serve an itch, and urban suits us because of our experience. Our DNA is on the real estate side, and at the end of the day that pushes us to focus less on being an operator and more toward the merchant developer space.
TR: Thank you for talking with Telecom Ramblings!
See original article posted here https://www.telecomramblings.com/2023/09/industry-spotlight-metro-edges-craig-huffman-on-chicagos-imd1-project/