Summary: The transition of professional and educational activities into the cloud has suddenly accelerated, which bodes well for digital infrastructure assets such as fiber-optic cables. With millions of people newly-working from home and using cloud-based applications to do so, more data is being sent through fiber-optic cables. This is turn is driving demand for greater bandwidth, a trend that we see continuing in the future. As a result, MRP is adding Long Digital Infrastructure to its list of active investment themes. |
A cliché often used by property experts is that the three most important factors in determining the desirability of a property are "location, location, location". While this may be true for real estate companies that lease office space, it is not true for the segment of the real estate industry that leases fiber optic cables. Both benefit from the growth of the “desk job”. But while one thrives in a world where the workplace is centralized, the other thrives in a world where the workforce is becoming decentralized.
A Different Type of Commercial Real Estate Asset
A fiber-optic cable, also known as an optical-fiber cable, is similar in assembly to an electrical cable, except that it contains optical fibers through which pulses of light are sent. The light transmitted forms an electromagnetic carrier wave modulated to carry information. Fiber-optics have become the preferred transmission medium to handle aggressive bandwidth demands, which is why the use of cloud-based applications, audio-video services, and video-on-demand services are strong growth-drivers for the sector. The global fiber optic cable market is expected to expand at a CAGR of +10% between 2020-2026.
While not technically real estate, fiber optic cables, are often owned by property investment firms which then lease them out –- much like office or retail space –- to users, typically telecom companies. Because the Internal Revenue Service (IRS) treats income from such leases as property income, some real-estate investment trusts (REITs) have built up large property portfolios comprised of these cables.
Shift from Corporate Office to Home Office
One of the characteristics that marked America's shift from a manufacturing economy to a service-dominated economy was the proliferation of so-called white-collar jobs performed within an administrative setting. That shift fueled the growth of real estate companies dedicated to owning and managing office property. For these companies, the game is all about securing a physical structure in an attractive area and then leasing the space to commercial tenants. The more central the location and the greater the number of workers that can be supported at that property, the more rent the property owner can charge, everything else being equal.
The above model, which has benefitted office property REITs, is being disrupted by yet another transformation: the digitalization of the service economy through cloud computing. In turn, cloud computing has fast-tracked the decentralization of the workforce by making it easier than ever for people to work from home. Thus, the transition from corporate office to home office has begun.
The “Railroads of the Future”
In our March 26 report, we wrote about how the nationwide shelter-in-place orders have forced more businesses to operate via the cloud, thereby boosting data center REITs. That same shift, as it turns out, is generating more demand for fiber optic cables. David Guarino of Green Street Advisors recently explained to the WSJ why this is the case.
“Within large offices, data is often sent around through internal networks. When people work remotely and do much of their work over cloud-based applications, they send more data through fiber cables.”
So, the more people work remotely and use cloud-based tools like Zoom video or Microsoft Team to engage with each other, the larger the amount of data that has to be transmitted, and the greater the need for increased bandwidth via fiber optic cables.
The lockdowns forced a great telecommuting experiment on the world and has changed many attitudes about the efficacy of remote work. After the lockdowns have ended, thousands of companies will likely fully embrace a remote work culture, or they will adopt a hybrid model. In any case, the use of cloud-based applications will grow, and more data will get transmitted via fiber-optic cables than before the COVID-19 pandemic, delivering a win to this obscure segment of the real estate industry. The upcoming transition to 5G is another positive catalyst for this sector.
One REIT executive sums up the opportunity as follows: “These are literally the railroads of the future.”
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