Are You 5G Future Ready?

Fall 2016

In the next five years, 5G connectivity will go from being a desirable amenity to a market necessity.

THE WAYS IN WHICH people use commercial real estate are changing. The fact that digital native millennials are driving these changes is widely accepted, but the supporting wireless infrastructure for this connectivity and collaboration is often overlooked by everyone except the “big carriers,” AT&T, Sprint, T-Mobile and Verizon.

The transition from third-generation (3G) to fourth-generation (4G) mobile networks enabled the pervasive use of iPhone and Android smartphones. The 5G rollout will change how people communicate, live and work in ways that may not yet be understood. In the next five years, 5G connectivity will go from being an amenity to a market necessity. It will become even more important as millennials make more real estate decisions, and as other technologies are commercialized for personalized medicine, online learning, autonomous vehicles, retail and the Internet of Things (IoT).

How will 5G differ from earlier mobile networks? For some perspective on this big data wave — as well as on the amounts of data that are being used now and will be used in the future, as shown in the graph on page 18 — consider how long it takes to download a two-hour movie:

  • 3G: 26 hours.
  • 4G: six minutes (yes, minutes, not hours).
  • 5G: 3.5 seconds (yes, seconds, not minutes).

As these networks evolve, wireless connectivity is expanding exponentially.

As the smartphone market has matured, carriers have begun looking to add growth from alternative revenue sources, such as the use of tablets, laptops, digital media players like Apple TV, wireless TVs and watches. Data, music, videos and other media, as well as “sponsored data” — basically commercials — will all need to be delivered to subscribers on the go. This is the driving factor for 5G networks and additional cell site locations. And 5G is closer than you may think: Verizon is currently testing it in five U.S. markets, and AT&T is testing it in at least one Texas city.

For commercial real estate owners and especially property managers, this creates risks and opportunities. The carriers have a real estate challenge in juggling their coverage and capacity. Coverage is a matter of location, while capacity involves managing a finite amount of federally licensed spectrum. The rents and fees that the major carriers will pay in the course of deploying the next generation of wireless infrastructure will create challenges and prospects for owners and managers, as well as their communities.

Keeping Up

Search rings — the areas within which the carriers place cell towers — will become smaller for 5G service, since the equipment must be located closer to the user. Expect to see 15- to 20-foot-tall microtowers covering areas less than a quarter to a half mile in diameter. According to Tom Wheeler, the chairman of the Federal Communications Commission, who refers to 5G as “wireless fiber,” the “5G buildout is going to be very infrastructure intensive, requiring a massive deployment of small cells.” Each microsite will require its own electricity and fiber-optic service, whether it is a specialized structure or installed atop a building, utility pole or street light.

worldwide wireless data usage chart

If you’re a property owner or manager, how will you get your building ready for these 5G networks? How will your local private and public sector leaders get your market ready? Building out wireless infrastructure takes a significant amount of planning and development. Because of restrictive zoning laws and local opposition, it can take months or even years to deploy. Communities not preparing for this will be left behind, as carriers will focus primarily on first-tier markets.

Those in secondary and tertiary markets may need to reach out to carriers themselves by creating their own public-private partnerships. With $90 million in private money already pledged, the city of Columbus, Ohio, edged out cities like San Francisco, Portland, Austin, Pittsburgh and Denver to win the U.S. Department of Transportation’s Smart City Challenge in June 2016. The city will receive up to $40 million from U.S. DOT and up to $10 million from Paul G. Allen’s Vulcan Inc. to reshape its transportation system in ways that make use of data, technology and creativity.

New Opportunities

Wireless infrastructure is a new type of asset class, one in which technology and real estate intersect. It has typically been undermanaged by building owners and managers because most of the market information is controlled by the carriers.

In the last 10 years, many original ground telecommunication leases executed 20 to 30 years ago have been expiring. They were written when simply talking on a flip phone was expensive, well before people began streaming video, audio, photos and other data on their smartphones. Single-tenant, proprietary cell towers have been sold off to specialty REITs, allowing carriers to recapitalize and spend billions on upgraded equipment, federal spectrum auctions and content providers such as AOL and DirecTV. Almost all towers now host multiple carriers, each under a separate lease. Because of standard termination clauses that add uncertainty, building owners often face a challenge in leveraging tower rents with lenders, making these types of assets difficult to finance.

Additional income opportunities exist. Auditing and reviewing current leases often uncovers missed rent escalations or overlooked breaches and terminations that present opportunities to renegotiate and update leases to market terms. Tower sites can be actively marketed to carriers, both for additional equipment on existing installations or to add a new carrier.

This also presents monetization opportunities, in the form of the ability to sell a wireless specific easement along with an assignment of any carrier lease and rents on the site. In contrast to tower rents, which are taxed at higher ordinary income tax rates and often ignored by lenders and appraisers, a transaction involving a wireless specific easement qualifies for capital gains tax rates and IRC Section 1031 deferral.

Making the Leap

Wireless infrastructure is a key part of the puzzle for the carriers. 5G brings new opportunities for building owners, communities and dark fiber operators (those that have optical fiber infrastructure already in place but not yet maximized). It will enable them to generate rents and capital events from what are otherwise undermanaged, non-core assets, whether by signing a lease with a carrier or selling a wireless specific easement. Becoming 5G future ready for gigabit connectivity is a chance to both strengthen your market and your building.