El Segundo joining downtown as a computer storage market: with Web 2.0, demand has increased for co-location facilities.

One Wilshire in downtown Los Angeles looks like an average office building from the outside.

But on the inside, many floors show no trace of cubicles or conference rooms. Just rows of machines, humming loudly as Internet users visit Web sites. It's the physical location for the gear of cyberspace.

Downtown may be better known for its condo conversions, but it's still a leading center for "server farms"--now known as co-location facilities such as One Wilshire.

El Segundo is also becoming a hot spot for the sector. A cluster of data centers has formed in the city, and activity is growing at a healthy pace. That's happening due to a city wiring project that allows cost savings for companies setting up facilities there.

Many of the early co-location sites went bankrupt and their data centers were closed after the tech bust. Today, as YouTube, MySpace and other Web 2.0 success stories emerge, Internet traffic doubles every year and requires high bandwidth to operate. So the co-location industry is on a roll again. Almost all of the closed data centers have been reopened and are functioning at full capacity, and conversions and new construction are increasing though demand far outweighs supply, industry analysts said.

"We are seeing the growth realization that people projected in 1998 and 1999," said David Dunn, senior vice president of Los Angeles-based CRG West, a subsidiary of the Carlyle Group, which owns and operates One Wilshire. "It just took a few more years than expected."

Growth this time around is far healthier and more diversified than it was during the boom, when companies were creating co-location facilities without the tenants to fill them, said Daniel Golding, vice president of Minnesota-based industry research firm, Tier 1 Research.

Southern California is the second largest market by number for co-location facilities next to Silicon Valley because of the strong presence in L.A. of entertainment companies and Asian carriers, according to recent statistics by Tier 1 Research.

In and around Los Angeles, and to a lesser extent, San Diego, demand for data center space is up 5.8 percent between the second half of 2006 and the first half of 2007, and up 137 percent since the first half of 2002. Supply is up only 31 percent since the first quarter of 2002.

Funding for these projects isn't what it used to be, said Miles Kelly, the vice president of marketing and corporate strategy for San Francisco-based 365 Main Inc. which maintains two co-location buildings in the Los Angeles area.

"Everyone has fresh scars from the '90s that have kept funding for this market in check," he said. "Before you can get funding you need documentation of demand."

The cost of creating a colocation facility is high. Construction costs $800 to $1.000 per square foot when building from the ground up, said Dan Walker, vice president of Forest City-based Equinix, a co-location company with a strong presence in Los Angeles.

Finding the right space is an additional challenge. In Los Angeles, the original data centers were downtown, said CRG's Dunn.

"Until 1984, everything happened at the Bell Central office about two blocks away," he said. "All phone lines to everywhere in the United States connected there."

Then, as the Internet boomed in the 1990s, new communication data centers came to the area. Today, El Segundo has become a site of choice.

In the 1990s, the City of El Segundo installed fiber infrastructure that runs to downtown servers in order to attract technology companies. That means co-location companies don't have to pay the price to make the connection themselves, said Aaron Wangenheim, president of San Francisco-based Base Partners Inc. and a veteran of the first round of co-location build outs.

He recently purchased his first L.A.-area co-location facility in El Segundo, although it has yet to open.

"El Segundo makes permitting as easy as possible." Wangenheim said. "That isn't true with a lot of cities because these centers don't create a lot of jobs. But they also don't bring a lot of street traffic."

When he was considering a place for a Los Angeles location, he looked all over the county. "You need increased clear height and column spacing, so a lot of what is downtown like the old garment buildings, become a problem," he said. "We looked in the Santa Clarita area but it was a long way to connect fiber, and it is very hard to find a 100,000-square-foot building in the Valley."

Taking off again

Co-location started to take off again at the end of 2005 and the beginning of 2006. Equinix, which survived the fallout from the tech bust, saw business pick up again when vendors began making pizza box-size servers. That led to condensed racks and higher power and cooling demands per square foot.

Many companies, including large corporations, couldn't accommodate the demands with their own facilities anymore and they had to go to data centers, Walker said.

Increased demand was also driven by regulation on data storage after 9/11, including the Sarbanes-Oxley Act of 2002, which required companies to have disaster recovery strategies.

A number of the companies most prominent in the L.A. marketplace today, including 365 Main and CRG West, got into the co-location business as the dot-com era was collapsing. Carlyle Group purchased One Wilshire in 2001 and formed CRG West to operate the building, Dunn said. At the time, the building was already equipped with data center capabilities.

One Wilshire now houses telecom service providers such as AT&T, Level 3 Communications, Sprint Nextel, Time Warner and Verizon, as well as some of the largest telecom companies in Asia.

The big companies' servers are together on the fourth floor, so they can interconnect their machines. It's called the "Meet-Me-Room," and there's high demand for space there. Leases go for several hundred dollars per square foot per month.

Space in the rest of the building is comparable to asking rates in the L.A. co-location market, at about $20 per square foot per month.

"The infrastructure and the amount of management required to keep this up make the cost higher than an office building. They are also paying for their ability to connect to other companies," said Dunn.

One Wilshire is currently 95 to 99 percent leased, he said.

Earlier this year, CRG West started leasing out data center space in the 450,000-square-foot Wilshire Annex, also called the "Postal Annex" downtown.

The company also has facilities in San Jose, Milpitas, Washington, D.C., Miami, and Chicago.

By SARAH FILUS

Contributing Reporter