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The Converging Real Estate Storms in Wireless Infrastructure

Contributed article by Michael Fraunces, J.D.

Michael Fraunces, J.D. — president, North America at MD7.

Mobile network operators long have understood the potential effect inclement weather has on their networks and typically maintain business continuity, loss prevention and disaster recovery plans well in advance of a damaging storm or catastrophe. However, a few storms of more controllable origins are developing before our eyes that many operators remain unprepared to endure. It appears highly probable that these brewing storms are set to converge, thus increasing the effects felt across the wireless infrastructure world.

The United States and Europe have roughly 800,000 cellular antenna sites, and underneath every single one is a piece of real property that must be acquired, developed, managed, maintained, upgraded and renewed throughout the life of each cell site.

The future of 5G wireless communications networks depends on these cell sites, and without a proactive strategy in place to manage the converging storms of rising volumes, costs and complexities within underlying real property portfolios, the rollout of 5G wireless communications could be derailed.

The advent of 5G services will significantly increase the number of sites required to provide mobile broadband, the total rental expense required to maintain the real property portfolio and the volume and complexity of corresponding documents and data that will need to be maintained for each site.

The Small Cell Surge

The wireless communications industry trade association CTIA cites S&P Global Market Intelligence as estimating that more than 800,000 small cells will be deployed in the United States by 2026. Although this number may be affected temporarily as budgets shift from deploying millimeter-wave small cells to capitalize on the $81 billion recently invested into 3.7 GHz and mid-band spectrum, the number of U.S. cell sites could triple over the next five years.

European operators also expect to take advantage of mid-band frequencies to deploy 5G service. However, it is safe to say that between 500,000 and 800,000 small cells will be required in Europe over the next five years as well, thereby more than doubling the combined number of sites on the continent and contributing to the exponential increase in demand of small cells globally.

Just because we call them “small” cells does not mean they are easier to manage or require less long-term management with the owner of the right of way. As with traditional macro sites, each small cell must be acquired, deployed and managed to increase further the load on their bottom lines.

Traditionally, operators have managed these vast, real property portfolios in-house to maintain control and confidentiality despite property management lying outside their core mobile communications expertise. Given the number of new 5G sites and the speed at which they will be deployed, the industry is primed to face nothing ever experienced before with 2G, 3G or 4G technology.

With knowledge of this small cell expansion data set, operators need to rethink their strategies for real property and asset management in order to optimize the efficiency of their rollouts. Amid a rapid transformation such as what we are experiencing with 5G wireless, it is critical to keep operators’ attention focused on their areas of expertise and to delegate appropriately to those who can handle the less-technical, yet wildly complex, roadblocks.

Rising Property Costs

The rent spend for cell sites is one of the largest operating expenses for operators, along with payroll and backhaul. Recent lease accounting changes also add lease liability to the balance sheet and modify how leases are expensed. These magnify bottom-line effects and associated risks.

Companies’ annual earnings reports typically combine cell site rents with rents for retail locations, offices and other operating facilities, which make it difficult to discern their rent spends on cell sites. However, using conservative assumptions about the number of cell sites, forecasted site upgrades, typical rents for each, and newly constructed sites, reveals an estimated industrywide rent spend in the United States of $9.3 billion in 2020, and a forecasted spend of $19.6 billion by 2035.

A mobile network operator’s real estate portfolio can be extensive. However, its current size will be dwarfed by what the future brings. The assumption across many of these sites is an annual leasing cost increase of 3 to 4 percent, but that does not paint the complete picture. Unlike networking equipment, where operators see a reduction in per-unit cost based on volume, site-leasing costs continually increase, and site upgrades remove an additional 2 to 3 percent per year from the bottom line.

These costs are proving to have a powerful effect on the current speed of network deployments — and they only account for the current sites under management. As more sites come online to enable 5G service, they will incur additional costs. Every site will require modification, and carriers will need to add significantly more infrastructure and equipment to their portfolio. This means a greater chance for more — and potentially avoidable — costs.

A Deluge of Documentation

When it comes to managing leases, not much has changed over the years, despite technical advances elsewhere. This is somewhat ironic, because wireless networks help to increase innovation worldwide, yet the underlying lease management systems have not followed suit.

In addition to the added complexity of managing an operation in this fashion, the paperwork itself is at times lacking in quality. Real estate is a network of many properties for mobile network operators, evolving from multiple acquisitions, integrations and divestments.

This evolution has led to a tangled web of paperwork with unscanned, unreadable and incomplete files stored in multiple locations. Adding to this problem, many different groups and organizations are involved in every deal, leaving tools, processes and priorities to provoke more conflict, further exacerbating the problem.

This matter of document management historically has led to incomplete and inaccurate data, as well as inefficient processes. As the size of portfolios increases, newer and better ways of working must be explored to streamline the process and build a truly world connected.

Conclusion: Evolving the Deployment Approach

Between the surge of small cell sites, the escalating costs of leased real estate and problems with lease documentation, carriers face an uphill battle with their real estate expenses.

Solving these problems is possible with the right approach at data and document management. The accuracy of data and its ease of accessibility can make all the difference for efficient rollouts. Organizations need to optimize their real property portfolios and use data-driven lease management, and simply continuing to do the same thing is not an option for enabling the world to reach its technological peak.

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Michael Fraunces, J.D., is president, North America, at MD7, where he leads MD7’s consulting practice and is responsible for keeping the company at the forefront of the industry through product and service innovations. Fraunces previously led MD7’s U.S. business operations. He joined MD7 in 2003.