South Loop data center begins signing tenants

601 W. Polk St. Photo from CoStar Group Inc.

More than a year after being bought out of bankruptcy, a South Loop data center is getting a new lease on life — several, actually.

Pi Data Holdings LLC, a Pennsylvania-based venture backed by private investors, paid $10 million last fall for the 108,000-square-foot building at 601 W. Polk St., a deal that allowed the building's previous owner, an affiliate of private-equity company Ten X Capital Partners LLC, to pay off creditors and drop a Chapter 11 bankruptcy case.

Now, Pi Data has partnered with Chicago-based operator PlusOne Data Centers to renovate and lease the building, an old Marshall Field & Co. warehouse.

“We believe that we have the largest amount of viable space in (downtown) Chicago right now,” said Scott Tillman, manager of the Pi Data venture.

So far, Mr. Tillman said he and his partners have spent nearly $6 million renovating the two-story building, whose existing tenants include Comcast Corp., France Telecom and Kozy's Cyclery, a bike shop. About 25,000 square feet of first-floor space will be built out and leased to multiple data tenants — they've already reached deals with three and are in talks with at least six others — while the building's second floor has been divided into five suites totaling 38,500 square feet.

By the time the project is complete, the total cost of renovations could top $25 million, Mr. Tillman said.

Although data centers, which house servers and other computer equipment, make up a small percentage of the local real estate market, they've become increasingly popular as companies of all sizes conduct more of their business online.

Because of the vast amount of digital information that needs to be stored and processed — not to mention the potential security risks associated with storing that data in-house — many businesses have turned to off-site locations that are better equipped to handle such operations.

The heightened demand has spurred new developments in the South Loop, home to one of the world's largest data centers, a 1.1-million-square-foot building at 350 E. Cermak Road.

Just down the street from that facility, an affiliate of James McHugh Construction Co. plans to build a 315,000-square-foot data center at 111 E. Cermak Road, near McCormick Place. The project will cost $40 million, according to BidClerk.com. McHugh representatives did not return calls.

Additionally, Server Farm Realty Inc., a subsidiary of Israeli real estate firm Red Sea Group, is in the middle of building out a 450,000-square-foot data center at 840 S. Canal St., about 2½ blocks east of 601 W. Polk.

Avner Papouchado, Server Farm's president and CEO, said his company had signed a contract to buy the Polk building before dropping those plans to buy its current building and two adjacent lots in late 2010, which offered them more space and flexibility.

“Size matters,” said Mr. Papouchado, whose building is four times larger than 601 W. Polk. “You can get a lot of efficiency with size; it's harder to build redundancy into a smaller data center than a big data center.”

But less square footage hasn't stopped Pi Data from overcoming what is sometimes the biggest hurdle for data center developers: financing. Because most facilities are built on a speculative basis, or without tenants lined up in advance, many lenders avoid them, forcing developers to finance the projects with equity.

After raising $16 million from investors, Pi Data was able to secure a $7 million loan from J.P. Morgan Chase Bank N.A. in March to help finance the renovation. As Pi Data and PlusOne line up tenants for the building, they'll continue piecing together the layout of the first floor.

“The beginning stages of a project like this are a little bit like using the green Lego mat,” with some tenants requiring a larger footprint than others, said Kevin Francis, director of real estate at PlusOne. “We see tons of upside in the property, and I think Chicago is going to continue to be one of the top-tier markets in the U.S.”