The telecommunications industry is in the beginning stages of rolling out its fifth-generation (5G) standard for mobile service. It promises download speeds 100 times faster compared to the current 4G system, which will allow for increased connectivity between mobile devices. Because of that, it will be a game changer for our increasingly data-driven society.
As a result, the rollout of 5G, which will become more pronounced in 2020, will have major implications for the commercial real estate sector. That's because instead of primarily utilizing macro cell towers like the current 4G system, it will rely on smaller antennas spaced closer together since the wave signals don't travel as far. This shift in infrastructure will affect commercial real estate operators, who will need to adapt to this new technology.
How 5G will impact infrastructure REITs in 2020
Leading infrastructure REIT Crown Castle (NYSE: CCI) has already started positioning its operations for the upcoming rollout of 5G. The company has complemented its portfolio of 4G-focused macro towers by investing in the acquisition and deployment of fiber optic cables and small cells attached to things like street lights and utility poles, both of which are crucial for supporting 5G networks.
As of the end of last year's third quarter, Crown Castle had 70,000 small cells either on air or under construction, giving it an industry-leading position. That number should grow in the coming years, according to CEO Jay Brown, who noted on the accompanying conference call that the company believed it was "still in the very early innings" of deploying small cells. According to one industry estimate, the U.S. alone will grow its small cell deployment nearly tenfold by 2026 (from 85,000 at the end of 2018 to 800,000 by 2026), implying significant growth ahead for Crown Castle's 5G-focused infrastructure footprint.
However, while this projection bodes well for Crown Castle's future growth, it won't have a dramatic impact in 2020. In the company's view, it will deploy about the same number of small cells in 2020 as it did in 2019 because the transition to 5G is still so early in its lifecycle.
Cell tower REIT American Tower (NYSE: AMT), meanwhile, continues to focus most of its attention on owning macro cell towers around the world. That's because 5G won't entirely replace this infrastructure with small cell antennas. Instead, it has noticed increased signs that the existing infrastructure will provide critical support to next-generation networks, such as handling things like phone calls, to free up capacity on 5G systems for other data like video. As such, it doesn't expect any near-term negative impact from the upcoming rollout of 5G on its legacy operations.
How 5G could affect other commercial real estate owners in 2020
Most infrastructure for mobile data networks is out in the open, on either a cell tower or a small antenna attached to a streetlight or utility pole. However, users consume nearly 80% of data inside buildings. That's a problem as more data goes mobile because those signals can't easily penetrate the treated glass, concrete, and steel that makes up most commercial properties. Because of that, commercial building owners need to begin planning for the upcoming shift to 5G networks.
Eventually, those preparations could lead to the installation of infrastructure on rooftops or setting up in-building systems capable of supporting 5G networks. At the moment, though, most property owners are taking a wait-and-see approach before upgrading their systems since 5G is still in the very early stages of deployment.
That's the case with Vornado Realty Trust (NYSE: VNO), a REIT focused primarily on owning office and retail properties in New York City. It has been one of the early adopters of installing in-building wireless technology to support its tenants. However, Vornado, like many other commercial property owners, is currently "still spending a fair amount of time in understanding the technology and planning for future developments" when it comes to 5G, according to the REIT's VP of information technology, Nicholas Stello, in an article by Connected.
Because 5G deployment is still very early on in its life cycle, it likely won't directly affect most commercial building owners in 2020. However, as it becomes fully commercialized, building owners will need to consider upgrading their facilities to support this network. Otherwise, they could start losing tenants to 5G-ready locations.
5G is coming, but the biggest impacts likely won't happen until after 2020
Mobile data usage continues to expand at explosive rates, stretching the capacity of current 4G systems. While 5G will provide data consumers with a much faster network, telecommunications companies are still in the very early stages of deploying this technology. Because of that, it won't have too much impact on commercial real estate in 2020.
However, it could affect the sector much more as the rollout continues. Not only will infrastructure REITs need to deploy additional small cells, but property owners will likely need to upgrade their in-building systems to handle the increasing amount of mobile data. Because of that, property owners would do well in following Vornado's lead in taking the time this year to understand the technology and planning for future developments.