For decades Hollywood’s sound stages and backlots, the places where movies and television shows are brought to life, have primarily been controlled by either major studios or independent family operators. But that is changing, and private real estate firms are getting in on the action thanks, in part, to Netflix.
Streaming platforms have not only uprooted how content is distributed, but also how it is produced. Traditional entertainment companies were once happy to rent sound stages as needed, production-to-production, but an increasingly competitive marketplace has put that practice to bed. When Netflix began taking on multi-year leases to secure space for its ballooning production pipeline, other groups had to follow suit. This cashflow stability has made the space more palatable to institutional capital.
That capital includes Blackstone, which last month paid $800 million for a 49 percent stake in Los Angeles-based Hudson Pacific Properties’ Hollywood Media portfolio, which included 1.2 million square feet across 35 sound stages plus nearly a million square feet of adjacent office space.
Acquired with core-plus capital from its open-end Blackstone Property Partners fund, the investment gives the New York mega manager exposure to the largest independent studio operation in the US, and Netflix is a major tenant. The streaming giant has leased three full office buildings from Hudson Pacific, totaling more than 700,000 square feet, and it also has long-term commitments for sound stages.
“The portfolio consists of three individual studio lots with five office buildings that are on lot or immediately adjacent to the lot,” Nadeem Meghji, Blackstone’s senior managing director and head of Americas real estate, told PERE. “We really view this as critical infrastructure for TV and film production, whether it’s for traditional or streaming media companies.”
Blackstone’s investment also marks the start of an open-ended joint venture with Hudson Pacific, a listed owner, operator and developer. The firms plan to expand their studio holdings by exercising the million-plus square feet of development rights on their Hollywood properties. They also hope to expand to other film hubs such as New York, London and Vancouver.
Setting the script
As private real estate’s industry leader, Blackstone’s embrace of studio investment puts the property type in the spotlight, but Hudson Pacific has been active in the space for more than a decade. It bought its first studio lots during the global financial crisis, scooping up Sunset Gower Studios and Sunset Bronson Studios in 2007 and 2008, respectively, before going public in 2010. In 2017, it purchased Sunset Las Palmas Studios.
Alex Vouvalides, Hudson Pacific’s chief operating and investment officer, said the real estate investment trust was drawn to the space initially because of the entertainment industry’s recession resilience and the operational aspects of studio ownership that allow for enhanced returns. The advent of streaming was a welcome surprise. “None of us could have predicted what happened in the sector with Netflix, Amazon, Apple, the various streaming services, and now the traditional studios have gotten into that business,” he said. “That’s obviously created increased demand for content, so as an owner of production facilities, that bodes well for us.”
London-based Aermont Capital was among the first private equity real estate firms to capitalize on the original content boom. In 2016, it acquired Pinewood Studios in a £320 million ($421 million; €379 million) take-private transaction.
Paul Golding, a partner at the firm and interim chief executive of Pinewood, said Aermont’s studio investment thesis stems from a 2015 effort to identify the internet’s impact on real estate. The goal was to find assets that would be to content consumption what logistics warehouses were to e-commerce. “We put two and two together that Pinewood would be the beneficiary, given it was the home of content production, which we realized would have to increase to meet demand,” Golding said. “That was the thesis going in, but we were struck shortly after acquiring Pinewood by the increase in the speed and consumption and therefore production of content. We were happily surprised.”
Box office smashed
Netflix and Amazon both debuted their first original programs in 2013, just as digital content production was taking off. Between June 1, 2012 and May 31, 2013, US studios produced a total of 17 live-action, scripted shows to run on digital platforms, according to FilmLA, a non-profit representing the Greater Los Angeles filmmaking industry. That accounted for less than 6 percent of the overall market. Between 2018 and 2019, digital production had swelled to 171 shows representing more than a third of the market – and only 11 fewer than cable networks, which just two years prior produced more than twice as many series as their streaming competitors.
Overall, the total number of series in production has more than doubled during the past decade. This demand for content is reflected in the occupancy rate for the 5.5 million square feet of sound stage space in Greater Los Angeles, which has hovered between 90 and 96 percent since 2016, according to the brokerage CBRE. “Looking at the supply-demand dynamic, there just are not enough high-quality sound stages and ancillary production and offices to satisfy the demand,” Craig Solomon, co-founder and CEO of New York-based Square Mile Capital, told PERE. “That means the content providers need to lock up their ability to produce in the best of those stages for a longer period of time.”
Square Mile has been on a studio buying spree since 2018. Through a partnership with Los Angeles-based owner-operator Hackman Capital Partners, it owns more than 50 sound stages in the US, including those on the MBS Media Campus and the former CBS Television City site in California, as well as Second Line Studios in New Orleans. The joint venture is also pouring $620 million into redeveloping Culver City Studios for Amazon and reportedly in the process of acquiring Silver Cup Studios in Queens, New York.
Along with attractive supply-demand dynamics, Solomon said the sector benefits from the creditworthiness of top tenants. Whereas traditional media companies would form individual entities for each of their productions, Netflix backs its movies and shows directly. This model is bolstered, in part, by streaming revenue. Instead of relying on box office and ad sales, streaming platforms are financed by monthly subscribers. Netflix has more than 167 million subscribers, Amazon counts 150 million, Hulu has 100 million and Disney+, which launched late last year, already has more than 50 million. Other legacy companies, including Comcast, Warner Media and Viacom, are gravitating toward the model by developing their own streaming services: Peacock, HBOMax and ViacomCBS, respectively.
As subscriptions increase, so too has content consumption, a trend that has been accelerated by covid-19 shelter-in-place orders. Globally, 115 billion minutes of content were streamed during the week of February 24, according to the research firm Nielsen. That figure shot up 36 percent as the virus spread, hitting 156 billion the week of March 16. This surge in streaming activity only increases the demand for new content.
While viewing habits may normalize after the pandemic, the overarching trend will not change, Solomon said: “Technology has taken hold, like it has in so many parts in our lives, and moved entertainment from the TV to the computer to the laptop to the mobile smartphone with the ability to watch content 24/7. Our view is that’s not a short-term trend, it’s a fundamental shift in how people receive content in the same way there’s been a fundamental shift in how people purchase goods. It’s not a 100 percent shift but it’s fundamental and durable.”
There are two main factors that determine a location’s viability for studio space: labor and tax incentives.
California and the UK each offer tax credits of up to 25 percent of a production’s budget, which has helped Los Angeles and London retain their positions as the top entertainment hubs in the English-speaking world. Both markets are also home to large talent pools, consisting not just of actors and directors but also technical workers that make up the bulk of production crews: designers, camera operators, lighting specialists and others.
Given the low vacancy rate and the rising demand for sound stage space, both markets could benefit from additional supply. Real estate consultancy Lambert Smith Hampton estimates the UK will need between 1.6 million and 1.9 million square feet of additional production space by 2032. That is easier said than done, Aermont’s Golding said.
Studio lots require at least several acres of land, which is especially hard to come by in the highly coveted areas of core Los Angeles and along the western periphery of London’s Orbital Motorway. Developers in the sector also must compete with a crush of industrial real estate investors keen on constructing last-mile distribution assets on the same sites. “The cost of building a sound stage is roughly four or five times the cost of building a distribution warehouse,” Golding said. “If you’re going to sink that kind of money into that kind of real estate, it’s got to be in the right location.”
Aermont has built nine new sound stages since acquiring Pinewood, Golding said, and it plans to build 20 more at its Shepperton Studios location. Meanwhile, in Los Angeles, the dominant investment partnerships – Blackstone-Hudson Pacific and Square Mile-Hackman – are adding square footage within their current footprints. Efforts are also underway to build or repurpose space farther away from the city center.
Rising demands and costs have created opportunities for other locales to carve out niches. Low-cost Georgia has the second largest supply of sound stage space in the US with 1.8 million square feet, followed by talent-rich and tax-friendly New York at 1.5 million square feet, according to CBRE. Canada has also used subsidies to build up production hubs in Ontario and British Columbia.
Will Nelson, senior vice-president of real estate lending at Washington-based Columbia Pacific Advisors, said states are using tax programs to compete for production investment. He experienced this first-hand while underwriting a bridge loan for a pair of new studios being built in Jersey City, New Jersey earlier this year. “Not only did New Jersey initiate their production tax credits as we were underwriting the deal, but it accelerated the program as they witnessed the increase in demand. We had a similar experience in the Atlanta market,” he said. “Due to the significant cost associated with film production, tax incentives programs have become a driver for production companies as they pursue markets in tax-friendly states.”
There are also other potential avenues for institutional capital to get in on the studio action. Despite the rise in streaming services, most of the production facilities in Hollywood remain in the hands of major studios. Warner Brothers has 36 sound stages, accounting for half a million square feet; Paramount has 361,000 square feet across 29 sound stages, and NBC-Universal has 358,000 square feet in 27 facilities, according to CBRE.
While some consider these historic studio lots sacred cows, others see them as the white whales of the content production space. The argument is that real estate management is not the prime operational efficiency for entertainment companies and a sale-and-leaseback, ground lease or similar arrangement could provide a cash-injection for new content creation.
It remains to be seen how much of this market can be accessed by private capital, but what is clear is that some forward-thinking managers – including private real estate’s biggest heavyweight – have already claimed their stakes in this booming part of the digital ecosystem.