King Street makes movie studio entry with AimCo

The partners, along with an unnamed sovereign wealth fund, have already committed $500m to a joint venture to buy and build rentable production space.

King Street Capital Management is the latest real estate manager to enter the content creation space, PERE has learned, and it is bringing a pair of institutional investors along as partners.

The New York-based firm has launched a joint venture with the Alberta Investment Management Corporation, or AIMCo, and an undisclosed sovereign wealth fund to buy and build movie studios. The partnership has already committed $500 million to three projects in Greater Los Angeles.

David Walch, a partner at King Street, said the firm was drawn to the studio sector by the surge of streaming content being produced for Netflix, Amazon Prime Video and Apple TV. This uptick in production has caused demand for rentable studio space to exceed the current supply.

“Our base case assumption is that this is a moment in time where, because of the changes in content creation and consumption, there needs to be a lot more space fit for purpose than there has been,” Walch told PERE.

The venture is not tied to a specific amount of capital or investment period, Walch said. It also does not have a set end date, so investors could opt to hold onto the assets indefinitely, he noted. For its share of the venture’s capital, King Street is tapping several of its commingled funds, PERE understands. The firm is targeting opportunistic returns.

Walch said the venture is open to developing studio space across the US and even venturing into some international markets. However, he expects most of the activity will center on Los Angeles and New York, the two biggest hubs for film and television production.

Two of the venture’s first three sites are in Glendale, which is situated between Los Angeles and Burbank, a longtime studio hub. The third is in Downtown Los Angeles. Together, the three projects will yield 750,000 square feet of production space.

“We’re excited to build on our experience in real estate and thinking about changes that are going on in the world to bring it to bear for this exciting asset class,” Walch said. “We’re particularly excited that we have a group of investments already that we have committed to and purchased. We’re hitting the ground running.”

An ‘untapped’ trend

Unlike traditional movie and television studios, the tech companies behind the streaming surge do not own sprawling studio complexes with soundstages and production offices, at least not in prime locations. Instead, they must rent space for their productions. While third-party studio space is not new, demand for it has never been higher, Walch said. This has led to a novel concept in the media production industry: long-term leases. Rather than rent space one production at a time, companies are signing multi-year contracts.

Other real estate investors have hopped on this trend, including New York-based Square Mile Capital, which partnered with Los Angeles-based owner-operator Hackman Capital in 2018. Then, last summer, Blackstone paid $800 million for a 49 percent stake in Los Angeles-based Hudson Pacific Properties’ 1.2-million-square-foot studio platform.

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Walch said the effort to ramp up production space is in its nascency. Anecdotes abound about the lack of production space in Hollywood, he said, but there are few groups equipped to handle it. Still, while the supply-demand dynamics are poised to be favorable to owners for the foreseeable future, he does not expect that imbalance to be permanent.

“This is a trend that is untapped,” he said. “We think it’s important to capitalize on it early.”

A highly specialized space

Production studios have been part of the conversation around alternative real estate that has emerged during the pandemic, joining data centers and life sciences lab space. But dedicated ventures for the sector have been sparse.

Walch said this is because the space is highly specialized. “The size of the market is both a benefit and a drawback to institutional capital,” he told PERE. “It can be big enough to make investments, but it is not so big that it’s so easy to access.”

To solve for this, King Street is also partnering with East End Studios, a group that invests, manages and leases production space and is backed by the New York-based investment firm, East End Capital. Walch said the group will play a crucial role in identifying opportunities and executing the business plan, which differs from traditional property ownership.

“This is not like some other real estate sectors that have a natural built-in brokerage system for leasing space,” he said. “There’s a lot more direct relationships with the user base, particularly for the long-term lease commitments that Apple or Netflix are looking to take.”