Studio wars: battle of the streamers sparks real estate frenzy

The coronavirus pandemic injected new urgency into the frenetic streaming battle under way in Hollywood: audiences were stuck at home and seeking television as an escape, but coronavirus restrictions prevented the filming of new material and created a production bottleneck.

With filming now back to pre-pandemic levels, Hollywood studios are scrambling to churn out shows. But a parallel race has emerged for locations to shoot, luring private equity groups into what has previously been a niche market.

Investors including Blackstone and TPG have committed more than $4bn in recent months to acquire sound stages — large, warehouse-type buildings where producers place sets — in entertainment centres across North America and Europe, according to real estate brokerage Jones Lang LaSalle.

“I’ve never seen this type of deal flow,” said Carl Muhlstein, managing director at JLL. “It coincides with the post-Covid backlog of content, the changing economics of studios and the globalisation of the industry.”

Driving the boom are the streaming wars as Disney, WarnerMedia, Netflix, Amazon and others invest tens of billions of dollars in becoming a leader in the future of entertainment.

In Los Angeles, demand for locations to shoot TV shows vastly outstrips supply: churches, abandoned malls, industrial warehouses and even a former Ikea store have been repurposed into production facilities.

There’s proven to be just not enough sound stage studio space

The supply strain has tightened as streamers shifted demand towards television series and away from films. TV series are more likely to be shot on sound stages in Los Angeles, where the actors live year-round, while films are often produced in other locations.

Blackstone, the world’s largest real estate investor, said that studio space was among its top picks for investments.

“This is one of the most exciting themes we are pursuing in our real estate business globally,” said Nadeem Meghji, head of real estate for Blackstone Americas. “We are still in the early innings of the megatrend around content creation and within the studio business as well.”

In August, Blackstone and real estate developer Hudson Pacific committed almost $1bn to developing a 91-acre site north of London. This followed Blackstone’s June 2020 investment in 2.2m square feet of space in Hollywood valued at $1.65bn.

Streaming has made these stages more attractive to institutional investors for a few reasons.

A decade ago, studios would rent out a space for several months to shoot a show with no guarantees it would last beyond a single season.

Netflix has shaken up that tradition, instead signing long-term leases to create production hubs in Los Angeles, Vancouver and Albuquerque, New Mexico.

Because Netflix has thousands of TV series planned years in advance, the streaming giant can confidently commit to a lease of many years. Amazon and Apple have followed suit, both signing leases on production space in Los Angeles for their streaming businesses.

“It’s a lot easier to underwrite a 10-year lease from Apple than underwrite a series of six-month leases with some risk,” said Eric Willett, managing director of RCLCO Real Estate Advisors. “Netflix shifted the market for everyone.” Willett estimated that up to a third of new leases were longer than three years.

CBS Studio Center, where ‘Seinfeld’ was shot, was acquired for $1.85bn © Bing Guan/Bloomberg

With occupancy rates for Los Angeles sound stages hovering above 95 per cent, according to JLL, producers have had to be creative to find places to shoot. Sound stages are typically cavernous, empty buildings with high ceilings, making industrial warehouses a viable option.

A former Ikea store in Burbank, California has been repurposed into a television production site where shows such as Netflix’s Floor is Lava, in which contestants must navigate rooms filled with red slime, have recently been filmed.

“Covid really exacerbated the demand for all types of content, and there’s proven to be just not enough sound stage studio space,” said Jennifer Frisk, managing director of broker Newmark Knight Frank, whose clients include Amazon.

TPG last month spent more than $1bn to acquire Cinespace Studios, which holds 2.9m square feet of studio space in Toronto and Chicago, according to two sources briefed on the deal.

The purchase came two months after TPG agreed to buy a large stake in Germany’s Studio Babelsberg, where Fritz Lang’s 1927 masterpiece Metropolis was shot.

A former Ikea store was repurposed into a production site, where TV shows such as Netflix’s ‘Floor is Lava’ were filmed

A former Ikea store was repurposed into a production site, where TV shows such as Netflix’s ‘Floor is Lava’ were filmed © Adam Rose/Netflix

The most active buyer in the market is Hackman Capital, a Los Angeles real estate investor, which in November partnered with Square Mile Capital on deals worth more than $2bn.

The investor group acquired Scotland’s largest studio as well as Kaufman Astoria Studios in New York and southern California’s CBS Studio Center, where Seinfeld was shot. The CBS price tag of $1.85bn was $500m higher than ViacomCBS has anticipated when it put it up for sale in August.

“These are high-quality assets that are not replaceable,” said Craig Solomon, chief executive of Square Mile Capital, which through the joint venture with Hackman has struck more than $7.5bn in studio space deals since 2018.

Lease prices for sound stages have jumped during the furore. Renting a 10,000 sq ft office space in Burbank would cost about $500,000 a year, while studio space would run at least double that, according to Newmark.

But while other real estate classes are valued in terms of revenue per square foot, the assessment of studio space is murkier. Owners will charge producers for add-ons such as lights, catering and “grip” technicians, services that can make up as much as half a property’s rental income, according to industry executives.

As media groups such as CBS and Viacom consolidate, they are selling off overlapping studios, freeing up money to spend on making TV shows to stock their streaming services.

Yet the storied Hollywood studios — Paramount, Universal, Warner Bros, Disney and Sony — have held on to their legendary studio lots, where classics such as Casablanca and The Sound of Music were filmed. These lots hold dozens of sound stages as well as outdoor streets built as generic backdrops for shows, wardrobe and catering trucks, post-production spaces and offices.

This too could change if the market continues to boom. “It wouldn’t shock me over the next five years if one of these big lots does sell,” said a veteran real estate executive. “Entertainment is consolidating. Do we really need five lots?”

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