The premise of the opportunity is simple: a steep increase in demand for movies, television shows and other digital entertainment content since the start of the pandemic has translated into similar demand for new and existing studio properties. But the execution – particularly on the lending side – is where it could get tricky, market participants tell Real Estate Capital USA.
Transaction volume in the studio space sector has increased steadily over the past four years, according to data from JLL. The advisory firm reports that soundstage occupancy has been at around 95 percent since 2015 and, with the increase in demand for new content, this has meant content creators have been converting existing industrial and retail space into new studios.
“Fundamentally, [what’s driving the sector] is all of the content creators who need more sound stages, and the ancillary uses to produce more content to meet demand accelerated by the pandemic,” Paul Brindley, a senior managing director at JLL, tells Real Estate Capital USA. “Investors, particularly those who have already been active in the alternative sectors, recognize this demand dynamic and have been seeking opportunities to deploy capital in the sector.”
Heading into production
New York-based King Street Capital Management is one of the investment managers gearing up for an expansion into the sector. In October, the roughly $20 billion company formed a joint venture with Alberta Investment Management Corporation and a sovereign wealth fund in a bid to take advantage of the increasing occupier demand for studio properties.
David Walch, a portfolio manager at King Street, tells Real Estate Capital USA the partners, working alongside East End Studios, have together acquired three sites in the Greater Los Angeles area with a total capitalization of more than $500 million and a projected delivery of approximately 750,000 square feet of studio production space.
The joint venture has another asset under contract in New York, as well as a pipeline of additional assets. And although its transactions have so far been on the equity side, King Street believes there are opportunities on the debt side as well.
Walch describes the market as niche in that it is still small relative to some of the bigger asset classes. However, he notes that lenders of all stripes are starting to understand what is unique about lending on these properties.
“The markets where the companies are looking to operate – where there are actors, producers, stagehands or cameramen – are undersupplied with good-quality facilities and are already leased out on long-term leases,” he says. “There is bit of a need to find and lock up your space for longer periods of time.
“There is some pricing power, which means people will pay more for the right studios and the right locations, and we like that from a credit perspective.”
Like many trends real estate managers are chasing these days, the fundamentals driving studio space shifted significantly due to covid-19. With more people at home, demand for fresh content skyrocketed at a time when there was not enough supply to accommodate it.
“People have more screens to look at and better Wi-Fi and 5G on which to download things,” Walch says. “And creating content requires more and more space.”
Value of incentives being offered to studio developers in New Jersey through 2025, per CBRE
Number of soundstages in New York, New Jersey and Long Island, according to CBRE
Average occupancy rate for soundstages in Los Angeles, per a September JLL report
Size of Sunset Glenoaks Studio, Blackstone and Hudson Pacific’s Los Angeles development that broke ground in June and is the first large-scale studio project in a generation, according to a press release
Size of the deal for ViacomCBS’s landmark CBS Studio Center complex, which was sold to Hackman Capital Partners and Square Mile Capital Management, according to the Los Angeles Times
The changing demand drivers have meant there have been increases in transaction volume and a greater number of large, high-profile deals completed in markets such as New York, Los Angeles, Chicago and Atlanta. There have also been transactions of note in the UK and Germany.
Yet underwriting a major studio loan in Los Angeles, where much of the US activity happens, is different to underwriting for an office or for industrial properties.
Lenders have to consider factors such as tenancy, including analysis of whether an asset is leased long-term to one credit tenant and whether it will operate on a show-to-show or season-to-season basis. This has a significant impact on the kind of lender that will take on a loan, says Kevin MacKenzie, an executive managing director at JLL.
Traditional investors and lenders often want to think about these assets in terms of traditional metrics, such as price per square foot, occupancy levels and in-place yields. However, those investors and lenders do not often apply for studio space.
“Depending on the asset type, a production might not care as much about the horizontal square footage, but it may need clear height, or more access to equipment or backlot sets,” MacKenzie says. “There can be significant upside via increasing utilization and driving rents, or future development or redevelopment, depending on the site.”
The lenders that are considering these properties span the gamut of market participants, all of which want to diversify into the emerging sector.
“If it is an asset with various users and short-term, season-to-season leases, it has been predominately banks including domestic, international, and investment banks, as well as debt funds [providing financing],” MacKenzie says. “However, there is capital available from other lender types as well, including pension funds and their advisers. Where there is a longer-term credit lease in place, that opens additional lending options, including securitization.”
One thing to remember is that real estate is a relatively small part of the budget of productions in a sector that is dominated by new entrants such as Apple, Netflix or Amazon – as well as by new entrants on the commercial real estate lending and investment side.
“While real estate is important, the real estate cost to these productions is modest,” Walch says. “People will pay more for the right studios in the right locations because it’s a small part of the overall budget. From a lending perspective, it is a market that is niche in that it is small in size relative to some of the bigger real estate food groups. We see lenders getting comfortable with the space increasingly and this is a market that historically has not attracted so many lenders.”