Blackstone Snaps Up Studio Lots for a Slice of Streaming Riches

(Bloomberg Businessweek) -- Stuck at home during the Covid-19 pandemic, Americans have been streaming movies and TV with abandon. They’ve plowed through Tiger King and the much-acclaimed production of Hamilton. Millions have even made time for game shows as low-brow as Floor is Lava (pretty much what it sounds like), which turned into a hit for Netflix Inc. At the peak in late March and early April, people in the U.S. were devouring in excess of 160 billion minutes of streaming video per week—the equivalent of about 8 hours per person, or twice what they had a year prior, when a trip to the cineplex didn’t run much risk of contracting a deadly virus.

Against this backdrop, Blackstone Group Inc. decided to buy a 49% stake in three Hollywood studio lots. Hard times have always been a boon for escapist entertainment, but the Blackstone deal, which the company said was completed Aug. 3 and valued the properties at $1.65 billion, was a long-term bet on streaming. Even after the pandemic, companies such as Netflix, Amazon.com Inc., and Walt Disney Co. will need stages to feed the world’s bottomless appetite for video.

Blackstone and its partner, Hudson Pacific Properties Inc., are betting they can buy up more of the space in such key entertainment hubs as Vancouver, New York, and London in the coming years. “This is as strong a trend, as far as demand growth, as anything we see in the real estate business,” says Nadeem Meghji, the head of real estate for the Americas at Blackstone. “If you look at the data, we’ve seen an almost doubling of total content spend globally over the last three years.”

Commercial real estate investors have been puzzling over where to invest during the pandemic. Hotels and retail space look dicey as the virus curtailstravel and trips to the mall. The future of offices is cloudy, too, as people telecommute from home. Even apartments, which have long been viewed as recession-resistant, are looking due for a couple of bad years with so many unemployed. That’s left elephant-hunting real estate investors such as Blackstone with a narrower set of options. Owning studios is “pretty niche,” says Danny Ismail, a senior analyst at Green Street Advisors. But “it checks many boxes that your average real estate investor would find very appealing.”

Sound stages were seen for years as a ho-hum business for landlords. The norm in the industry was for production companies to sign short leases, because many shows got canceled after a season. But the rise of Netflix and other streaming services changed the equation. The new content creators wanted offices on-site and were willing to make longer-term commitments for space they could restage for show after show. The streaming wars have stoked demand, as binge-watchers expect a big menu of programs for their subscription. Meanwhile, very few new sound stages have been built, because it’s hard to find enough land for the airplane hangar-sized buildings in a city like L.A.

Leading up to the pandemic, there was about a 1% vacancy for the space, according to broker Newmark Knight Frank. “Studios were able to pick and choose who they wanted on their lots, what kind of shows, what kind of terms,” says Jennifer Frisk, senior managing director with Newmark’s L.A. office. “The market was incredibly strong.” Even when the virus shut down production, landlords didn’t have to provide rent relief or deal with tenants leaving, she says. “Everyone’s keeping their space, with plans to pick back up as soon as they can.”

The tight market is forcing producers to consider lower-quality space, including one formerly used by bankrupt retailer Forever 21, says Jeff Worthe, chairman of Worthe Real Estate Group, which has a partnership with Blackstone on offices and production facilities in Burbank. “People are going to make do with stuff they wouldn’t have filmed in two or three years ago,” he says.

It’s all been a validation for a strategy that Hudson Pacific started pursuing more than a decade ago, when Netflix’s big business was still mailing DVDs in red envelopes. Starting in 2007, the real estate investment trust began buying up some of Hollywood’s historic lots, including one where the first “talkie” was shot. Series as varied as The Golden Girls and True Blood have filmed at the others. Hudson added “creative” offices to the properties, collectively called Sunset Studios, and leased space to tenants that included Netflix, CBS, and Disney.

Victor Coleman, Hudson’s chief executive officer, began speaking with Blackstone President Jon Gray about a potential partnership late last year. Ultimately, Coleman says, he went with Blackstone in part because they had a shared commitment to be in the studio business for the long haul. The deal gives Hudson the capital to develop new office and production facilities. Blackstone is one of the deepest-pocketed investors in the world, with $46 billion in “dry powder”—cash committed by investors—to spend on real estate.

Right now, though, there are some challenges to running studios. When California went into lockdown in March, filming halted. Even though production was allowed to resume in June, shows have been slow to restart as cast and crew figure out how to maintain social distancing while shooting fistfights and kisses. Even today, the lots look deserted. Hudson’s Sunset Bronson property, which contains Netflix’s main Hollywood office, has a billboard in the parking lot advertising “Spenser Confidential,” starring Mark Wahlberg. It debuted on March 6.

Hudson Pacific makes additional money by providing services, such as lighting, grip, and control-room rentals, which can represent about a third of the revenue in normal times. A drop-off in filming caused income for that line item to plunge in the second quarter according to Coleman, even as the company’s studios collected nearly 100% of the rent.

A further challenge for studio owners could be lower demand for on-site office space, says Laura Martin, an L.A.-based entertainment industry analyst for Needham & Co. After having everyone work from home for months, companies such as Netflix may decide that back-office legal and accounting jobs can continue remotely. “The longer Covid goes on, the more likely some of the traditional habits of making TV and film change,” Martin says. “And if they change, they’re more likely to be more distributed and less centralized on lot space.” Coleman is skeptical of a sea change. He says in-person collaboration will still be key for script writing, editing, set design, and other production jobs.

There’s also a long-running trend in the film and TV business of moving production to lower-cost locales that have generous tax breaks. Content creators may choose to own some facilities, rather than lease. Netflix, for instance, bought a studio in 2018 in Albuquerque that it’s using as a U.S. production hub.

Still, Martin thinks L.A. will retain its leading role, because that’s where the stars live. “The talent doesn’t want to sign up for a series that’s going to be in Wichita, Kansas, for 10 years,” she says. “Remember Hawaii? The Lost people were there for 10 years. Lots of complaints. People don’t even want to live in Hawaii for 10 years to do a series.”

A widely anticipated shakeout among streaming players could also hurt demand over the long term. Right now, the space is crowded with companies that have billions of dollars to burn on new digital content, including Disney, Netflix, Amazon, and Apple Inc. But there are smaller players that could end up getting absorbed or shutting down.

Which services make the cut won’t affect Blackstone’s bet much, says Meghji. “We’re really not taking a view on who the winner will be,” he says. “We’re taking a view on aggregate demand growth.” So far, the data are on his side. The Covid-19 bump for streaming video had subsided some by early June as the economy reopened, according to Nielsen. But it was still up about 50% from a year earlier.
 
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