How Real Estate Is Being Used As A Weapon In The Streaming Wars
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Streaming platforms, increasingly viewers' choice for screen-based entertainment, are duking it out for subscribers — and real estate is fast becoming a key element to their competitive edge.
This year, the so-called streaming wars have ramped up, and the battle is only set to intensify over the next six months. In a few weeks, The Walt Disney Co. will launch its highly anticipated streaming subscription service, Disney+, while NBC’s Peacock and AT&T’s HBO Max are both set to launch in the spring. Apple TV+ — with $6B reportedly available for original content — is available in November.
It is a new era for viewers and content creators, but the impact on commercial real estate could be almost as profound. Increasingly, these companies want to build and control their own production space and creative hubs for their talent.
With more shows vying for the viewers, the pressure is on for the shows to stand out from the pack, meaning bigger budgets and stretched-out production schedules — all resulting in longer-term lease deals, making the real estate they occupy more valuable.
Increasingly, commercial real estate players said, owners of studio space can bank on more demand with greater regularity, and for a longer time. And as streaming giants like Netflix forge ahead with major real estate expansions, big leases and their own production facilities, it could set a new bar for the industry.
“People who are really going after being successful are trying to lock up space,” said Raulet Property Partners’ John Raulet, a broker who also owns a 350K SF production space in Atlanta, a third of which is occupied by Warner Brothers to develop streaming content.
“You can't do that by trying to one-off grab a stage here and grab a stage there as you need it," he said. "These companies have made the decision to take larger chunks of space for a longer term, so they always have something available when content's ready to shoot.”
That approach is beginning to show up in the numbers. In 2011, streaming services accounted for the production of just 2% of original series, according to a CBRE report earlier this year, which cited FX Network Research data.
By the end of 2018, those platforms were responsible for 32% of those shows, causing a major spike in leasing. Some 1.7M SF of production space was leased in the Greater Los Angeles region in 2018, more than double the 780K SF leased in 2011, CBRE found.
“Our stage space in Los Angeles, the vacancy rate is at an all-time low,” said CBRE Vice Chairman Jeff Pion, who is based in LA. He added companies' push into content production means they are leasing up significant amounts of office space, too.
“Netflix, which started up in Northern California, has probably got close to 1.5M SF now in Los Angeles, most of which is clustered in Hollywood,” he said. “You've got Amazon Studios, which is leased close to 600K SF in Culver City."
Real estate companies are taking notice of that growth, as well as the money these platforms are willing to spend making their own shows and films.
Netflix, for example, is losing shows like The Office to NBC’s Peacock and Friends to HBO Max in the next 18 months. But the streaming giant is expected to spend some $15B this year making original works like the Martin Scorsese film The Irishman and the comedy series The Politician. Meanwhile, Apple TV+ has invested its dollars into tapping entertainment royalty like Reese Witherspoon and Oprah Winfrey to generate content.
Budgets like these — and the world's collective love of screen time — give investors like Square Mile Capital the faith to start investing in production space, CEO Craig Solomon said.
Explosive demand means companies will be on the hunt for space in markets across the country that have a high concentration of talent, and the right economics for making content.
“[It used to be] if you had a well-located studio or production space in Los Angeles or New York, you would have six-month arrangements with productions or a year arrangement with productions, perhaps a little bit longer; they weren't long-term lease arrangements,” Solomon said. "That is beginning to change."
Solomon, who co-founded Square Mile in 2006, said these companies also want to lease office space close to their production facilities to build a creative ecosystem.
“The content providers, because it's so competitive, wanted to control and lock up that space for a long period of time," he said.
In August, Square Mile joined with Hackman Capital Partners to buy MBS Group's portfolio from the Carlyle Group, which includes the MBS Campus, a 587K SF studio facility in Manhattan Beach, California. The sale included the MBS service platform, which Hackman will run.
"We continue to be acquisitive in the space,” he said, saying that they are looking to invest in these kinds of assets — which he has described as "cycle-resistant" — across the U.S. and globally. ”That includes New York City, [which] has a shortage of supply and those studios that are here do extremely well."
New York's best-known studios are Silvercup and Kaufman Astoria Studios, both in Queens.
It is not a trend unique to the United States. This year, Netflix leased a major portion of Shepperton Studios, the film studio to the west of London that forms part of Pinewood Group's network of studios. Pinewood is owned by real estate private equity firm Aermont. In August, the streaming giant — which makes shows like The Crown and Sex Education in Britain — leased 134K SF at the UX1 building in Uxbridge, also west of London.
Studio space demand is far outstripping supply in the U.K.; some 1.9M SF will be needed according to brokerage Lambert Smith Hampton.
The Netflix deals were the first examples of long-term leases of that nature, said London-based LSH broker Christopher Berry, but they won't be the last.
“People are going to be forced to follow suit and take longer-term deals," he said, adding that more studio space development is in the works, as well as multiple warehouses starting to be converted into soundstages.
Berry, whose firm represents the BBC and British free-to-air television channel ITV, said companies had already started to push forward toward producing their own content (as opposed to commissioning it) well before streaming platforms began their prolific growth.
Plus, budgets for these kinds of programs have grown significantly, and companies want bigger stages for more ambitious set builds. That runs counter to previously held assumptions that special effects technology would reduce the need for larger stages.
“It’s subscription money,” he said. "TV is attempting to rival the film quality, and therefore they're making content with much higher budgets than they ever used to.”
At Tyler Perry Studios in Atlanta, General Manager of Studio Operations Steve Mensch said the studio now gets calls from companies that a few years ago, weren’t making content at all.
Perry’s new studio, on a former U.S. Army base for which he paid $30M in 2015, officially opened last week and features some 12 soundstages across 330 acres. All of Perry’s productions will be shot on the lot, and other companies can lease there. Last month, Perry and Viacom launched their own streaming service, with some 1,000 hours of shows.
"The fact that there are more content creators in the space, if you are in the facility business, that's all good news,” Mensch said. “With increased competition, there's always two things: one is there's more work being created, and it's reasonable to assume that the quality of content is going to go up, which usually takes more time to produce.”
Some sources said film studios remain a precarious business. Shows come and go, and banks still see these assets as risky, making their development sometimes difficult to finance.
In New York, there are plans afoot for a brand-new, $400M studio in Astoria, which would offer several stages, open and private offices, lounges and production-support areas. The project is being developed by Wildflower Ltd., Robert De Niro, his son, Raphael, and producer Jane Rosenthal. Representatives for the group declined to comment for this story.
Meanwhile, Netflix is planning a major expansion in New York, leasing 100K SF of office space in Manhattan and moving forward with a plan to build six soundstages in Bushwick. The company will be eligible for as much as $4M in tax credits over a decade, as part of the Excelsior Tax Credits program, if it creates 127 jobs by 2024.
And at Doug Steiner’s Steiner Studios at the Brooklyn Navy Yard — the largest film and television complex east of Hollywood — an expansion is underway that will ultimately see the project span 60 acres in the next 10 to 15 years. Amazon Prime's Emmy-winning show The Marvelous Mrs. Maisel is filmed there.
Steiner said investing and building production space could seem like a tempting alternative to multifamily or office in an era of high land prices and rent regulation, but it is not for the faint of heart.
“People are looking for things to do, but unlike [other] uses, this is a particular type of business with a finite workforce and driven by a finite tax credit,” he said.
Owning studio space is wholly different to any other real estate work he has done, he said. And like with all conflicts, the streaming wars will have winners and losers.
“There are a lot of players each trying to be the next HBO and they can't all be successful," Steiner said. "While there are a lot of players today I think that will get whittled down over time."