When Harry, Albert, Sam and Jack Warner, Polish émigrés who arrived in Los Angeles via Canada and the Midwest, bought a vacant farm on Sunset Boulevard, the history of entertainment changed forever.
At the Warner brothers’ eponymous studio, the first-ever talking picture, Al Jolson’s The Jazz Singer, was made, and cinema as we know it today was born.
A century later, the modern iteration of that studio is part of a similarly momentous change to the way we make and consume the stories we tell about our world — one that could have a big impact on real estate, as well as film and television.
When Blackstone buys into a sector, it does it in a big way, and its investments often presage wider shifts in society and real estate — just think of the way it bought into industrial and logistics after the financial crisis as the wave of e-commerce broke around the world.
Its newest investment theme is film studios, and while the world is unlikely to ever need as many studio soundstages as it does distribution centers, the real estate giant has grand ambitions in the sector.
“Our business comes down to identifying themes we believe in, and then finding ways to invest in those themes,” Blackstone Head of Real Estate in the Americas Nadeem Meghji told Bisnow in an interview. “Content creation is a megatrend, and there has been explosive growth in both the demand for content and the spend among traditional media companies and the big film studios.”
Blackstone is backing up its belief in the theme of content creation, and the real estate that supports it, by buying a 49% stake in Hudson Pacific’s Hollywood Media Portfolio, also known as Sunset Studios, a 2.2M SF collection of Los Angeles studio facilities and office buildings valued at $1.65B. The joint venture was agreed between Hudson Pacific and Blackstone Property Partners, the investor’s core-plus vehicle, in June.
The deal includes Sunset Bronson, Sunset Gower and Sunset Las Palmas Studios, which collectively comprise 35 soundstages totalling 1.2M SF of production and support space in Hollywood. It also includes 966K SF of office properties that Hudson Pacific has developed on or adjacent to the lots, specifically 6040 Sunset, ICON, CUE, EPIC and the soon-to-be-completed Harlow.
Netflix is the portfolio’s largest tenant, leasing more than 700K SF, in addition to signing long-term deals for stages and production space, with some leases as long as 10 years.
The Sunset studios portfolio is marinated in film and TV history. But being anchored by tenants like Netflix puts the portfolio at the forefront of the changing way in which film and television is made, and the way its business model works.
Owning successful commercial real estate has historically been about creating places people want to come to when they leave their home, but owning film studio property allows owners to capitalize on the fact that we are increasingly content — or required — to stay at home to have fun.
One of the studios in the joint venture, Sunset Las Palmas, was set up in 1919 as Hollywood Studios, and the early stars and directors who put Hollywood on the map, like Charlie Chaplin, Harold Lloyd and Douglas Fairbanks, filmed there. Sunset Bronson, then Warner Bros. Studio, is where The Jazz Singer was filmed and recorded, the fact that words and pictures were married for the first time giving a huge boost to the pastime of going to the cinema. As time went on, from the 1950s to the early 2000s, the studios in the portfolio were the location for TV shows like I Love Lucy and The Golden Girls, which exemplified the media business model of TV shows made to be shown at a specific time and funded by advertising.
Today, Sunset Bronson is home to Netflix, a technology and production company that makes some of the most renowned films and TV shows of the era, and is at the leading edge of persuading us all to stay at home and consume content whenever we feel like it, on any device with a screen.
According to MoffettNathanson, the 10 largest companies in the content creation business spent around $80B in 2019, a figure that has nearly tripled over the last three years. Disney was top of the league at nearly $19B, with Netflix’s spend topping $9B.
Once upon a time, those companies would have rented space on a soundstage on an ad hoc basis if they didn’t own their own studios. Today, the fact that companies like Netflix or Amazon are simultaneously creating multiple films and series that comprise many seasons as a way of driving subscription revenue, means they can’t leave it to chance. That change in the distribution method and business model of TV and film has created an opportunity in the world of real estate.
“LA remains the capital of film and television production,” Meghji said. “You have rising demand and limited supply. You have an increasing number of recurring series being created that are filmed on soundstages and not on location. As soon as one show is finished, they are straight on to filming the next one, and companies need to be able to secure that space.”
As a result, in a real estate world where, in almost every sector, leases are getting shorter, in this one, they are getting longer. Previous reports about Netflix taking space at Sunset Bronson said the company had signed 10-year leases.
“Leases are getting longer, which is absolutely the trend we are seeing,” Meghji said. “There are a limited number of these soundstages, and that makes them increasingly valuable.”
The Harlow office building at Sunset las Palmas is the latest to be completed by Hudson Pacific. The growth of the sector is exemplified by the financials of the Sunset Studios portfolio since Hudson Pacific bought it in 2007. Since 2010, when Hudson Pacific became publicly listed, the portfolio has grown from 972M SF to 2.2M SF, with land that can support another 1.1M SF of development, according to a presentation to Hudson Pacific investors.
Meghji said that room for further expansion was a key attraction for Blackstone in the deal. Net operating income has risen from $18.6M to an estimated $68M in 2020. About $38M of that will come from the studio space, the rest from the offices, with Meghji pointing out that the two are highly interdependent: Production companies use the office space for post-production and marketing and other uses associated with the filming itself. The portfolio is 93% occupied. Blackstone paid what amounts to a 5% cap rate for its share of the venture, the investor presentation showed.
When asked why Blackstone took a stake in the venture through its core-plus vehicle, rather than one of its opportunity funds, Meghji said it used the vehicle that is a long-term holder of assets. And in terms of backing its conviction, Blackstone and Hudson Pacific have appetite to do more in the space.
“This is a fragmented market with myriad owners,” Meghji said. “Our studio platform is significant, but it is still only 35 soundstages out of more than 500 in North America. We think there is an opportunity to consolidate and build scale, and that was part of the thinking behind the JV. We will be focusing on a handful of markets, but there is definitely an opportunity to expand the platform.”
In its investor presentation, Hudson Pacific highlighted Vancouver, New York and London as potential markets for expansion. London is a market where another real estate investor, private equity firm Aermont, has invested in the sector and done very well. It bought the Pinewood network of studios to the west of London in 2016 for £365M, but a recent £600M refinancing valued the business at £1.15B. The value of the business was again significantly buoyed by Disney and Netflix signing long leases on studio space.
Meghji said his current favorite TV show is Medici, the Netflix series about the 15th century Florentine dynasty that dominated Renaissance finance and funded the creation of some of the period’s great art. An apt choice as Blackstone builds a new empire.
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