LA's Studio Spaces Face An Uncertain Season Amid Mergers, Economic Slowdown

In the wake of media mergers, a rough first half of the year for big names in streaming and general economic gloom, the entertainment industry’s once-voracious real estate needs are shifting, at least in the short term.

Because productions are planned so far in advance, it is hard to gauge the full impact of the latest economic events on the long-term demand for studio space, but content producers have telegraphed their intent to scale back.

“Many media and entertainment companies have noted plans to slow content spend as they push toward a focus on profitability, a shared concern across the broader market amid falling share prices and valuation multiples among less profitable companies,” an October report from Green Street on rising investor interest in studio space said.

The report calls these plans “a potential risk for studio landlords.”

These leaner times for media companies come as there are over 2M SF of soundstages planned for greater Los Angeles — the world’s largest studio market — from the San Fernando Valley to Downtown LA. Spurred by growing interest in the property type from developers and investors, a need to update aging stock and the well-documented streaming boom, these projects are in various stages of planning in a tumultuous time for media and the wider economy.

In July, after a disappointing second quarter, Netflix announced it would take an $80M write-down in order to exit some of its real estate leases. That, coupled with the company’s stock dropping 35% in the spring, was startling. Though Netflix's stock rebounded, the company’s bumpy ride cast doubt on streaming media’s ability to keep growing at such a pace. 

“There was concern over the past year, with some of the big entertainment users seeing a dip in their stock,” JLL Managing Director Nicole Mihalka said.

But while Mihalka said she sees hints of larger content providers recalibrating their space needs, studio space demand remains strong simply because “there's really nowhere to go — there aren’t many opportunities out there for there to be a surplus of supply for soundstages in the core areas of Los Angeles.” 

Soundstages in Los Angeles County have been almost fully rented for years, according to FilmLA, the nonprofit that oversees film permits in the city and county of Los Angeles. The business used to rely on short-term leases for space, but with the increasing number of potential users and the slim supply, it has shifted to longer-term leases. That shift made it harder for new productions to find space, experts say.

“We know that there's still demand for long-term stage leasing, but there's just no product,” Mihalka said. 

Historically, acquisitions have been a factor in bigger content creators’ decisions to seek out more space. When they acquire new sectors of business, that sector needs its own space, Mihalka said.

But a major merger, the union of WarnerMedia and Discovery, so far seems to be resulting in paring down rather than sizing up.

As part of a cost-saving plan, the company anticipates making cuts involving "facility consolidation activities and other contract termination costs" to the tune of $400M to $700M, Warner Bros. Discovery, as the new company is called, reported in a Monday filing with the Securities and Exchange Commission.

The costs will be spread over two years, the Los Angeles Times reported. 

While the effects of consolidation on the demand for studio space are factors that FilmLA is watching, it is far too early to tell what the impacts will be industrywide, FilmLA spokesperson Philip Sokolowski said. It will likely be at least a year before the effects show up because most studios book their space in advance.

But the other major content producers are "continuing to offer guidance toward higher content spend this year than they have in the past,” Green Street analyst Dylan Burzinski said. 

Burzinski, who co-authored the report for Green Street about rising investor interest in studio space, also said that many legacy media companies are still playing catch-up to the Netflixes of the streaming world. Those companies are continuing to invest in content, and it follows that they will need space to do that. 

“These businesses tend to be cyclical in nature, so a downturn in the broader macroeconomic environment is maybe going to have them reassess their needs” for content, Burzinski said.

Even so, “content spend is likely to remain elevated relative to what it's been over the last five to 10 years across the broader media and entertainment space,” he said.

Some in the industry have said that even if there were a scaling back of production, it might not make a dent in such aggressive demand.

“We’ve seen streaming growing at an average rate of 35% a year,” FilmLA President Paul Audley told the Los Angeles Times in August. “Even if that backs off, which some people are now predicting, we still don’t have enough stage space to deal with that.”