The Curtain Fell For Thousands Of Movie Screens. Survivors See Opportunity

The United States has lost more than 2,165 movie screens since 2019, more than 5% of the country’s total inventory, as theater operators were forced to close or adjust programming during the pandemic. 

Now, as the summer blockbuster season gets into full swing, some operators see those vacant spaces as an opportunity to quickly grab market share at a discount from landlords eager to replace their lost anchors.

Alamo Drafthouse Cinema, the 12th-largest movie chain in the country, is eyeing some of these vacant theaters in malls and mixed-use locations for its next phase of growth, which includes opening five to 10 theaters in each of the next five years. 

The Texas-based chain, which now has 39 locations, became one of the first theater chains to declare bankruptcy in early 2021. But as the broader retail sector emerges from the pandemic, Alamo Drafthouse's executives say the theater chain, which drives a large portion of revenue from its full kitchen and bar offerings, is once again ready for its close-up. 

“We think there's a big opportunity for real estate owners to really take an introspective look to see what their facilities need to be able to not only survive but compete for the long haul and the cinema business,” said Chris Drazba, the chief development officer at Alamo Drafthouse. “We think that our business model is exactly what consumers want nowadays.”

Alamo Drafthouse isn’t the only chain looking to expand. AMC Theatres closed 106 locations while opening 49 new ones during the pandemic, but its CEO said in November that it was looking to leverage its liquidity to “pick up theaters quite inexpensively and pick up really high-quality theaters and potentially quite profitable theaters.” 

Executives at Cinemark, which operates 516 theaters in the U.S., said on a May 5 earnings call that it is expanding into new markets while closing underperforming locations.

The expansion pushes come as the movie theater industry continues to recover from pandemic lows. Box office numbers still lag pre-pandemic earnings because of a decline in the total number of theatrical releases, according to The Cinema Foundation’s 2023 report. Movie theater foot traffic was 34% below 2019 levels in 2022, according to a report from location data company Placer.ai.

The industry’s sluggishness to fully recover is working against theater operators in their push to expand, said Scott Burns, managing director and retail brokerage lead for JLL in the greater Los Angeles market. Cinema chains rely on box office and foot traffic data to negotiate beneficial lease terms with landlords, and their bargaining power is weakened by their current underperformance, Burns said. 

“It’s not a great time to lock in a long-term lease,” Burns said. 

He said he expects more theaters to close as the industry shifts toward smaller footprints with fewer screens. Large properties with 15 or more screens are more likely to be redeveloped than to be replaced by another operator, he said. Smaller cineplexes could still be good opportunities for chains looking to expand, he added. 

Analysts say theatergoers, after spending years during the pandemic watching new releases at home, are looking for a more premium experience. More than a third of theater operators told The Cinema Foundation in a survey that they plan to add alcohol service to some of their theaters in the next three years.

Operators are also upgrading theaters to lure moviegoers. More than half of survey respondents said they planned to upgrade sound systems and projectors in the next three years, and around 40% of respondents said they were planning to add recliner seating or upgrade to large-format screens. 

Older theaters have had trouble adjusting to new demands. Cineworld, the parent company of Regal Cinemas and second-largest theater operator in the world, shuttered at least 69 locations as it underwent Chapter 11 bankruptcy last year. It filed plans last month in a Texas court to reorganize after scrapping plans to sell off portions of its business.

Pacific Theaters, which includes ArcLight Cinemas, filed for a Chapter 7 liquidation in June 2021 after its 17 theaters had been closed for more than a year. At the time, the company had $69M in liabilities and $5M in total assets. AMC snapped up at least four of the locations, taking over theaters in Los Angeles and Chicago in December 2022 and two other locations in San Diego and Washington, D.C., two months later.

Alamo Drafthouse’s bankruptcy in March 2021 was one of the first for the industry during the pandemic. The company was unable to service about $105M in long-term debt and closed three theaters as part of its restructuring, including its original Downtown Austin location. 

“There was a lot of hand-wringing between lenders and landlords and also among our investors,” Drazba said of the bankruptcy. “It just made sense to take our company through bankruptcy, restructure our organization and fortify our balance sheet for the long haul.”

The company operates largely under a franchise model and owns 40% of its operating locations and 20% of its development pipeline. Drazba said the theater chain negotiates with studios on screening rights on behalf of franchisees, which allows them to focus on operations. 

“None of the people I talk to on the outside about franchising have an understanding of how to negotiate film-buying with Disney, Sony, Universal, etc. So they really do rely heavily on Alamo in that regard to run their business,” Drazba said. “Then when we're able to take that complexity away, the day-to-day operations really becomes about running a food and beverage operation.”

Landlords and theater operators frequently enter into these types of deals, called management agreements, leaving the operations to tenants while splitting the profits. Burns said that he expected these agreements to become increasingly common during this transitional period for the industry. 

“There are some new chains out there that are looking to increase market share, so you will see transactions being made with certain chains,” Burns said. “I think you'll see a trend towards operating agreements being signed with owners where an owner owns the building and they have all the screens set up. If a tenant moved out, they bring in an operator partner.”

Alamo Drafthouse, like AMC, has already taken over one premium theater. Its next location to open will replace Boston’s ShowPlace Icon Theatre, which closed in 2021. The upscale theater had opened in 2018 at One Seaport, a two-block retail center in the Seaport District. 

The 44K SF space included a full-service restaurant and bar, which Alamo Drafthouse said was a key feature it looked for when considering a space. The property’s owner, WS Development, said that Alamo Drafthouse’s expanded amenities fit with what the retail center’s customers were looking for. 

"The process of bringing Alamo Drafthouse to Seaport Boston involved careful collaboration to revitalize the theater space and deliver a unique cinematic experience,” Todd Norley Jr., the vice president of leasing at WS Development, told Bisnow in a statement. “Alamo Drafthouse has an innovative approach to movie screenings, with a commitment to creating an immersive environment, dynamic programming, and award-winning food and beverage. They have created a new dimension to the movie-going experience that sets them apart from traditional theaters.”

Drazba said Alamo Drafthouse, with its full-service offerings, was uniquely positioned to take advantage of the shift in consumer demand. But of the thousands of newly vacant theaters across the country, for many, the credits have rolled and the curtain has come down.

“If they were released by another circuit, there was something wrong with the market, with the condition of the building, perhaps even maybe the saturation of the overall supply and that immediate trade area,” Drazba said. “So we have to evaluate each of those buildings on their own merits.”