Mention “studio offices,” and what might come to mind are bungalows near huge TV sound stages and movie grounds all over Southern California. Still, according to a recent Green Street report, commercial studio real estate – specifically, production space and office space – could be considered an attractive alternative type of commercial real estate investment.
The report acknowledges that the sector is smaller than others – specifically, less than 30 million square feet worldwide (soundstage and office space combined). But within the industry itself — in which streaming services continue to demand more and more content — the ownership type “benefited from increased content spending,” the report said. In addition, the sector’s cap-ex is in line with the commercial real estate average.
The studio space consists of two facets:
- Stage/production space, consisting of large areas and clear heights up to 35 feet. Acoustical designs and an adjacent “control room” tend to make this space highly specialized.
- Office support space, which is more like a suite and close to the stage/production space. Tenants in this space are typically not represented by leasing brokers, but landlord-occupant relationships are critical to successful leasing.
Studio space differs from standard office space in the following ways:
- Shorter rental periods, due to the uncertainty typical of the entertainment industry. But Green Street said this niche is moving more towards longer-term leases, in line with demand.
- Incidental income, in that landlords contract with tenants to provide additional services, including lighting, HVAC, telecommunications, and additional rental equipment. Some of this could be negotiated with the rent.
- Lower NOI margins, in the mid 40% range, compared to the low 60% range of the standard desktop. However, higher demand, over time, increased scale and longer leases could improve this measure.
- Credit qualitybecause film and television production is generally financed by large studies.
- Supply barriers, especially in infill urban markets, such as Hollywood. However, the Green Street report indicates that supply in the outer suburbs and suburbs is growing.
While there may be growth in this particular niche, the Green Street report issues various caveats to potential investors. Real estate caters to a narrow industry (media and entertainment), which means high concentration risk. There is also a lack of data available in the public domain, which means good investment decisions can be difficult. Finally, supply variables continue to be problematic.