While the COVID-19 pandemic has had an adverse impact on commercial real property markets in much of the country, an ever-increasing demand for streaming content has caused existing studio space in Los Angeles and elsewhere to become even more valuable, and the demand for studio space continues to rise. In this Q & A, Venable partner Andrew Schmerzler discusses some of the long-term trends that have contributed to this increased demand, tech companies making a commitment to Los Angeles (leading to the rise of “Silicon Beach”), and how the pandemic is accelerating these trends.
- The increased availability of streaming services has changed how we consume content, but to what extent has this change impacted the commercial real property market?
There’s a big difference between going to the theater to see one movie or watching a weekly episode of a television show, and binge watching an entire series over a weekend. As a result of the way in which we now consume entertainment, the demand for content and the pressure to keep producing content have increased exponentially since the advent of streaming. We’re also spoiled for choice. Just flick around your smart TV and you’ll find seemingly endless offerings. This of course means that content providers need production space to film that content. Now obviously, not all of this content is actually filmed in or around Los Angeles—there are very active production facilities in New York, Atlanta, Canada, England, and other hubs around the world—but nonetheless, a large percentage of the content has traditionally been and will continue to be filmed in Los Angeles. So existing studio space has become much more valuable, and the demand for studio space continues to grow. As more companies, including tech companies, jump into the production and distribution of content, there is a recognition of a long-term need for space to produce that content.
- The COVID-19 pandemic caused a lot of productions to shut down for some time. Shouldn’t that have had a negative impact on demand?
Not really. The deals that we’ve been involved in and that others are doing are part of much longer-term trends related to the public’s demand for content. So, the temporary shutdown of productions didn’t really have any meaningful impact. If anything, COVID-19 has actually helped drive demand for production space in Los Angeles. Since the pandemic began, we have seen production companies that in prior years would likely have elected to film elsewhere instead choose to film in Los Angeles, as they believe they can better control the distancing requirements and comply with other pandemic-related restrictions. Quarantine requirements elsewhere have also made it more difficult to shoot on location. For instance, Canada has very rigorous quarantine requirements that require people to self-isolate for two weeks. Among other things, that means production companies may be required to incur additional expenses to put their cast and crew up in hotels for two weeks prior to shooting. These extra costs, combined with a reluctance to travel, are driving the increase in local productions and hence the increased demand for space.
- Is the demand for space being fueled by existing entertainment companies or by new entrants into the Los Angeles market?
Both. Many of these deals that we, and others, are doing involve established players in the entertainment industry. For example, my partner Mitch Evall and I helped Warner Bros. on its “Second Century” project. That project, which was finalized in 2019, involves, among other transactions, Warner’s long-term leases of two new Frank Gehry-designed office buildings, with a total area of approximately 800,000 square feet, and its acquisition of the balance of the iconic Burbank Studios. We have also seen a marked increase over the past few years in the acquisition and leasing of properties in LA by technology companies that previously did not have much of a footprint in Southern California. For example, over the past few years Mitch and I have represented a major online content provider, which was originally located in Silicon Valley, in significantly expanding its presence in Los Angeles. The most recent of these transactions included the negotiation of a long-term office lease for a space in which they intend to house one of their production groups.
- Are other Silicon Valley companies entering the market?
Oh, yes. With the ongoing convergence of entertainment and tech, many of the major tech companies are making a big commitment to space in Los Angeles. This trend of big-name tech companies looking for a foothold in Los Angeles has been under way for around ten years already. At least part of the reason for that is that tech companies are increasingly involved in producing content. So, this trend also helps explain why studio space is becoming more valuable and why there’s a lot of activity in that market.
- Real estate markets have been struggling across the country. Is what’s happening in Los Angeles bucking other real estate trends?
The real estate market in LA is decidedly mixed right now. In particular, office and retail are both suffering tremendously. Many office buildings are operating at 20% capacity or less, so the LA market is experiencing the same kind of slowdown that is being felt across the country. The retail market is also struggling, with restaurants in LA County just suffering another blow as dine-in service again was recently suspended in an attempt to slow down transmission of the virus. LA is lucky, however, that in the midst of the general bad news, there are a few bright spots. The residential market is still very hot here, there is also a good amount of activity in the industrial and biotech space, and, of course, the area of studio production space is a good news story that is fueled by the demand for entertainment content. While with some exceptions entertainment companies aren’t generally looking for new office space, they continue to need production space because that is work that cannot be done remotely.
To learn more about Andrew Schmerzler’s real estate practices, click here.