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Lights, Camera, Action! Understanding Studio Office Investments
Mention “studio offices,” and what might come to mind are bungalows near huge sound stages on television and movie lots throughout Southern California. Yet according to a recent report from Green Street, studio commercial real estate – specifically, production space and offices – could be considered an interesting alternative investment type within commercial real estate.
The report acknowledges that the sector is smaller than others – specifically, less than 30 million square feet globally (sound stage and office space combined). But within the industry itself—in which streaming services continue to demand more and more content—the property type “has benefitted from growing content spend,” the report said. Furthermore, cap-ex for the sector is in line with the commercial real estate average.
Studio space consists of two facets:
- Stage/production space, made up of big-box areas and clear heights up to 35 feet. Acoustic designs and an adjacent “control room” tends to make this space highly specialized.
- Office support space, which is more suite-like and proximate to stage/production space. Tenants in this space are generally not represented by leasing brokers, but landlord-occupier relationships are critical for leasing success.
Studio space differs from standard office space in the following ways:
- Shorter lease terms, due to typical entertainment industry uncertainty. But Green Street indicated that this niche is moving more toward longer-term leases, in line with demand.
- Ancillary income, in that landlords contract with tenants to provide additional services including lighting, HVAC, telecom and additional rental equipment. A portion of this might be negotiated with the rent.
- Lower NOI margins, in the mid-40% range, versus the standard office’s low-60% range. However, higher demand, over time and increased scale and longer leases could improve this metric.
- Credit quality, as film and television production is generally sponsored by major studies.
- Supply barriers, especially in urban infill markets, like Hollywood. However, the Green Street report indicates that supply in outer rings and suburbs is growing.
While there could be growth in this particular niche, the Green Street report issues various caveats to would-be investors. The real estate caters to a narrow industry (media and entertainment), meaning high concentration risk. There is also a lack of available data in the public domain, meaning sound investment decisions can be difficult. Finally, supply variables continue to be an issue.
- ◦Lease
- ◦Sale/Acquisition
