By Peter Grant
A Blackstone Group partnership is planning to develop a new office tower near the sprawling Burbank and Warner Bros. studio complexes in California, where television programs such as "The Ellen DeGeneres Show" and "Days of Our Lives" are produced.
Blackstone's plan with Worthe Real Estate Group to build the 500,000-square-foot tower represents one of the largest U.S. office developments to move forward this year.
The project, which will be positioned to attract employees in the entertainment business, is a sign that space serving the TV and film industries is one of the few bright spots in the office sector during the coronavirus pandemic, which has forced many employees to work from home.
"Content creation is one of our highest conviction themes," said Nadeem Meghji, Blackstone's head of real estate Americas. "We're seeing long-term demand growth."
Like data centers and cold-storage warehouses, production-related facilities are niche property investments that have performed well of late. They are attracting more investment dollars as property owners sour on traditional holdings such as hotels, retail space and office buildings during the pandemic.
The virus that causes Covid-19 has prompted Hollywood to close theaters, postpone film releases, lay off workers and cut costs. But the high consumption of streaming content by hundreds of millions of people sheltering at home is translating into strong demand for studios where it is produced and the office space that supports it.
Starting in August, casts and crews began returning to their studio sets. Several of California's largest leases signed since the pandemic hit have been in Burbank, including one for 170,000 square feet that Netflix Inc. agreed to in September.
"The studio parking lots are full again because people are back filming, " said Jeff Worthe, president of Worthe Real Estate and the largest owner and developer of office space in Burbank.
Mr. Worthe said the decision to move ahead with the new building was made recently at a meeting of the venture that he formed with Blackstone in 2017. The venture owns 13 buildings and five development parcels, acquired for a total of $1.7 billion.
"It's very difficult to produce a television show on Zoom," he said. "You need the writers together in the writers' room. You need to cast it. You need to film and edit it."
Blackstone has been involved in other entertainment deals since the pandemic began. The firm in June purchased a 49% stake in a venture that will own three film-studio lots and five adjacent buildings in Hollywood, in a $1.65 billion deal. Netflix, CBS and Walt Disney Co. are among the facilities' customers, according to Hudson Pacific Properties Inc., which kept a 51% stake.
Blackstone and Worthe are likely to break ground on the new building in 2022 on a site adjoining an existing office tower. That 480,000-square-foot property is fully leased thanks partly to demand from the Burbank Studios, which is across the street.
Burbank Studios is a 35-acre complex, and includes the site of the former NBC Studios where Johnny Carson hosted "The Tonight Show." Warner Bros. said last year that it would expand into two new Frank Gehry-designed office buildings and other properties in the complex.
The new development comes at a difficult time for the Los Angeles office market, which has suffered during the pandemic. With many employees working from home, leasing volume has fallen sharply and sublease space on the market swelled to 6 million square feet in September, up 46% from a year earlier, according to CBRE Group Inc.
But most of that sublease space is coming from startups and other smaller companies. "We're not seeing large offerings from the studio players," said Eric Willett, a CBRE research director.
At the same time, the pandemic has fueled demand for Los Angeles studio space because actors and crews are reluctant to travel to shoot scenes for fear of the virus.
"The potential of another uptick puts renewed attention on sound stages locally," said Carl Muhlstein, an international director with real-estate firm JLL.
Office buildings located close to studios are considered especially healthy. For example, in July, DBRS Morningstar issued new ratings on some $660 million in debt, most of it backed by four of the buildings in the Blackstone-Worthe partnership. The ratings showed no deterioration from ratings on the bonds before the pandemic.
The ratings report says that leasing risk in the portfolio is limited by the properties' proximity to studio headquarters. One of the buildings "is considered a mission-critical location for Disney, which has invested over $40 million in the building's infrastructure," the report states.
--Joe Flint contributed to this article.
Write to Peter Grant at email@example.com
(END) Dow Jones Newswires