Leases  ·  Office

Strikes, Slumping Office Market Hurt Hudson Pacific’s Bottom Line in 2023

L.A. REIT grappling with studio production that’s below pre-strike levels as show business takes longer to get back into action

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Hudson Pacific Properties(HPP) stock price declined more than 16 percent Tuesday after the company announced results from a particularly trying 2023, and said show business has been slow to boost the company’s prospects for 2024.

After a year with historic Hollywood labor strikes, high interest rates and declining demand for office space, the Los Angeles-based REIT reported lower revenues, less leasing and much greater net losses compared to 2022. Hudson Pacific Chairman and CEO Victor Coleman said the “once-in-a-generation dual studio union strike effectively shut down the entertainment industry,” leading to a 40 percent drop in film and TV production in 2023.

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“Many industries, including tech, focused on cost cutting, in part through layoffs and real estate downsizing,” Coleman said on Tuesday during HPP’s fourth-quarter earnings call. “While the nationwide office leasing activity improved incrementally in the fourth quarter, it remained about 10 percent below the five-year quarterly average.”

The office and studio REIT reported $952.3 million in total revenue on the year, compared to $1.03 billion in 2022. Its office revenue declined 4.7 percent in 2023, from $852.7 million to $812.4 million, while studio revenue fell more than 19 percent to $140 million in 2023 when compared to 2022.

That led to a net loss attributable to common stockholders of $98 million in the fourth quarter, and $192.2 million on the year, which is more than 3.5 times greater than it was last year. 

In the fourth quarter, HPP and Macerich sold the Google-leased One Westside and Westside Two office redevelopment to UCLA for $700 million, as well as a 5.3-acre land parcel in North San Jose for $43.5 million. Further, Hudson Pacific also sold tranches of debt associated with the Blackstone-based Hollywood Media Portfolio, generating $145.8 million.

Hudson Pacific’s office portfolio declined in the fourth quarter at 80.8 percent occupied and 81.9 percent leased primarily because of the sale of One Westside. And HPP displayed little hope for major improvement in office leasing activity this year.

“In 2022 and 2023 we had an atypically high number of office leases expire, largely the result of short-term renewal leases signed during the pandemic,” HPP President Mark Lammas said. “[This year] our occupancy will likely be under pressure at least during the first three quarters of the year with the potential to return to essentially flat occupancy by year-end.”

Despite the sale of One Westside, Google is still HPP’s largest office tenant, leasing four properties for almost $52 million per year, making up 10 percent of the landlord’s base rent. Amazon, Netflix and Riot Games are the next largest tenants. Remarkably, nine L.A. offices are 99.6 percent leased. (Most of HPP’s office portfolio is in the San Francisco Bay Area, and that portion is only 74.6 percent leased.

HPP’s studio portfolio ended the year 80.4 percent leased after a tenant vacated six stages at Sunset Las Palmas due to the actors and writers strikes. The return is slowing progress and activity in 2024, too.

“Following SAG-AFTRA’s contract ratification in December, production companies have been slow to greenlight new productions,” Coleman said. “In January, production counts remain approximately 20 percent below 2021 and 2022. Based on the level of activity we’re seeing in real time, we now anticipate that production levels may not materially improve until the second half of the year. Media companies are still adjusting their business models through both revenue-generating and cost-saving measures.”

Coleman emphasized, however, that original content remains integral to subscriber growth, and pointed out that Netflix budgeted $17 billion in spending on content for the year, which is in line with the streaming service’s 2021 and 2022 pre-strike spend. 

“In 2024, our priorities are fourfold,” he said. “Aggressive leasing within our studio and office portfolio, executing on opportunistic dispositions, successfully progressing our New York studio development, and further fortifying and deleveraging our balance sheet.”

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.