Hollywood’s Studio Leasing Problem Is Much Worse Than You Think

You don’t need to study Hollywood’s golden ages or sift through decades of box office numbers to see there are major problems in Tinseltown that have forced an existential crisis on the entertainment capital of the world.

Anyone around just a few years ago during the feverish Streaming Wars can see how quickly show business has descended into a dismal scene. Now — more than a year after the end of the historic labor strikes that shut down the filming industry, and long after people forgot about social distancing — half the film and TV production stages in Los Angeles are said to be empty.

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The Otis College Report on the Creative Economy released March 27 found that, compared to the peak in 2022, the number of shooting days in L.A. County was down 42 percent in 2024. And analysts estimate Southern California’s production levels are a staggering 50 to 70 percent below their peak just six years ago.

The declining level of filming activity and rising industry unemployment numbers are more than alarming, particularly as the region wrestles with a high cost of living and economic uncertainties. And all these challenges were evident and insurmountable in many cases even before the region was hit by historically devastating wildfires in January.

This is not necessarily from a lack of demand for new content, either.

“California is not the first, second, third, fourth or fifth choice for filming at the moment,” said Sam Nicassio, president of Los Angeles Center Studios.

The entertainment industry’s distribution and marketing sectors are likely to remain in L.A. over the long term, but stakeholders say Hollywood is in serious danger of losing its claim as the best place to make movies and television.

Jason Hariton — chief studio and real estate officer at MBS Group, the operator affiliate of the biggest owner of content creation space in the world, Hackman Capital Partners — said L.A. is not competitive in terms of attracting new high-end film production.

“It’s not even on the list in terms of being competitive with those other major markets,” he said.

Oh, how quickly we forget.

Very recently, companies such as Netflix (NFLX), Amazon (AMZN) and Facebook were racing to spend as much money as they could to build up their content libraries. They edged their way into Hollywood to compete for eyeballs, and for creative real estate, with the likes of Disney, Warner Bros., Fox, Paramount and Sony — who were themselves also racing to establish their own streaming platforms.

Netflix, the era’s darling, led the new wave after moving its L.A. base to Hollywood and master-leasing as much studio space as it could while also declaring it didn’t care about other states’ tax incentives. Netflix’s executives made it clear they were betting on California.

As leasing rates grew with viewer subscriptions, studios and their new streaming divisions similarly told developers that if they built more soundstages, they would lease them. That led to this story’s apparent climax when an asset management firm by the name of Blackstone (BX) came to Hollywood in 2020 to break into show business.

The real estate company bought a 49 percent stake in Hudson Pacific Properties’ 2.2 million-square-foot portfolio of soundstages and Class A office space — all in Hollywood proper — and partnered with the L.A.-based real estate investment trust to expand the portfolio with new soundstage development in Southern California. Netflix is the portfolio’s largest tenant, leasing 700,000 square feet of the office space on Sunset Boulevard.

The move from an asset management titan like Blackstone — which was not traditionally involved in show business real estate — unofficially led to the incredible surge of new outside investors showing up at L.A. City Hall with plans to build soundstages to take advantage of the massive content creation budgets coming out of Hollywood.

But that was before the historic writers and actors strikes in 2023.

Hollywood has survived many challenges — from the world wars and the Red Scare to a global pandemic. It’s even been through past “runaway production” scares in the 1980s and 1990s, when some studios sent crews to Canada to take advantage of its new tax incentives.

Coming out of COVID, there was a record amount of production activity in every market because there was so much pent-up demand and streamers coming online.

But, this time, it’s different. After the strikes ended, it didn’t open the floodgates in the same way it did after COVID restrictions were lifted.

“I think there was hope that, in January 2024 — bam — we’re all gonna be back in business,” said Nicole Mihalka, vice president at CBRE’s Downtown L.A. office. “But we were slower to ramp up, mostly because all the projects that had been previously greenlit, that were put on hold, needed to be reactivated.”

Hariton said there is no instant on/off switch this time.

“It’s been incredibly challenging in Greater Los Angeles and in California in terms of production activity,” Hariton said.

Leading up to the strikes, it became clear that having subscribers alone wasn’t going to cover the billions spent each year on production. In response, companies cut their budgets and headcounts significantly. That made worse the latest wave of projects being pushed elsewhere.

The Otis report also found that there are still 25 percent fewer film and TV jobs in the state than in 2022. Only 26 percent of the jobs lost during the strikes have been recovered, “underscoring the lingering impact of an industry in transition.”

That transition also includes rising competition from user-generated content. Studios now find themselves competing for viewers, not only among each other, but also with YouTube and other online platforms that showcase content by amateurs filming in backyards or basements.

To see that Hollywood didn’t fully recover from the double labor strikes throughout 2024 has struck fear in stakeholders and investors in the future viability of having so much studio space.

Even worse, Netflix is considering leaving those same office buildings on Sunset Boulevard that were part of the landmark Blackstone recapitalization. The streaming giant is thinking of relocating from those buildings, which is more crushing considering the same company has been busy opening new stages in New Jersey, Brooklyn, the United Kingdom and other markets outside California.

Hudson Pacific, one of the largest studio developers and Netflix’s favorite landlord, suffered similarly during the strikes, and the REIT’s stock price has fallen 92 percent since its record high five years ago. The development firm has also canceled plans for a new studio development outside of London.

“Looking ahead, the film, TV and sound sector appears to be settling into a ‘new normal,’ characterized by lower employment and production levels compared to its pre-strike peak,” according to the Otis report.

That new normal could be difficult to accept. But, indeed, a recent report from ProdPro, which surveyed crew members, executives and suppliers on the outlook for 2025 and 2026, showed that none of the top five preferred filming locations was in the U.S.

Ghost lights
L.A. Center Studios’ Nicassio said he tracks utilization at about 300 soundstages in Southern California, and half are empty right now because global film production is much lower than a couple of years ago, while there’s also far, far more available production space than ever before.

“There are 85 jurisdictions in the world right now that have film and TV tax credit incentives, and that number grows,” he said, adding that many other markets have more favorable programs than California’s.

Hariton is the fourth generation of his family working in the L.A. entertainment industry, and he previously oversaw global production operations for Netflix. Speaking from his office at the Radford Studio Center, he said it was until recently one of the busiest locations in Hollywood.

“You could never get a stage at Radford,” he said. “Our occupancy now is higher than the competition, but we’re at the lowest occupancy that we can ever remember.”

He said filming and entertainment is at an inflection point because it has become a worldwide business. In the 1980s and 1990s, some productions left Hollywood for newer, secondary markets like Canada to save money. But it would entail bringing an American crew with them.

“Now the entire business is global,” Hariton said. “You can shoot the largest of tentpole films in the likes of a London or a Sydney, or Budapest even. And there’s 100 percent local crew. Canada has a very robust and talented crew base, and so do a lot of locations in Eastern Europe and London.

“A television series that moved because of the strikes, it’s not like they’re going to come back in the next season [of the show].”

In the past few years, massive billion-dollar studio campuses have sprouted in places like Las Vegas, New York and Nashville, offering better tax incentives, as well as a generally lower cost of living for workers. (To take a recent example: A former military base in Monmouth, N.J., is currently preparing itself to be a 289-acre, $903 million Netflix campus. Or, last week, Innovo Property Group opened a ground-up, purpose-built studio with 274,283 square feet of production and support space and 70,351 square feet of office space in Long Island City, managed by MBS Group.)

Last summer, FilmLA — a nonprofit that tracks production activity and shoot days in Southern California — found that of all production activity in L.A., only 3 percent of that activity was related to feature films.

“The majority of tentpole film productions do not shoot in Los Angeles,” Hariton said.

However, a separate Otis report from last summer found that other markets are struggling with occupancy and demand as well, and that no one market is taking the title from L.A.

“Right now we’re in a state of contraction,” Mihalka said. “And so there is excess supply in all markets, not just Los Angeles.”

Indeed — when California increased its tax incentive program to its current level a decade ago, Georgia and its 30 percent tax incentive was the top new alternative market luring productions away from Hollywood. But, last year, Georgia studio owners (not named Tyler Perry) started reporting spikes in vacancy rates and their own oversaturation. New York City is another market that saw a rush for studio development the past several years, but last summer the city started facing that same problem of getting people on set. 

The more recent Otis report also found that employment in California’s creative economy contracted by 0.9 percent during the past year, and was 7.1 percent below the pre-pandemic peak. At the same time, the number of jobs across the remainder of the state’s economy grew by 2.3 percent during the same period.

“[California’s] entertainment employment is still below its 2022 peak and may not bounce back soon,” the report said.

The loss of production jobs then affects other sectors, including post production, visual effects and music. In February, the Los Angeles Economic Development Corporation reported that every dollar spent on California’s Film and Television Tax Credit generates $24.40 in economic activity, $16.14 in GDP and $8.60 in wages.

“L.A. was the behemoth for all of those components — now, not for any of the components,” Hariton said. “The majority of your high-end TV and film projects are not shooting in L.A., and those have the highest amount of crew.”

‘Incentives chasing incentives’

Last year, 71 percent of projects recently unable to secure tax credits in California opted to film elsewhere, according to the governor’s office.

To address the problem and make California more competitive, lawmakers this summer want to boost California’s Film & Television Tax Credit Program allocation to $750 million per year, well over double the current annual cap of $330 million.

That would make it the highest of any state with a capped tax incentive program. New York currently has the highest mark in the U.S. with an annual cap of $700 million, while Illinois and Georgia, which have been popular alternatives for productions the past decade, don’t have a cap at all.

But it might not be so easy. California’s base production limit is generally set at 20 percent. But film producers quickly point out the state’s effective limit is a 12 to 13 percent tax incentive because California’s limits which parts of a production qualify, while other markets have that allotment set at 30 percent. 

Lawmakers on March 24 introduced a revised version that boosts the credit to 35 percent, with an additional 5 percent available for projects outside of L.A., and expands the category of productions that qualify.

“The program right now, in its current form, [has] a structural problem,” Hariton said. “[It] needs to be amended to actually be competitive and to be able to properly utilize the $750 million. Increasing the program is wonderful, but it would be all for naught if the program itself wasn’t competitive.”

Further, some markets like those in the United Kingdom allow tax breaks for a lot more or even all “above the line” budget items — referring to key creative roles in a production such as directors, screenwriters, key cast members and visual effects. Some even cover residuals for actors, which can be a massive expense for a large-scale production with A-list actors.

“It’s not about L.A. versus Atlanta,” Hariton said. “It’s actually about L.A. having a seat at the table. … It’s still not going to be as good as the other international, competitive locations.”

The revised tax incentive introduced March 24 does not mention above-the-line costs, which Nicassio said would be an important addition. But he’s worried it could be jurisdictions racing to the bottom.

“You have to be careful when increasing the tax credit, or it could turn into incentives chasing incentives,” he said.

Cut!
The expansion of so many secondary markets — coupled with the number of empty stages — make the current pipeline of soundstage development in Los Angeles utterly overwhelming, if not laughably impossible. That pipeline will need to adjust to the slowdown to not oversaturate the market and further weaken the supply-demand balance. 

“I think all the [companies with soundstage development] plans that can evaluate are re-evaluating the current status,” Hariton said. “Some have already announced that they’re canceling some big projects.

“I think it’s a very concerning time from a studio infrastructure development point. Because right now the demand is not great enough to serve the current supply.”

Particularly in California, home to perhaps the nation’s most difficult path to securing entitlements, real estate development is lagging years behind the trends (which is partly why Netflix wanted as many master leases as it could get a decade ago because it was far easier and effective than building the soundstages it needed).

Hollywood isn’t giving up, however.

Mihalka said there were real signs of leasing life in the second half of last year, and data for February showed improvements over the same month last year. She also said more production companies are looking at office space on studio lots, and she expects a ramp-up in activity throughout the industry this year.

“[Those office leases] tells me that definitely production-related and entertainment companies, they want to stay here in L.A., particularly in the core TMZ,” she said, referring to the entertainment industry’s geographic core. “First, we’ve got the office and the groups planning the productions as you see the writers rooms requirements start up again. Then you see the production and the stage activity.”

The Otis report found that California is still home to 35 percent of the nation’s film, TV and sound employment, and the state remains the national leader of the creative economy. 

“Los Angeles continues to be the executive and creative hub of the global screen industry, retaining a concentration of high-wage, highly skilled jobs,” the report read. “However, the cost-sensitive nature of some production means that some projects — particularly those that do not require access to California’s state-of-the-art studios and specialized workforce — will continue to be filmed elsewhere.”

CBRE’s Mihalka said show business is always going to hinge on California. 

“Do I think that Hollywood’s moving to Texas? Absolutely not,” she said. “Especially with the activity that I’m seeing today.”

There’s also hope because Hollywood isn’t new to the game, and it’s not the only market facing industry-wide issues. L.A. can fall back on its institutional pull for the creative industry, whereas other markets don’t have the history to fall back on. 

“The infrastructure is still here,” Nicassio said. “The industry still wants to be here. Your writers, your high-end talent — they still want to be in Southern California. So you couple it all together [with the new tax credit plan], and that’s what we’re putting our hopes on.”

Similarly, Hariton said a genuine desire to film in California exists inherently.

“If the programmatic changes are made to be competitive, along with the increases,” he said, “then we will see a meaningful and quick recovery.”

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