Sound Stages Signal Commercial Real Estate Revival

A giant crane is tilting up 90-ton sound-stage walls at Manhattan Beach Studios today, as a commercial real estate project with a lot to say about the changing face of Southern California industry takes a key step forward.

The $50-million project to build 11 sound stages and office structures is seen as one more confirmation that the entertainment industry is driving the Southern California economy. The architectural and construction firms building Manhattan Beach Studios hail from Irvine; the developer is from Studio City.

Further, the project is evidence that a liveliness not seen in more than a decade is returning to commercial real estate. “Deals are being put together by developers again; it reminds me of the good times in the ‘80s,” says one observer of the Manhattan Beach construction.

Indeed, it seems that way. The new Manhattan Beach facility for making films, television shows and commercials began only two years ago as an idea sketched on a restaurant napkin by developer Ron Flesch of Flesch & Neuhauser of Studio City and architect Gary Bastien of Bastien & Associates in Irvine.

“We got to thinking that the film and TV business has multiplied in size but almost no new sound stages have been built,” Flesch says. Demand for sound-stage space was intense everywhere. Projected returns of 25% to 40% a year on sound-stage investments looked very attractive.

Flesch and Bastien concluded that building new stages and leasing them out to independent production companies was a sure-fire business proposition.

But they had to think again. Financing has been tough to obtain because banking and entertainment have different ideas about long-term obligations. “Banks want to see tenants with five-year leases, but the typical entertainment producer only looks ahead six months to a year,” Flesch says.

The difficulty was surprising because Shamrock Partners, the investment company of Roy Disney and Stanley Gold, was the initial equity investor in Manhattan Beach Studios. Shamrock took an option to buy land for $18 million from TRW that the aerospace concern no longer had use for.

But Shamrock made the land purchase dependent on Flesch obtaining a long-term agreement from a film studio to use the sound stages. The partners feared that the stages, built at a cost of $6 million to $7 million apiece, could stand idle.

Nor were the studios eager to sign up. The industry in early 1997 was looking at meager returns from several big-budget films, a poor television season for ABC and the specter of “Titanic,” which many industry experts then thought would be a colossal money loser.

Studio executives hesitated; one studio backed out last August.

But Flesch, a developer for the last 20 years, scrambled and got Fox Studios to commit in October to a five-year lease on five stages plus three adjoining office properties. On the strength of that lease, Bank of America, a traditional lender to the entertainment industry, made a $41-million construction loan. And Shamrock exercised its option to buy the Manhattan Beach site from TRW.

That’s why the walls are going up today on stages that will be in operation by June 15, so Fox can start taping such series as “NYPD Blue” for the fall season.

The message of Manhattan Beach speaks more to the commercial real estate business than to the entertainment industry. The new sound stages will serve as models of financing and construction techniques for other projects to come.

Wayne Brandt of Nomura Securities, who places investors’ money in real estate projects, understands the hesitation of bankers and studios. “Sound stages are single-use properties, not easily transferred to other business. That’s a tough call for bank lending,” he explains. “But I would like to be equity partners with Shamrock. Sound stages are very suitable for equity investment.”

Some figures bear him out. Sound stages, which range from 18,000 square feet for taping a typical sitcom to 25,000 square feet for a film or larger TV production, lease for about $34 per square foot per year. With additional charges for services, each sound stage returns more than $1 million a year. The Manhattan Beach project should recover all its equity investment in the first two to three years and then go on pumping cash for 30 to 50 years after that.

In Southern California, with roughly 250 sound stages in operation, many of them quite old, it’s no wonder there is enthusiasm for building new ones. Projects on the drawing board include a proposed sound-stage expansion in Santa Monica and a plan to convert a vacant office building near downtown Los Angeles.

The development firm Smith & Hricik is trying to arrange financing to build six sound stages at the former Unocal headquarters just west of the Harbor Freeway. It seems a natural site as more films, TV shows and commercials are shot in the downtown L.A. area than any other location in Southern California.

Still, Stephan Smith of Smith & Hricik says financing is a hurdle. He expects to announce within a month plans for equity investors and other aspects of the Los Angeles Center Studios project.

A leading real estate executive thinks L.A. Center will go forward. William McMorrow, chairman of Kennedy-Wilson, a Santa Monica-based real estate investment firm, sees a pattern emerging as the sports arena, Disney Hall and other attractions raise downtown’s profile as a leisure destination. Entertainment, broadly considered, will bring a new attitude toward downtown, says McMorrow, whose firm is acquiring buildings in the area. “There will be spillovers,” he says.

Indeed, spillover effects of successive industries, from railroads to oil to movies to aerospace, have built Southern California from the start. Now the entertainment industry that developed from movies is prompting a new cycle of urban growth. Expectations, along with walls, are going up in Manhattan Beach today.