Golden Age of Studio, Soundstage Expansion Has Peaked

The end of the actors’ and writers’ strikes in Hollywood has accelerated the dawning of a new cost-cutting era in film and TV production as the burgeoning streaming industry shifts to a new business model.

The new labor contracts are adding to a fiscal cliff looming in front of the industry, which has seen mounting losses in streaming and an evaporating cable TV bundle.

As a result, what has been an insatiable demand for new streaming content over the past three years is expected to diminish by at least a third during the next three years in Hollywood, according to a report in the Wall Street Journal.

In Hollywood, they’re calling the new reality the end of “peak TV,” an explosive growth in programming during the past four years. Companies are expected to make fewer new shows and cancel more shows that are on the bubble.

“The contraction in investment in content will by definition restrict the amount of work that’s needed,” a veteran TV producer told WSJ.

The seven prominent streaming services that launched in the past five years (including services from ESPN, Disney, Apple, Peacock, HBO Max, Discovery and Paramount) increased their cumulative content creation budgets from $6.5B in 2020 to nearly $14B in 2022, driving demand for studio soundstage space and spurring a surge in investment in purpose-built facilities by content producers, studio owners and real estate investors.

In terms of the gold rush in studio and soundstage expansions during the past two years, the impending course correction is not expected to have a noticeable impact on overall soundstage demand for the next two years, with demand keeping pace with expanded supply through 2025, according to a new annual digital media survey from Deloitte.

However, the investment curve in expanded soundstages is likely to shift from the conversion of existing industrial facilities to a preference for new, purpose-built film production studios, experts say.

Deloitte, which charts studio production supply and demand dynamics across four major hubs, including NYC, Los Angeles, London and Vancouver, projects that demand for soundstages in LA and NYC will exceed supply through 2025.

“Shifting consumer preferences, substantial year-over-year real estate investment and a projected growth deceleration of streaming services content may ultimately close the gap between demand for space and supply of facilities in select locations,” said Deloitte’s report, which was issued at the end of September.

Deloitte found that while select opportunities exist for further investment in purpose-built studios, “the content production landscape moving forward may look significantly different that it has over the past three years.”

Content output will either decrease in 2023 or growth will be marginal compared to prior years, the report said. As the content spend growth levels off and market consolidation occurs, “the amount of production space required will likely level off in tandem,” Deloitte said.

“The significant year-over-year growth of content production is unsustainable, and a deceleration of growth is expected over the next few years,” Deloitte said.

The industry trend in streaming will focus on quality over quantity, the report said, with interest in new soundstage facilities focusing on specific types (purpose-built versus conversions).

According to Deloitte, Greater Los Angeles will continue to maintain its dominance as the leading global hub for filmmaking with the largest studio production market, including nearly 400 certified soundstages and more than 50 studio production facilities, all of which are operating at more than 90% capacity.

In June, California extended the state’s generous film and TV tax incentives through 2030. Purpose-built new facilities account for about one-quarter of the square footage under development in the LA pipeline, with nearly 60% involving conversion of existing industrial space.

“Based on our analysis of the current supply and pipeline along with the projected demand for film and episodic content needs, we anticipate little or no available soundstage space [in greater LA], with occupancy nearing 100% through 2025,” Deloitte’s report said.

Tax incentives for film and TV production in the Empire State are increasing from $420M to $700M per year through 2034, surpassing California’s $330M per year credit and making inroads against Georgia’s uncapped credit, estimated to be $1.3B in 2022.

Despite the improved tax credits, NYC remains the most expensive location to film in as the cost of labor, tax on goods and services, and cost of goods are among of the highest in the country, Deloitte said. Small-to-midsize productions may have a difficult time justifying to studios and investors the need to film in NYC, utilizing lower-cost cities like Vancouver as stand-ins for the Big Apple, the report said.

Content creators (like Netflix), as well as investment firms and existing independent studios, are continuing to invest in the NYC area, including northern NJ, with supply projected to double by 2025.

“This projection is largely driven by massive new builds ranging from 750K SF to 1.5M SF. Based on our analysis, including these new builds, we anticipate that soundstage availability in NYC will be extremely limited, with occupancy averaging near 100% through 2025,” Deloitte said.

“We anticipate content producers deprioritizing converted facilities if newer, purpose-built facilities are available, as content producers prefer these facilities and are willing to spend a premium to film in them,” Deloitte added.

“With the new development of purpose-built stages, warehouses will go back to being warehouses. Studios will only want to film in purpose-built stages,” the managing director of a North American film production center told Deloitte.