Not too long ago, I attended a presentation by Howard Stern.
No, not that one; Howard Stern, the president and director of Hudson Pacific Properties, a real estate investment trust (REIT) focused on owning, operating and acquiring office and media/entertainment properties in select growing California markets. Mr. Stern spoke before the Moriah Society, a real estate professionals association and American Jewish University fundraising group. I thought I’d share his insights into the dynamics of a couple expanding real estate markets: the tech market in San Francisco and the entertainment market in Los Angeles.
San Francisco tech market
When Hudson went public in 2010, its real estate holdings were concentrated in Southern California. Today, 55 percent of the company’s annualized rent is generated by San Francisco properties.
The Bay Area’s real estate market, particularly for tech-company offices, has recently mushroomed: Stern says rents have increased 15 percent in the past few months, and predicts further, double-digit increases in the next few years.
Deja vu? Not quite. Stern insists the current tech real estate boom is fundamentally different from the one that accompanied the dot-com bubble. Then, the property in high demand was large high-tech manufacturing facilities in Silicon Valley. Now, the growth area is social media and the cloud, where physical space is not as important; accordingly, the real estate that people want is office space in San Francisco.
Stern also noted that whereas dot-com companies commonly overcommitted themselves real estate-wise, leasing expensive properties even when they weren’t profitable, 2012’s recession-born tech firms are conservative, leasing more modestly, but more sustainably.
Los Angeles entertainment market
Hudson’s other focus area is entertainment production facilities in Los Angeles.
Stern pointed out that the supply side of this market is limited: There are only 305 stages in L.A. (fewer if one needs a stage of 5,000 square feet or more). The reason is, stages require a lot of land and can’t be built one on top of the other, so constructing new ones isn’t very profitable. Meanwhile, the demand side of the market remains high. Although film production is increasingly relocating to outside of L.A., TV is generally staying put. Ninety-five percent of Hudson’s revenue from this sector is from TV production.
The big drawback of the entertainment market is that the leases typically aren’t long-term, because they’re based on short-term factors such as whether a TV show is renewed. Real estate investment trusts like Hudson don’t like that, since cash flow and continuity are integral to their business model. So, Stern has been trying to persuade lessees to commit to longer-term agreements. One strategy he’s using is making long-term leases less burdensome than short-term ones (including fewer stipulations and such). Another tactic is including in long-term leases a relocation clause, which commits the landlord to paying the tenant’s relocation costs if the tenant is forced to move during the lease term (because, say, their show got cancelled).
Lastly, Stern discussed some ways aside from rent that Hudson generates revenue from its entertainment properties. Again, stages can’t be built on top of each other, so the amount of revenue the properties can generate through basic rent is capped. To ensure sufficient cash flow from the stages, Hudson requires tenants to use the properties’ so-called ancillary services—phones, intercom, parking, HVAC, lights, etc.–rather than bringing in their own. Such services yield forty percent of the income created by Hudson’s entertainment properties.
-By Berbay Principal Sharon Berman