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Thursday, May 19, 2022

Disney Downsize

Walt Disney Co. is now a streaming business.

Burbank’s biggest company and a major tenant of office space made this declaration in October. So how will this switch impact the Tri-Cities’ commercial real estate sector, where Disney leases hundreds of thousands of square feet of space?“That’s a huge employer in the Burbank area,” said Kirk Lesh, assistant professor of Economics at California Lutheran University in Thousand Oaks. “’But the question is: How much further do they go? How much more reconfiguring?”In addition to its headquarters at 500 S. Buena Vista St., Disney occupies large swathes of office space in Burbank, much of it owned by Blackstone Group or Worthe Real Estate Group.

In the Blackstone/Worthe building The Tower, Disney occupies 115,673 square feet of a total 501,000 square feet at 3900 W. Alameda Ave. Walt Disney Animation Studios occupies much of floors 25 through 30. Disney renewed its lease last April until December 2029.Across the street, in another Blackstone/Worthe building named Burbank Centre at 3800 W. Alameda Ave., Disney renewed its 425,000-square-foot lease last November.

In addition to its presence at The Tower and Burbank Centre, Disney also leases another 150,000 square feet at the Burbank Media Studios North complex at 2255 N. Ontario St. It houses the film production arm, Walt Disney Pictures.Of the space that Disney occupies at Burbank Centre, about 32,000 square feet has been devoted to back-up operations of ESPN and Radio Disney. Signed in 2011, that lease runs through 2023.However, Disney, on Dec. 6, announced it would close Radio Disney after 24 years. Also, ESPN has suffered under the weight of the coronavirus crisis, which has led to a cancelation of sports events.Also, earlier this month media reports indicated Disney could relocate several business divisions to Florida, where it owns the Disney World resort. The company has not made any public announcement on the matter.Down yearIn 2020, Disney did not have a good year. It was a stark contrast to 2019, when — amid the culmination of several big cinematic franchises, including Marvel and Star Wars, and the launch of its new Disney Plus streaming channel — Disney grossed $69.6 billion in net revenue — a company and entertainment industry best. By November 2020, Disney only managed to make $8.1 billion for the year.The coronavirus pandemic strangled several revenue streams with the closures of movie theaters and amusement parks.

Additionally, Disney announced in November that it would lay off 32,000 employees through spring 2021 from its total 223,000 employees worldwide. While most of those layoffs would occur at Disney’s amusement parks, there were some high-profile executives as well. Following the successful launch of streaming service Disney Plus in late 2019, Head of Streaming Kevin Mayer exited last May to become chief executive at TikTok, and former Senior Vice President of Content for Disney Plus Agnes Chu left in July to head Condé Nast Entertainment.

Staying powerThere is a consensus among several real estate brokers who spoke to the Business Journal both on and off the record that Disney’s reconfiguration of its workforce will not profoundly affect the office market in Burbank.That’s because the one bright spot in Disney’s year has been the rocket rise of Disney Plus. By 2021, Disney Plus had far exceeded its original subscription goal for the streamer’s first year, totaling 86.8 million subscribers and proving to be the first serious contender for Netflix’s streaming crown. Disney said in December that it expects Disney Plus to reach 230 million to 260 million subscribers by 2024.News of the media giant transforming itself from a movie and television studio to an online entertainment entity did not come as a total surprise: Facing mass layoffs and amusement park closures due to COVID-19 as well as entertainment’s inevitable march toward streaming platforms in the aftermath of Silicon Valley player Netflix Inc.’s game-changing influence, Disney’s move seemed like a logical next step – a decision only accelerated by the 2020 pandemic.Because of Disney Plus’ success, William Boyd at Kidder Mathews’ Pasadena office does not expect Disney to dramatically shrink its Burbank footprint.“Those of us who have watched Disney for four decades now in this office market generally point to the past for (indications) for the future,” Boyd said. “While there may be short-term pauses, there is no indication that they will be retreating from the office space. Eventually, they will need more space.”John Loper, an economist at USC Lusk Center for Real Estate, agreed.“In terms of Burbank real estate,” Loper explained, “if Disney Plus is adding (employees), they’re going to draw from people in California. They’re probably going to be in Burbank. So, I don’t see that having a huge impact on office.”At Disney’s Investor Day in December, the company announced that Disney Plus will soon have 10 Marvel series, 10 Star Wars series and 15 new live-action movies. With that announcement, Disney has boldly prioritized Disney Plus and cemented its commitment to streaming as the company’s future. The company did not specify where those shows will be produced.Boyd said there is plenty more Disney office space in the Burbank market that is not made public.“There are other office buildings in the immediate area,” Boyd continued. “One transaction that our team did for a landlord was 80,000 square feet of Disney space. That went unreported.”Boyd added that Disney keeps a low profile on its real estate deals for departments such as accounting and business services. “They do a very good job of not having their leases publicized,” he said. “Most of it, we just don’t hear about.”Potential relocationHowever, just as Disney’s switch to streaming makes economic sense, so do the rumors about transferring operations to Florida.

“Disney is in the same realm as Tesla (which relocated from Hawthorne to Austin, Texas),” Loper said. “They have to think about the shareholders.”Recently, Disney has become frustrated with California, especially Gov. Gavin Newsom’s strict COVID regulations that keep Disneyland in Anaheim closed. In 2020, the company wanted to launch a Marvel attraction at Disneyland as well as build on its 2019 investment, the Star Wars-themed Galaxy’s Edge.“All the momentum from Galaxy’s Edge and new Marvel and (amended) California Adventure and other recent investments (has sputtered),” Loper said. “They can’t make money on their theme parks.”Meanwhile, Disney World in Orlando has stayed open, continued Loper, who would not be surprised if Disney moved some operations outside of California, especially given vibrant movie production in Atlanta, where Disney’s Marvel has done a lot of filming and where talents such as Tyler Perry have large operations.“If I’m Disney,” he said, “and I see Atlanta having a very robust production facility and I see production in Vancouver going on for months while in L.A. County, we’ve stopped production, (the question becomes) ‘Do I want to have production in California or am I able to do it this year?”Earlier this month, a Disney spokesperson told the Orlando Business Journal, “As the largest employer in Central Florida, we are always exploring opportunities for additional locations within the vicinity of our theme park, but there is nothing concrete.” If confirmed, the divisions would reportedly move to Lake Nona, a master-planned community in southeast Orlando, according to the paper.“Florida is where a lot of talent is moving,” Loper said. “The financial world is moving to Florida. Disney has a lot of property there.”Post-virus pathAfter the coronavirus crisis, Disney will enter a competitive playing field in the streaming sector.

When the dust settles on the pandemic, Netflix will establish its first animation studio with 171,000 square feet at Empire Center in Burbank — an existential threat, not only to Disney owned streaming services Disney Plus and Hulu, but to Disney’s legacy bread-and-butter business of animation, which Disney pioneered in the 1920s and has dominated ever since.In addition to Netflix, the competition for eyeballs includes Burbank-based Warner Bros. Entertainment’s HBO Max; NBCUniversal’s Peacock, Roku and ViacomCBS’ CBS All Access. Other streamers, such as Paramount Plus, are on the horizon.

Michael Aushenker
Michael Aushenker
A graduate of Cornell University, Michael covers commercial real estate for the San Fernando Valley Business Journal. Prior to the Business Journal, Michael covered the community and entertainment beats as a staff writer for various newspapers, including the Jewish Journal of Greater Los Angeles, The Palisadian-Post, The Argonaut and Acorn Newspapers. He has also freelanced for the Santa Barbara Independent, VC Reporter, Malibu Times and Los Feliz Ledger.

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