From a small northwestern observatory…

It’s a bit off topic for me, but I was struck by an article this morning about the movie business. I spend very little time in that subsector, but naturally have been intrigued given the impact of COVID. While the pandemic has damaged many sectors, it has absolutely eviscerated the movie chains. Given the amount of real estate devoted to this sector, it’s worth taking a peek.

Most movie goers — even those of us in the real estate biz — have little understanding of how movie real estate works, and indeed there is no exact one-size-fits-all. Going into the pandemic (as of March, 2020), there were 5,477 movie theaters in the U.S. (not including 321 drive-ins). The unit of comparison in that industry is the “screen”, much like the unit of measure for a hotel is “rooms” and for apartments is individual apartment units. As of that same date, there were 40,449 screens, for an average of slightly over 7 screens per theater. In recent years, however, the trend has been toward fewer but larger locations, and the modern movie multi-plex has more like 11 screens. About 20 years ago or so, there was a very real consolidation, with many theater locations closing but many more screens popping up, as shown below.

Data courtesy the National Association of Theater Owners

The typical modern theater has an owner and an operator who may be different entities. For example, AMC, the largest operator in the U.S., operates 8,218 screens. Their nearest competitor, Regal, operates 7,350. Of course, these numbers were as of pre-COVID. In the same way that Marriott “operates” many hotels that they do not actually own, many (most?) of these theaters are owned by private entities. EPR Properties, for example, is a specialty REIT focused on “experiential” real estate, such as theaters, day-care centers, golf courses, and such. They own 179 theaters as of the end of 2019, although there is no report on exactly how many screens they have. They don’t operate any of these, but rather lease them out to operators like AMC.

Measuring the market value of this real estate is tough. Based on recent data from EPR and AMC, we can very roughly estimate that the value of a stand-alone movie theater is about $2 million per screen. With that, we have about $81 Billion in movie theater real estate in the U.S., including the furniture, fixtures, and equipment. These have been basically dark since the onset of the pandemic, much like other hospitality real estate, such as hotels and restaurants. Of course, when the pandemic is finally over, hotels and restaurants will eventually fill up again. However, movie theaters had already been feeling the headwinds of Netflix and other on-line services even before the pandemic came along. The industry is facing the very real possibility that movie-going habits will significantly change when the restrictions are lifted. Indeed, the streaming services are banking on that, and investing billions to back up that theory.

Movie-going has enormous spin-offs, including adjacent restaurants, parking lots, and shopping. Some large multi-plexes are part of malls, and some small boutique theaters are attached to bowling alleys and other experiential venues. Much like the change in brick-and-mortar retail, the impact of this shift on the real estate landscape may be very large and very real.

“May you live in interesting times”.

As always, if you have any questions or comments on this, please reach out!

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com