Blog November 19, 2020

How the future of movie theaters will impact commercial real estate

By Brian Zrimsek

If you own commercial retail space that includes a movie theater, you should be paying attention to the state of the theater exhibition industry. AMC Theaters, one of the largest theater chains in the world, recently warned of potential bankruptcy as a result of ongoing impacts of the pandemic. With 1,000 theaters and more than 11,000 screens globally, AMC’s Q3 revenue was down 90%+ year over year, and the company’s year-to-date revenue was down roughly 75% as compared to last year.

AMC isn’t alone. With the pandemic still impacting businesses across the globe, movie theaters today look a lot like the ghost towns that we’re used to seeing in old John Wayne and Clint Eastwood movies – desolate, empty, and in desperate need of a hero on horseback to save the town. With theaters occupying large footprints in retail centers around the world, the eventual outcome for theaters represents a substantial risk for landlords. There are a number of ways things could turn out, and each of these possible scenarios are likely to have impacts on landlords everywhere.

1) Third parties might make theaters an offer they can’t refuse

While movies have become more advanced and expensive every year, theaters themselves have largely kept the same business model for over seventy years: a production company would make a movie and the theater chains would have sole rights to show that movie for a certain amount of time. But recently, the Justice Department threw out the regulations that made that model possible, meaning that production companies can now own their own theaters and show their own movies.

As mentioned previously, theaters are hurting, and they might just need a superhero like Iron Man to fly in and save the day, even if that means getting bought out by the likes of Disney or Netflix. This would pose an interesting challenge for commercial property owners that have theaters in their retail spaces. If a company like Disney were to hypothetically acquire AMC and only show Disney movies at AMC theaters, how would that impact your tenant mix? What will that do to foot traffic?

2) Theaters need the banks to “show them the money”

The worst-case scenario for theater chains big and small, of course, is for no action to be taken. Major theater chains can’t round up the usual suspects for buyouts, no federal bailout money comes in, and smaller, community-driven theaters can’t get the bigger boat they need. The bigger theater chains file bankruptcy and restructure their debt and smaller theaters close for good. The movie theater industry ends up looking like the small country town at the end of Twister.

The impact on landlords would be mixed with some sure winners and some sure losers. Where theaters remain, high volume foot traffic will follow, providing much needed patronage for the shopping and dining elements of the retail center. Theater closures, on the other hand, will leave large, purpose-built structures vacant and will require reinvestment in order to renew and repurpose.

3) The new home of movies ends up being the matrix

For movie theaters everywhere, this pandemic didn’t create new problems; it exposed and expanded upon existing problems. Streaming services like Netflix and Disney+ were already pulling audiences away from theaters, and studios were already itching to put their movies on video-on-demand (VOD) platforms before their contracted time in theaters expired. The closure of theaters early this year gave studios an excuse to make their newest films available in the form of premium VOD rentals. With indications that this model may be here to stay (such as Universal Studios’ release window deals agreements with AMC Theaters and now Cinemark, or news that the new Wonder Woman 1984 will be released on streaming and in theaters simultaneously), movie theaters may end up going the way of the dinosaur.

This option, unfortunately, would be a veritable death knell for the traditional theater experience. With larger TVs being more affordable, and high quality sound being more achievable, the availability of content is the biggest barrier to a fully home-based theater experience. For commercial owners with theaters in their retail spaces, this would mean clearing out a purpose-built space and putting serious resources into remodeling. For commercial owners with retail near large theater complexes, this could mean a huge drop in foot traffic.

Whatever future comes true for the movie industry, commercial landlords will be faced with the challenges and opportunities to reinvest, reinvent and renew. While none of these outcomes are certain, it’s important for commercial owners to be watching this space and preparing to adapt to whatever changes may end up affecting them. The movie theater industry isn’t in Kansas anymore, and landlords should be watching for falling houses.

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