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What an AT&T/Time Warner Merger Could Mean for Commercial Real Estate

Stalled Deals May Regain Traction, Although Expected Downsizing Could Cause Pain for Building Owners
June 13, 2018
Image of Atlanta's AT&T Midtown Center, which AT&T already announced plans to depart.

Building owners and investors across the country - especially those on the West Coast and Eastern Seaboard - are bracing to find out how AT&T’s acquisition of Time Warner will impact their real estate markets.

The $85 billion deal was given the greenlight by a federal judge yesterday and is now expected to close within weeks. The effect of such a massive merger is expected to be huge. Across markets, people are asking the same two questions: Will the combination result in consolidation of redundant space, or will it trigger new, bigger space requirements?

As with most corporate mergers of this size, the answer may lie somewhere in the middle.

Now that AT&T's acquisition of Time Warner can go through it may clear out the logjam of real estate deals that had been on hold while the companies awaited for the court's decision. But it also may bring pain for the landlords and companies that could be causalities of rightsizing and streamlining by the companies as they join together.

In Los Angles, the merger could make an AT&T-Time Warner conglomerate one of the largest private office tenants in the market with millions of square feet and thousands of employees across the county.

Its LA real estate holdings would range from AT&T’s DirecTV, which occupies roughly half a million square feet in El Segundo, to Time Warner’s Warner Brothers studio, which owns its 62-acre lot in Burbank and occupies about half a million square feet in a nearby Douglas Emmett Inc. office building.

"Today’s announcement is well-received within the real estate community," said Carl Muhlstein, international director at Jones Lang LaSalle Inc. in Los Angeles, and one of the most prolific brokers in the city's media and tech industries. "Uncertainty due to recent M&A and partnership activity prevented material (real estate) transactions."

As an example, Muhlstein cited Time Warner’s premium channel HBO, which had been in negotiations last year to lease a 128,000 square feet in a Culver City building, but the deal ultimately fell through at the last minute because of uncertainty over the merger and the financial future of the parent company. Apple Inc. ended up swooping and taking that lease for its content creation division.

With the merger back on, brokers expect HBO to be back in the market for office space after the deal closes.

In Atlanta, AT&T’s acquisition of Time Warner could be huge. All told, CNN and Time Warner’s various Atlanta-based networks occupy 1.6 million square feet in the downtown and midtown areas alone. Each of the buildings is owner-occupied by Turner Broadcasting System (TBS).

Ted Turner founded TBS and CNN in Atlanta, and though Time Warner has relocated its weekday anchors to New York or Washington and moved much of CNN’s top talent and its chief executive position to New York, thousands of CNN employees are employed in Atlanta. Time Warner owns CNN Center, the company’s high-profile regional hub and studios in the heart of downtown Atlanta. TBS itself employees more than 5,000 in Atlanta.

Several Time Warner networks, originally part of the Turner Broadcasting System, are headquartered in Turner’s Techwood Campus at 10th Street and Techwood Drive in Midtown. Turner developed four buildings at Techwood to host the networks, each has its logo attached atop the buildings.

"I like the chances of keeping a good deal of Time Warner people that are not redundant in the bigger scheme of AT&T," said Jerry Banks, managing director of The Dilweg Cos. who owns an Atlanta building that TBS once anchored. At the same time, Banks acknowledged that "back office and support groups will be at risk here."

Indeed, the merger will inevitably create redundancy in real estate and employees that may lead to significant downsizing or reshuffling.

Last year, AT&T announced it was moving its entertainment group and its few hundred managerial jobs from Atlanta to join its Los Angeles and Dallas offices.

AT&T already is in the process of retrenching and vacating several office towers in Atlanta. By 2020, AT&T will vacate its landmark AT&T Midtown Center and twin towers at Lindbergh, in addition to buildings at Lenox Park. As AT&T works to identify which positions to retain after the acquisition, any redundancy in staff likely will result in job cuts in metro Atlanta, where AT&T employs more than 17,000.

If AT&T decides to relocate the networks or reduce staff, it likely would result in big blocks of space hitting the market, according to brokers. Any moves could especially impact the Midtown office market where developers have started or about to start several new speculative office towers. When the developers planned those projects, they may not have considered AT&T's Techwood Campus buildings could soon be back on the market as multi-tenant rentals.

In Los Angeles, the merger could see some entities, particularly AT&T's entertainment-related groups, spread out across the city reduce, consolidate or move into owned properties. The AT&T entertainment group could further consolidate into any other of the content production entities under the new conglomerate’s umbrella.

And that could have a serious impact across the county.

Consider E! Entertainment. Three years after Comcast acquired NBCUniversal, it moved its networks, including E! and Bravo, from their longtime locations in about 400,000 square feet on the Miracle Mile closer to its Universal Studios lot. Much of that space that it exited four years ago remains vacant today.

Moreover, with news of the future of AT&T’s acquisition, experts expect to see further consolidation on the media industry that will continue to force companies to further consider their real estate options.

"Any consolidation resulting in fewer major studios could put into play both owned-office and real estate properties that would not otherwise be available for sale," reads a note written by Transwestern Executive Vice President Dave Rock and Research Manager Michael Soto in Los Angeles. "In addition, leased-office space, especially in the entertainment-oriented office submarkets of Century City, Beverly Hills, Santa Monica, Culver City, and Burbank, could see long-term office space consolidations that may or may not be backfilled by tech-related entertainment requirements."

The ruling surely figured prominently in today's decision by Comcast, parent company of NBCUniversal, to pull the trigger on an offer to buy a large chunk of 21st Century Fox for approximately $65 billion, setting off a potential bidding war with Walt Disney Co., which is also pursuing the company with a $52 billion all-stock offer.

Observers speculate other media companies, such as CBS, which owns studio lots across Los Angeles, and Viacom, which leases hundreds of thousands of square feet in the city, could be on their way as well.

However, for the most part, investors are optimistic the latest round of corporate mergers is good for the future of the legacy companies. In fact, media takeover-targets have seen their shares shoot up today on speculation that more mergers could be on the horizon, according to Bloomberg. One such mentioned is Lions Gate Entertainment Corp., whose shares have seen the biggest single-day increase in the past five months today.

And legacy media firms aren't the only firms that may be put into play in these entertainment markets.

"Next up, all eyes on Hulu, Amazon and Netflix challenging traditional content creators and growing real estate needs," JLL's Muhlstein said.

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