New York City is busy again, and that’s music to the ears of Empire State Realty Trust, Inc. (NYSE: ESRT), who says its portfolio of office, tourism, retail, and residential assets in Manhattan and the greater New York metropolitan area offers multiple drivers of upside.
The REIT’s fully modernized, amenity-rich assets incorporate its industry-leading sustainability, energy efficiency, and indoor environmental quality at attractive prices—well below new construction—and are designed to be the accessible, “flight to quality” destination in the market. A string of expansions and new leases from reputable tenants like LinkedIn, iCapital, Signature Bank and Progyny suggest that ESRT has the right idea.
Evercore ISI is optimistic. “While the office sector remains challenged, the recovery of lost occupancy and observatory net operating income (NOI) provides ESRT with a roadmap to solid earnings growth over the next few years,” the firm wrote in a client note earlier this year.
ESRT held its IPO in 2013 after a consolidation of dozens of partnerships and sub-partnerships created by Lawrence Wien, son-in-law Peter Malkin, and current Chair, President, and CEO Anthony Malkin.
The company owns and manages office, retail and residential properties that include 9.2 million square feet of rentable office space, 700,000 square feet of retail, and 625 recently acquired multifamily units. It is perhaps best known as the owner of the Empire State Building, a 2.85 million-square-foot landmark finished in 1931 that includes the world-famous Observatory, which was recently named the number one attraction in the United States and number three in the world in Tripadvisor’s 2022 Top Attractions. Through a combination of aggressive on-property actions and offsets, the entire commercial portfolio is carbon neutral as of 2022, and the company maintains aggressive on-property emissions reduction goals for 2030 and 2035.
“We are a play on New York City,” says Anthony Malkin.
Never Waste A Crisis
Despite past challenges and the operating environment ahead, ESRT is optimistic. The REIT has a laser-focused strategy on its key objectives, which include leasing space, boosting income from the Observatory, and maintaining its leadership in sustainability, along with actions it believes will continuously enhance shareholder value. “We never waste a crisis,” Malkin says.
Malkin took on more responsibility at the height of the pandemic in 2020 as chairman, president, and CEO. ESRT’s EVP and CFO Christina Chiu—who had previously spent nearly two decades with Morgan Stanley, most recently as COO for the global listed real assets division—was hired at the height of the pandemic in 2020. As Green Street wrote at the time, “the reshuffling of the C-suite appears to set the stage for a new period for ESRT.”
Chiu says the company offers “multiple avenues to play the upside that is underway in New York City.” She adds that the REIT has a flexible balance sheet with a low level of debt, substantially all of which is fixed rate, and a compilation of assets “that we believe are extremely well-positioned entering into what is an uncertain environment.”
The looming uncertainly is nothing like what occurred as the recent pandemic swept the globe and forced many office tenants to temporarily shutter their spaces. The REIT also had to close the Empire State Building’s lucrative Observatory business for several months during the pandemic, during which time it revamped its operations to an all-reservations model and has led to far greater profitability and customer satisfaction.
Flight to Quality Destinations
ESRT benefits from the market’s flight to quality with its retrofitted, fully modernized, healthy, energy-efficient buildings that offer attractive amenities at an accessible price point, with most of its portfolio located within a nine-minute walk to primary transportation hubs.
Since the IPO, nearly $1 billion has been spent on the redevelopment of the portfolio, Malkin says. The buildings make quality “accessible to a broad range of tenants, not just the ones that can afford or want to pay $150 (per square foot) rents in brand new buildings,” he adds.
ESRT’s well-positioned portfolio delivers modern, in-demand spaces at accessible rents. ESRT pioneered tenant amenities with the Empire State Building’s 16,000 square foot tenants-only fitness center, conference center, and a comprehensive set of in-building dining options. The Empire State Building will add a new, tenant-only amenity space to include a basketball court that converts into an all hands meeting space for 400 plus, a lounge, food and bar service, and “ESRTees,” a reservable lounge with two golf simulators. According to the company, these new amenities will be constructed in a “unique concourse-level space with vaulted ceilings.”
The company also announced plans to add new amenities to its Broadway Campus—comprised of six buildings in close proximity—which will include a roof deck on 1333 Broadway and an all-hands meeting space at 1400 Broadway, both of which will be available to all tenants of its Broadway portfolio.
In the second quarter, the company’s NYC office portfolio was 88.3% leased, with tenants from a wide variety of sectors that include: technology, media, and advertising (21%); finance, insurance, and real estate (20%); and consumer goods (19%).
“Our Tenants Really Like What We Offer”
Tenants frequently grow within the portfolio, with more than two million square feet of expansion leases signed by existing tenants in less than a decade of public ownership. While many industry watchers wonder how the work-from-home trend will affect property owners long-term, ESRT invalidates those concerns with a flurry of recent leases and expansions that demonstrate tenants continue to enter long term commitments for high quality space.
LinkedIn now leases more than 600,000 square feet at the Empire State Building on a long-term lease, which makes it the largest tenant that contributes 5% of the portfolio’s annualized rent.
Signature Bank now has 11 floors at 1400 Broadway that total 313,109 square feet through multiple expansions. iCapital, a global fintech company, has grown multiple times at One Grand Central Place since its first 17,573 square foot space was signed in 2017, and now boasts a footprint of 123,651 square feet, according to the company. Burlington Stores Inc. signed a full-floor expansion for an additional 35,000 square feet of office space at 1400 Broadway in Manhattan. In Connecticut, Franklin Templeton, a global investment management organization, renewed its lease for 80,000 square feet at 100 First Stamford Place, representing about 10% of the complex’s square footage.
As mentioned by Malkin on the company’s second quarter conference call, “2.2 million square feet of expansions in our portfolio since October 2013 – I don’t think that’s a coincidence. It means that our tenants really like what we offer. The price point is good and we choose our tenants well and that’s a benefit.”
