Finance  ·  Leases

For Empire State Realty Trust, a Curiously Successful Run

Office REITs have been taking a beating this year. How come this owner of older office stock survived a devastated New York market chasing shiny new towers?


The received wisdom in the office real estate investment trust (REIT) world over the last two years can be summed up in terse truisms: New and shiny are good; old and outdated are bad. 

Case closed. 

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Yet, there has been a notable exception to all this. 

While many of the major office REITs — SL Green (SLG), Vornado Property Trust, and even Boston Properties (the largest private office landlord in the country) — have seen their stock price take a beating, Empire State Realty Trust (ESRT), led by Chairman, President and CEO Anthony E. Malkin, whose grandfather first bought the Empire State Building in 1961, has kept chugging along. The firm’s stock is up 29 percent year-to-date, and 17 percent on the year. 

At nearly $9 a share, ESRT is up 60 percent from a May 16 low of $5.50 when the regional banking crisis hit.

“While others bought and borrowed, we kept leverage low and invested in our portfolio,” Malkin told CO. “We’re modernized, amenitized, well located, energy efficient, and we’re real leaders in sustainability and indoor environmental quality.” 

At 8.6 million square feet of office space among eight Manhattan office assets, less than a million square feet of retail, and under 1,000 residential units, ESRT is decidedly smaller in scale compared to its New York City office REIT rivals. But that hasn’t stopped the family-led firm from becoming a favorite among analysts and CRE brokers alike, who praise the company’s budgeting, vision and investment strategy. 

“I think ESRT is seemingly the best-kept secret [in CRE],” said David Giancola, senior managing director of JLL Capital Markets. “They have an exceptionally strong balance sheet, they’ve maintained good cash-on-hand throughout, and, over the last 10 years, while many investors used a hyper-accommodative interest rate environment to fuel buying sprees, it felt like ESRT charted a different course.” 

During its third-quarter earnings call on Oct. 25, ESRT announced $1.2 billion in liquidity, including an $850 million revolving credit facility. The firm has a total outstanding debt of $2.2 billion, but no floating-rate debt exposure (critical amid high interest rates), with a weighted average maturity term of nearly six years. The firm’s first meaningful commercial property maturity isn’t until March 2025, while its net debt is only five and a half times its EBITDA (earnings before interest, taxes, depreciation and amortization), significantly less than Vornado’s 17 times debt-to-EBITDA ratio. 

“It’s been one of our top picks in the sector, and for REITs overall, for a while now,” said John Kim, senior analyst at BMO Capital Markets. “You look at ESRT, it kind of sticks out as pure play New York, or mostly New York, on a very healthy balance sheet.” 

This balance sheet is the work of Christina Chiu, ESRT executive vice president, COO and CFO, who joined the firm from Morgan Stanley in April 2020. From there, at the cusp of the coronavirus outbreak, Chiu coordinated a campaign to repurchase over $290 million in ESRT stock, but did so without levering up or adding risk during a sensitive time for all REITs. Unlike its peers, ESRT is not heavily into commercial mortgage-backed security [CMBS] financing — its largest office properties are financed by unencumbered debt and backed by cash flow — and its term loans pegged to floating rates have interest rate swaps in place to create protected, fixed-rate options on roughly $398 million in otherwise dangerous bills coming due.     

Moreover, in the last 18 months, ESRT has disposed of several underperforming suburban assets, in favor of a trio of performing multifamily properties in Manhattan: 345 East 94th Street, 561 10th Avenue, and 298 Mulberry Street. ESRT’s multifamily leasing stands at 97 percent, according to third-quarter financials. 

“It comes from a philosophy that our role is to have a balance sheet that enables broad access to capital, that enables us to execute on the business and create shareholder value,” said Chiu. 

“This is not about swinging for the fences and eeking out every last basis point of interest rate savings. It’s about achieving attractive levels of financing at attractive rates that allows us to execute our business plan,” she added.    

Now that interest rates appear to have stabilized (for the moment), and are likely to stay high in the near term (we think), Malkin is thanking his lucky stars he followed his late grandfather Lawrence Wien’s sage advice: When interest rates are low, you borrow as little as you need; when interest rates are high, you borrow as much as you can afford. 

“We got a lot of criticism for the fact that our leverage was low, and we got a lot of criticism for the fact that we didn’t do a lot of acquisitions during the boom times,” he said. “But we continued through that.” 

Right up there on Broadway 

A core tenet of real estate is tenancy: A building is only worth what your tenants will pay, and you earn money only if your tenants stay.  

Going by tenancy alone, ESRT has been wildly successful in a depressed leasing environment. 

In the third quarter, the firm’s Manhattan office leasing rate hit 92 percent, an annual increase of 300 basis points. All told, the firm’s commercial portfolio — including all residential, retail and office — is 90.5 percent leased. 

For some perspective: New York City office has an availability rate hovering around an all-time high of 18 percent, while 2023 leasing activity has stalled at only 15 million square feet through the third quarter, well off the historical rolling annual average of 35 million square feet, according to JLL data. 

With its office portfolio 92 percent leased, “that to me is an unqualified testament to the quality of renovation they provide and, not insignificantly, tenants’ confidence in ESRT as a stable owner,” said Giancola. “I think that stability matters. … Their capital stacks are invariably well positioned, and, when tenants see this, they know they’ll have an owner who will be here for a while.”  

Nowhere has a tenants’ trust in ESRT manifested itself better than this past May, when Flagstar Bank, a subsidiary of New York Bancorp, took over more than 300,000 square feet of office space at 1400 Broadway following the sudden March 13 demise of Signature Bank, which New York Bancorp bought that same week. Flagstar would pay $56 per square foot, only 1.5 percent less than Signature, and carry the lease until 2039. 

For Malkin, even the threat of a major office vacancy like Signature was mitigated by history: He knew that Signature had grown its real estate presence at 1400 Broadway organically over time, largely through his personal touch as the firm’s landlord, and that this reputation earned as a landlord had been imparted from Signature’s leadership to Flagstar’s during the transition. That made the decision to stay in place that much easier. 

“In every instance, we build relationships with our tenants. That’s part of the service component of what we do,” said Malkin. “We don’t look at our real estate leasing as a prison sentence, where a year before your lease is up we’ll discuss whether you want to stay. It’s a relationship we build over time, and we service the hell out of people.”

Since going public in 2013, ESRT has signed 2.6 million square feet of new leases with tenants that have expanded within the firm’s portfolio, according to Malkin. In the third quarter of 2023, ESRT signed 248,000 square feet of new or renewed leases, including 144,000 square feet with LinkedIn and 25,000 square feet with Starbucks, each to grow their footprint at the Empire State Building. 

“People choose to tenant with us, and they choose to stay with us and grow with us,” said Malkin.  

Make you feel brand new  

Nowhere has ESRT’s unique business model been more successful than at the firm’s most prized possession on 34th Street and Fifth Avenue: The Empire State Building, the most famous office building in the world. 

Built in 1931, and ready to celebrate its 93rd birthday next May, the Empire State Building somehow doesn’t feel dated. Stepping into the marble lobby off Fifth Avenue, the weight of history and ambition pervades every step beneath an enormous, WPA-era aluminum relief of the skyscraper, while a sense of luxury and class shines off terrazzo tiles and chromium elevators alike. A multiyear, $650 million renovation has helped, but the success of maintaining the Empire State Building into the 21st century is apparent on almost every floor and by almost every metric. 

The 2.7 million-square-foot, 102-story office tower with its Art Deco interior has increased its occupancy to 90.2 percent, up from 82.4 percent at the end of 2022. Aside from LinkedIn (whose lease spans five floors and 500,000 square feet) and Starbucks (whose flagship restaurant off the lobby is its first in the U.S.), the building’s tenants include Shutterstock, JCDecaux, Priceline, Expedia, Swedbank and Skanska. 

The iconic Midtown skyscraper includes a state-of-the-art, 15,000-square-foot fitness center, 4,000-square-foot conference room and eight on-site dining options. ESRT installed new elevators and replaced old windows (all 6,514 of them). ESRT is also presently building out a 10,000-square-foot floor for tenants, which will feature basketball and pickleball courts and two virtual reality golf simulators. Celebrities visit weekly, while tourists pour in daily to pass through the skyscraper’s on-site museum and visit its two observatories. 

Newmark (NMRK)’s Scott Klau, who serves as the exclusive leasing agent of the property, said the Empire State Building now generates a response he hasn’t seen in 35 years in the business. 

“Now that the market fully appreciates everything the building has to offer, it truly is unique,” said Klau. “You have a historic building that has global recognition, but it’s got a brand-new infrastructure, so you got the best of both worlds, and I think the market understands that.”

Compare the Empire State Building’s current standing to its oft-compared 1930s neighbor, the Chrysler Building, equally iconic but somehow not nearly as sought after. That classic Art Deco structure on 42nd Street and Lexington Avenue has fallen on hard times lately. Its occupancy reportedly hovers around 80 percent, according to an earlier report from CBRE, while an expensive ground lease owned by Cooper Union severely depressed the last purchase price of the property, which Tishman Speyer sold to RFR Holding for $150 million in 2019, compared to $800 million the Abu Dhabi Investment Council forked over for a 90 percent stake back in 2008. 

By comparison, the Empire State Building’s annualized office and retail rent was $148 million in 2022. 

Much of its enduring value has come from the concentrated effort to make the Empire State Building one of the most energy-efficient and sustainable buildings in the world, according to Dana Robbins Schneider, senior vice president and director of energy, sustainability and ESG for ESRT. 

“The Empire State Building has the most modern infrastructure, the highest performance systems, and the best of everything most people want in an office,” she said. “They want character, and being able to be in a building that symbolizes New York City with the character of a historic landmark and the newness of the leading technologies, being a modernizing building with the most efficient systems, that’s part of what we’ve done.”

The Empire State Building floors include MERV 13 filters to remove harmful pesticides, CO2 sensors, and air quality ionization units to neutralize airborne viruses like COVID. While the firm’s entire portfolio is carbon neutral, the Empire State Building has reduced its carbon emissions by 56 percent since 2009 and is expected to reduce them by a full 80 percent and achieve net-zero carbon emissions by 2030. 

It might seem counterintuitive that a nearly 100-year-old building is a paragon of green design in the 2020s, but the renovation of the Empire State Building into an energy-efficient skyscraper is the brainchild of former President Bill Clinton, whose Clinton Global Initiative came to Malkin in the mid-2000s to press the case for green-energy upgrades on offices. 

“They wanted to use the Empire State Building to prove or disprove the business case for investing in deep energy retrofits, and Tony said, ‘Of course.’ He saw the value in at least doing the study to figure out if it would work or not,” explained Robbins Schneider. “We set out to prove the technical and economic case for doing this work.”

Since then, the Rocky Mountain Institute and New York State Energy Research and Development Authority have also partnered with ESRT on green energy investments and innovations. 

But the secret weapon for Malkin and Chiu might be the Empire State Building’s famous observatories, which include an outdoor deck on the 86th floor (made famous by movies like “Sleepless in Seattle” and “Home Alone 2: Lost in New York”) and a newer, enclosed space on the 102nd floor, which allows visitors to view as many as five states on a clear day from within a panoramic glass vestibule. 

After revenues plummeted during COVID-19, the observatory’s visitor rates and revenue roared back to life in the third quarter of 2023, generating $37.6 million, while net operating income reached $28.1 million, a 14 percent increase year-over-year and a nearly 100 percent recapture of 2019 NOI levels. 

ESRT also has a pair of commercial properties in Stamford, Conn.: First Stamford Place, a 776,000-square-foot mixed-use office campus; and Metro Center, a 286,000 square-foot office building. 

“Most people think of ESRT as this legacy office landlord — they’re named after their most iconic asset — but that name might be reflective of a much broader New York City-focused portfolio,” said Giancola. “Between those multifamily investments, the observation deck, and then their retail, they’re a much more diverse REIT than most of the analyst community gives them credit for.”  

Let’s hear it for New York

While ESRT has done what it can to position against the current onslaught facing American office, it’s still unclear what the future holds for a smart, scrappy REIT whose portfolio largely consists of buildings constructed between the presidencies of Woodrow Wilson and Herbert Hoover. 

“The trend overall has been on a flight to quality and the premium buildings, the new developments, getting a bigger market share versus the older assets, and that’s where some of ESRT’s peers have an advantage,” said Kim. 

There’s also the problem of WeWork. The coworking giant’s recent bankruptcy has thrown more than 40 leases of well-regarded office space onto an already struggling New York City office leasing market. 

“The WeWork stuff, in many cases, is highly amenitzed, and that’s what they’re competing against,” said Manus Clancy, senior managing director at real estate data firm Trepp. “But you can’t deny that demand for office space is weak, and it’s no slam-dunk they can pull this off.” 

Even JLL’s Giancola admits that there’s probably a ceiling that ESRT’s current portfolio will hit, but he also believes they’ve taken pre-emptive steps through full-scale renovations and retrofits to ensure their buildings are the furthest thing from structurally or functionally obsolete. 

Giancola stressed that he doesn’t buy the narrative that New York office stock is now bifurcated between the “haves” who control glass-enclosed towers built after 2015, and the “have-nots” who are littered among aesthetically and financially unattractive, brick-and-mortar pre-World War II towers 

“That feels somewhat naive to me,” he said. “The idea that companies are continually elastic on what they can pay for rents and all they want to do is migrate to best-in-class, newly built space and pay whatever the freight is to get to those buildings, that seems a little myopic.” 

Thomas Durels, executive vice president of ESRT, shot back on this idea that prewar buildings are no longer desirable, noting that ESRT has had nine consecutive quarters of positive lease spreads and seven consecutive quarters of positive absorption. 

“I think that the narrative that only the top-tier, newest development gets the activity is completely wrong. It’s evinced from our performance,” he told CO. “I think we’re an incredible outlier.”  

Malkin, ever the optimist, plans to tune out the critics, as well. He said he’ll continue to lean into his background in private equity by using an ESRT financial department to underwrite and assess the credit risk of potential tenants  — a department that helped him avoid ever leasing an inch to WeWork, at one time the largest private office tenant in Manhattan and now one of the great corporate collapses in recent years.  

“We’ve stayed focused and haven’t gone into some pretty questionable directions, like life sciences, and we’ve stuck to things we understand where we can lease to good credits,” explained Malkin. “We’re not just an office business — we’re office, destination attraction, retail and residential. We’re a New York business.” 

Brian Pascus can be reached at