UPDATED, Jan. 6, 7 p.m. ET — More information about Empire State Realty Trust’s big pivot to apartment buildings is beginning to come to light.
Fetner Properties recapitalized two rental buildings with ESRT at a value of $307 million. An SEC filing previously revealed the 625-unit deal by the office landlord, but the landlord and the addresses of the buildings were not disclosed.
Fetner will retain a 10 percent stake in each of the two buildings. It will also stay on as day-to-day management, though ESRT will asset manage the properties.
Most of the units are at 561 10th Avenue, otherwise known as the 417-unit Victory, which was constructed in 2003. Fetner in 2017 landed $183 million from the state and federal government to refinance the 45-story building, which included 100 affordable apartments as of the time of the refinancing.
The rest of the 208 units are at 345 East 94th Street, a 13-year-old building in the Upper East Side’s Yorkville neighborhood.
Newmark’s Evan Layne, Brett Siegel and Jean Celestin served as brokers in the transaction.
CEO Hal Fetner told The Real Deal the timing was right to reroute capital to other projects after the buildings performed well during the pandemic.
“It was the right time for us to take some of the equity out of here and put it into other assets,” Fetner said.
The company said there were efforts to recapitalize the buildings prior to the pandemic, drawing interest from institutional investors. Multiple partners were interested in the latest effort to recapitalize the buildings as well.
Fetner described ESRT as “the perfect fit” for the recapitalization, citing united views on sustainability and deep New York roots.
ESRT’s pivot to multifamily real estate is a sign of the office market’s troubled times. The landlord’s portfolio-wide vacancy rate increased to 16.5 percent during the third quarter. Chairman and CEO Tony Malkin said in an October earnings call that the move came after the REIT saw “an opportunity to add value through another asset class.”
The firm hasn’t owned any multifamily properties since it went public in 2013. Malkin noted in the call, however, that Malkin Holdings, his family-controlled entity, owns a few thousand apartments outside of New York.
As Fetner scales back its equity in the two multifamily buildings, it can finally begin construction on another. Fetner and its partners, PGIM and Peakhill Equity Partners, last month closed on a three-lot assemblage at 270 West 96th Street on Manhattan’s Upper East Side. The developer also locked up an $80 million construction loan from Wells Fargo.
Fetner has been working on assembling the site for approximately five years. Construction on the 23-story, $125 million project is expected to last two and a half years. The building will have 177 units, 67 of which will be set aside as affordable.
Fetner is also working on a 600-unit development in Long Island City, spanning two properties on Jackson Avenue, for which construction on the first building has commenced. In total, the company has nearly 800 units in the development pipeline.
This story has been updated to reflect the details of the transaction and Fetner’s ongoing stake in the properties.