With offices in flux, Empire State Realty Trust is pivoting to apartments

Tony Malkin’s office REIT acquired two Manhattan multifamily buildings for $307M, an SEC filing shows

With offices in flux, Empire State Realty Trust is pivoting to apartments
Tony Malkin with the Empire State Building (Empire State Realty Trust, iStock)

As the pandemic continues to cast a shadow of uncertainty over Manhattan office properties, the owner of the Empire State Building has its sights set on residential real estate.

Office landlord Empire State Realty Trust — whose portfolio-wide vacancy rate increased to 16.5 percent in the third quarter — is acquiring two Manhattan apartment buildings totaling 625 units for $307 million, including $186 million in debt, according to an SEC filing.

Chairman and CEO Tony Malkin commented on the diversification effort on the REIT’s quarterly earnings call Thursday, but fell short of divulging details. What he did share is that with the deals, ESRT saw “an opportunity to add value through another asset class.”

“We like the prospects for our capital in these two transactions,” he added.

Malkin noted that even though the firm hasn’t owned any multifamily properties since it went public in 2013, he and his staff have a “long institutional history of experience in multifamily assets.” His family-controlled entity Malkin Holdings owns a few thousands apartments outside of New York, he added.

The deals are expected to close during the fourth quarter, Malkin said. One of the buildings’ owners will maintain a 10 percent stake in the properties and continue to serve as property manager, according to the filing.

Revenue from the multifamily assets could help stabilize the real estate investment trust, which has faced a pandemic-driven downturn.

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While physical occupancy at the REIT’s office buildings has ticked up to about 30 percent in Manhattan and about 50 percent in the New York suburbs, its portfolio-wide vacancy rate increased to 16.5 percent in the quarter, up from 14.8 percent in the second quarter.

The dip was primarily driven by the loss of major tenant GBG, a subsidiary of Global Brands Group Holding, which filed for bankruptcy in July. The bankruptcy court allowed GBG to terminate leases for 162,000 square feet at ESRT’s 1333 Broadway and 191,000 square feet at the Empire State Building.

When leasing was shaky in the past, the REIT was able to rely on the high-margin business of its iconic skyscraper’s famed observation deck. But the pandemic came for that, too.

In the third quarter, it hosted about 255,000 visitors, up 57 percent from the previous quarter, but down 76 percent from the same period in 2019. The observatory pulled in $12.8 million in revenue for the quarter, down about two-thirds from before the pandemic.

Tourism may see a boost after the Biden administration lifts travel restrictions on 33 countries in exchange for new vaccine requirements effective Nov. 8, although it remains to be seen how quickly international travel to the city will recover. Investment firm KKR placed a $500 million bet on tourists’ return with its purchase of the observation deck at 30 Hudson Yards earlier this month, though both lookout points face increasing competition.

Overall, Empire State Realty Trust’s balance sheet improved in the third quarter, with total revenue of $165 million, up about 7.6 percent from the second quarter and up 12.6 percent from a year ago. Core funds from operations was $55.2 million, up 13.3 percent from the second quarter and up 58.6 percent from a year ago.

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