A King Kong-Sized IPO?

From King Kong to Bugs Bunny, the iconic Empire State Building has made its appearance on screens big and small and is an immediately recognizable feature of the New York City skyline. But is history and iconography enough of a selling point to make it worth buying a stake?

Source: SXC.hu.

The owners of the 102-story skyscraper located at the intersection of Fifth Avenue and West 34th Street in Manhattan sure think so. Empire State Realty Trust (ESRT 1.10%) began trading on the New York Stock Exchange yesterday, but it opened at the low end of its anticipated range of $13-$15 per share and closed the day at $13.10, a rather inauspicious debut. It raised nearly $930 million in the process, or $754 million after expenses, but the bulk of it (approximately $650 million) will go to the estate of the late property magnate Leona Helmsley.

The building opened in 1931 and for nearly 40 years was the tallest building in the world. It lost that designation to the World Trade Center in 1970, but following the 2001 terrorist attacks it again became the tallest building in the city (numerous other buildings around the world have surpassed it in height). Yet its singularity in both the Art Deco design and prominence suggest the Empire State Building also remains a target for terrorist reprisal and no doubt figures into how investors appraise it.

The road to the public markets wasn't smooth for the building's owners, who also hold 11 other office properties in New York and Connecticut. The minority owners of the building were lukewarm to the offering, so despite filing for the IPO in February 2012, it wasn't until May of this year that the Malkin family majority owners were able to cross the necessary 80% threshold of shareholder acceptance that the realty trust was able to actually go public.

Part of the contention was the belief the Empire State Building itself was worth more than the value being assigned it, while many of the other properties in the real estate investment trust are overvalued. The minority shareholders, many of whom own a single share dating back to when they were first offered in the 1960s, felt they would derive more value simply by holding onto their shares. They also contended the corporate structure unfairly favored the Malkin family, which would control up to 30% of the voting rights in the new company. But the IPO was finally cleared in May when a judge refused to block its path.

However, investors are likely to remain leery of Empire's stock for a variety of reasons, not least of which is the company's structure, but also questions about its ability to generate enough revenues from its flagship building's observation decks as well as rents for leased office space.

Some 4 million people each year pay $16-$55 to visit the Empire State Building observation decks., With One World Trade Center's own observation deck set to open in 2015 -- it houses a memorial and museum dedicated to the victims of the 2001 attacks, so it holds some emotional attachment as well -- the high-profit center might come under pressure.

The building also has greater vacancy rates than do other area REITs. Where the Empire State Building is 84% leased, Vornado Realty (VNO 1.01%) boasts 96% occupancy rates in New York across 31 properties and No. 1 New York office landlord SL Green Realty (SLG 2.19%),  has 94% of its Manhattan property space occupied.

Still, there's something to be said for New York office properties these days, as even shopping mall operator General Growth Properties (GGP) is looking to branch out into office space as a profitable side business. Along with Brookfield Office Properties, the mall owner tried to buy some prime Manhattan real estate at 650 Madison Ave. earlier this year. While they ultimately lost out to a $1.3 billion bid from a consortium that included Vornado, it shows that the New York commercial real estate market remains vibrant.

At the same time, however, it just might underscore the concerns some investors had that Empire State Realty might have left some money on the table. That its IPO opened as weak as it did has me thinking this REIT, despite the opportunity to own a piece of an icon, may not be the right place to put your money yet.