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Why Empire State Realty Trust Will Thrive After the Pandemic

By Matthew Frankel, CFP® - Mar 15, 2021 at 6:43AM

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The New York office and tourism industries aren't exactly strong right now, but that could change sooner rather than later.

When the COVID-19 pandemic hit, Empire State Realty Trust's (ESRT 0.86%) stock price plunged. And it's easy to understand why. Not only were people not working in offices in New York, but retail tenants were struggling and tourism was virtually non-existent (Empire State owns the observatory atop its namesake building). 

However, the real estate investment trust, or REIT, could also be one of the biggest beneficiaries as the pandemic comes to an end. In this Fool Live video clip, recorded on March 8, contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss why they have a positive outlook for Empire State in the coming years.

Matt Frankel: J.K. said, "Hi, Matt. Would love an update on ESRT," which is Empire State Realty Trust. That stock has been on fire lately. It's pretty much doubled since the first vaccine news came out. Empire State was a terrible performer for a long time. Makes sense. New York City was the worst-hit area of the country by the pandemic. People still aren't back to offices there. Tourism really still isn't much of a thing right there, right now. They own the Empire State Building; a bunch of other properties all concentrated in the New York area. Lately, it's looking like the fears have been overblown. Wouldn't it be cool if someone had been saying that all along? 

Jason Moser: I feel like maybe someone was, but I just can't remember who.

Frankel: Even the vaccine rollout is going even faster than I ever thought it would. The vaccine rollout, it's been ramping up. We just hit a record for vaccines on Saturday; I believe almost 3 million in a day, so it's happening quicker. People are going to get back to the office. We're seeing demand for people moving back into cities, which is really something that no one thought would happen. I read something this morning that rent in San Francisco has bottomed. It's starting to come back up. Same with New York; they're saying it's starting to form a bottom. People aren't going to flee the city forever. Empire State is one of their most unique parts compared to other office real estate is that they own and operate the observatory on top of the Empire State Building, which if you've ever been to New York is pretty much it's one of those tourist attractions you have to do once.

Moser: Yeah.

Frankel: They just renovated that. In normal times, that is an absolute cash machine. That brings in more money than most of the rest of the Empire State Building does in office rent in normal times. They said during the 4th quarter, tourism rates there were less than 10% of pre-pandemic levels, so it's pretty empty. It's not making any money right now. In normal times, it looks like that's going to come back quicker than people thought. They just stand to benefit more than most from a swift reopening. If we can get back mostly to normal in the New York area by summer, which is the tourism peak, that's when people go to New York and go up to the top of the Empire State Building and want to take the tour and all that stuff. If a swift reopening happens and we get pretty much back to normal by summer, Empire State Realty will be a huge beneficiary. If people can get back to their offices, and their street retailers open up. Like most city buildings, they have retail on the street level. I know Starbucks (SBUX 2.98%) just recently signed a lease to open one of their big roasteries in the Empire State Building, which people thought that was really surprising that they were able to sign some big leases during the pandemic. People want to work in offices, another thing we're finding out. People want the ability to work in offices. Everyone wants the flexibility to work from home sometimes, but I will tell you as someone who's worked from home for pretty much the past eight years, it's not all it's cracked up to be at times.

Moser: I'm right there with you, man. [laughs] I mean, it's OK, I guess but having the option.

Frankel: Right. You're probably with me. If you could, you'd probably work from home one or two days a week. I don't feel like going out, especially when it's cold, stuff like that. You don't want to leave the house. People want to go to offices. Many surveys have shown this, even some of the tech companies. Facebook (FB 1.83%) signed over 700,000 square feet of new office space in Manhattan during the pandemic. They're not planning on downsizing their office space. Amazon (AMZN 3.66%) signed a bunch of inner-city office spaces. These companies are under no delusions that people don't want to work in offices anymore. Anyway, long story short, Empire State's gone up a lot; it's gone up a lot for good reason. It's still way below pre-pandemic levels because the New York City office market was struggling a little bit before the pandemic. Then, it started to turn the corner from great market to not-so-great market. I'm holding on. I am not planning on selling any of my shares. That is my single biggest stock position. When they reinstate their dividend, I could see a whole another leg up. They suspended it through the first half of this year. I think there's still a lot of positive catalysts that are going to happen over the next few years. That's not to mention they're sitting on about a billion dollars of cash that they could deploy. There's a lot to like about the stock right now in my opinion.

Moser: Man, when we were there, we took our girls there, it was like 2015 maybe, something like that. Anyway, we were there. One of the things we wanted to do, we wanted to go to the Empire State Building, go to the top. It was amazing how when we got there, how quickly I was able to rationalize paying for that, moved to the front-of-the-line fee that they have. You could pay some x amount of dollars and basically skip the line.

Frankel: Sure.

Moser: I mean, that saved the day for us because otherwise, you're sitting there waiting for hours in line to go to the top of the thing. It just spoke to me the pricing power that they have in that whole model. I mean, if you've ever been there, it is a very special experience. I mean, to get to the top and actually see what's going on, that's a very special experience; a lot of people will pay for it.

Frankel: I mean, it's not the tallest building in the city anymore. I mean, the new World Trade Center is taller than the Empire State Building, and you can go to the top of it. It's just a special place in New York history; it's been around since the '30s. It's just really historic building, the building King Kong climbed up in the movie.

Moser: [laughs] Yeah.

Frankel: It's just a really historic and special place, and it's going to remain a must-do tourist attraction for decades to come. The upselling, they do a fantastic job of. They just renovated. I don't know if you guys went to the really high level. There's the main observation deck on the east.

Moser: You went to the main observation, and you take the extra little shot up that almost like little needle. [laughs] It takes you up to the tippy top.

Frankel: They just renovated right before the pandemic. Talk about the worst timing in the world. They just renovated the top of that needle. Now, it's completely like glass, all floor-to-ceiling glass.

Moser: Wow.

Frankel: I want to get up there and see it. It's supposedly the best view of the city anywhere. It's just like 360 degrees of just pure glass.

Moser: That's a cool experience. It's something I'd certainly recommend anyone and everyone doing it at least once. I mean, our girls got a real kick out of it. I mean, that was nice as parents to be able to do it.

Frankel: I mean, they have pricing power. Like you said, there's convenience, especially now that it's brand new and renovated.

Moser: I mean, it was just so easy to justify that.

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Stocks Mentioned

Empire State Realty Trust, Inc. Stock Quote
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$8.20 (0.86%) $0.07, Inc. Stock Quote, Inc.
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