Empire State Realty Trust (ESRT -1.58%) has been in operation for many decades, but the owner of the iconic Empire State Building and other New York City commercial properties has only been listed on the public markets since 2013.

But during its publicly traded life, the stock has been a disappointment. Even including dividends, Empire State has delivered a negative 31% total return after nearly a decade, compared with a 185% total return for the S&P 500 over that span.

There were certainly some good reasons for its underperformance. The NYC office market had started to deteriorate even before COVID-19 hit. Demand fell off a cliff when the pandemic started. There's also the popular observatory atop the Empire State Building: The REIT completed a $165 million redevelopment of it in December 2019, but COVID required it to close shortly thereafter. And while the venue did reopen, it has operated at a fraction of pre-pandemic traffic levels for much of the time since.

However, it is starting to feel like the pessimism surrounding office real estate is turning around, and there are several other reasons to be optimistic. In fact, there are some big reasons to believe that Empire State could finally start to earn back investors' favor in 2023.

Could 2023 be the year things finally turn around?

There are a few reasons to expect that 2023 could be an inflection point for this real estate investment trust.

First is the observatory, which is perhaps the biggest differentiator between Empire State and other office REITs. Empire State owns and operates the observatory atop the Empire State Building, which in good times is a high-margin cash machine. Unfortunately, the pandemic caused this part of the business to grind to a halt, and it hadn't fully rebounded even as of mid-2022. However, a recent update revealed that December 2022 attendance was back to 95% of comparable 2019 levels, a very positive development.

Second is the growth of the REIT's multifamily portfolio. Empire State has been actively diversifying into multifamily buildings, recently closing on a 96-unit apartment building in the NoHo neighborhood of Manhattan. This is in addition to the two other multifamily buildings purchased, and it's worth noting that Empire State is buying it with proceeds from the sale of non-core (outside of Manhattan) office properties and with cash it has on hand, not by diluting shareholders.

Finally, there's the continuing return of workers to offices. There's still quite a bit of uncertainty about what the future of office real estate will look like, but we're seeing signs that even businesses that embraced remote work in recent years are coming back around to the idea that there's also real value to in-person collaboration. Just in the past few weeks, Disney (NYSE: DIS) and Starbucks (NASDAQ: SBUX) have announced return-to-office mandates, and they're just the latest big-name examples to do so.

It's also worth mentioning that Empire State Realty Trust clearly thinks its stock is undervalued. It has bought back roughly 11% of its outstanding shares since the start of the COVID-19 pandemic. Buybacks are somewhat rare for REITs (they're more likely to issue new shares to fund property acquisitions), so that amounts to a big vote of confidence from management.

Iconic assets, financial flexibility, and lots of optionality

To be sure, the first several years of its publicly traded life haven't exactly been kind to Empire State Realty Trust or its investors. Some of this was due to unfortunate timing, while some was due to the pandemic and general weakness in the office real estate market.

However, this business has key competitive advantages over other office operators. It owns one of the most iconic office properties in the world -- a building that many businesses would like to have a presence in. The observatory should be an absolute cash machine once it's operating at full capacity. And the REIT's diversification into multifamily buildings could be a big long-term win, especially since Empire State is growing its portfolio without diluting shareholders or taking on excessive debt.

Empire State is one of the largest investments in my portfolio, and one that I feel has an intrinsic value much greater than the market is giving it credit for. As we go through 2023, it will be very interesting to see how the normalization of the observatory, the continuing return of workers to offices, and its multifamily building additions start to show up in the company's results. If things go as planned, 2023 could be a turnaround year for this unique REIT.