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Empire State Building

Empire State Building's Owner Says Leasing Activity Now "At a Trickle"

Apr 28, 2020 by Marc Rapport
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The owner of the Empire State Building and its pandemic-shuttered sky-high viewing deck shared a cloudy view of the Big Apple's commercial real estate outlook in its quarterly report last week.

Empire State Realty Trust (NYSE: ESRT) said 88.8% of its 10.1 million square feet of rentable office and retail space in the New York City area was occupied at the end of the first quarter, virtually unchanged from the quarter before and the year-ago quarter.

The REIT also said it signed 35 new, renewal, and expanded leases in the three months ending March 30 at an average rate of $66.58 per square foot, an increase of 3.4% over the previous rent for those properties.

Those leases included 23,000 square feet to Starbucks (NASDAQ: SBUX) for a three-level space inside the Empire State Building itself.

"This unique concept will be a tremendous amenity, providing an engaging experience and amenity for our office tenants and its observatory visitors," said Thomas Keltner Jr., the company's executive vice president, general counsel, and secretary during a call with analysts last Thursday, April 23. "We expect Starbucks to be open in 2021," he added.

But the observatory, like most of NYC, is closed

The iconic skyscraper's 102nd floor observation deck had only reopened in the fourth quarter after being shut for redevelopment in early 2019. Revenue for the tourist attraction, which the company says generates nearly $20 million a year, was running ahead of last year when the doors shut on March 16 because of the COVID-19 pandemic, Empire State said.

That's not the only tour on hiatus. "Except for lease transactions that were in negotiation prior to the city's order to shelter in place, lease prospect tours have stopped and new leasing activity has slowed to a trickle," Keltner said in the Thursday call.

The company itself says it has $1 billion in capital to work with and another $500 million it can access and that it is continuing to buy back its stock. But while the REIT continues to engage with brokers through virtual tours and other digital means, the prospects for the real estate market that it occupies in and around Manhattan are uncertain.

A third of their rental revenue base is seeking deferral

Empire State said it had collected only 69% of its total rent for April as of the time of the earnings call, 73% for office tenants and 46% for retail tenants. Those numbers rise to 93% and 59% when security deposits are applied.

Keltner said those tenants will be required to restore their full deposits but noted that the property owner and manager also has received requests for rent deferral from 170 office and retail tenants who represent approximately 32% of Empire State's annual revenue from rentals.

He said food and service retailers have been particularly hard hit and that they are important amenities the company wants to see reopen when its office buildings are again safe to occupy.

Making no predictions

Empire State is considering each request individually and is requiring financial documentation and proof that the tenant has sought relief through the CARES Act.

Thomas Durels, the REIT's executive vice president for real estate, said the company has seen some "opportunistic" deferral requests from tenants who appear to be on solid financial footing.

"We're surprised by those requests, and we will pursue aggressively collection of rent. … But overall, the tone out there by tenants is to conserve cash … through the downturn, and some of this approach has showed up in tenant's attitude toward rent payment," Durels said.

"What we saw in April is not an indication of the future. And at this point, we certainly can't make any prediction about May and the months ahead," he added.

Sees fundamental changes coming in office space use

The coronavirus, which has made New York City a new ground zero, may also result in permanent social distancing in its properties, with floor plans that are more open and people less packed into their office spaces.

"We also believe current co-working build-outs are too dense and will be poorly positioned for tenant demand in the new paradigm," Keltner said.

Durels said new leasing activity is "pretty much frozen at the current time until lease tourists can resume and the shelter in place orders are lifted." Discussions with tenants and potential new tenants were at various stages when the pandemic hit, and while some continue, others have ended.

Technology companies add solidity to diversity

Tech companies were making prominent moves into the city, a demand that Durels said Empire State has seen within its diversified portfolio, including names like Microsoft (NASDAQ: MSFT), Expedia (NASDAQ: EXPE), and Shutterstock (NYSE: SSTK).

"These are all really, really solid tenants. And they had been growing with us pre-shutdown," Durels said. "And I'm happy that they're in our portfolio and look for more growth going forward."

A REIT's view on reopening

Durels said the company will follow government guidelines augmented by its own requirements for reopening its buildings. That could include thermal temperature scans, face masks, hand sanitizers, scheduled use of gyms and other amenity spaces, and controls on deliveries and visits, just to name a few precautions.

Keltner, meanwhile, concluded, "We believe in the resilience of New York City and the demand for employers and employees to be located here. New York City has recovered from past economic cycles and external shocks and come out stronger, more diversified, and more vibrant each time. For now, we continue to run our business and serve our tenants as allowed by the guidelines and instructions of the authorities, and preserve value for our shareholders."

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Marc Rapport has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Empire State Realty Trust, Microsoft, and Starbucks. The Motley Fool recommends Shutterstock and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, and short May 2020 $42 calls on Shutterstock. The Motley Fool has a disclosure policy.