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Empire State Building

Is Empire State Realty Trust a Good Fit for a Retirement Portfolio?


Jul 25, 2020 by Matt Frankel, CFP

Office buildings are generally considered to be one of the safer types of commercial real estate investments. Tenants sign long-term leases, and office space is a necessity for many businesses no matter what the economy is doing.

However, the COVID-19 pandemic has changed things a bit. Not only has the current situation caused many office tenants to struggle financially, but many experts think there could be a big trend towards allowing employees to permanently work from home as well as downsizing or even eliminating physical office spaces.

One particularly interesting real estate investment trust that focuses on office properties is Empire State Realty Trust (NYSE: ESRT). Is this NYC-focused office REIT a good fit for a retirement portfolio, or has it become a bit too risky in the current environment?

Empire State Realty Trust in a nutshell

As the name suggests, Empire State Realty Trust owns the iconic Empire State Building. It also owns more than a dozen other office properties in New York City and the surrounding area. Most of its leasable square footage is office space, but like most NYC high-rise buildings, there's also a significant amount of retail space on the lower levels.

Reasons to like Empire State Realty Trust for a retirement portfolio

Before we go any further, it's worth mentioning that I own Empire State Realty Trust in my own retirement portfolio and have added considerably to my position since the pandemic started. So it's no secret that I like the company as a retirement investment. And here are some of the biggest reasons:

  • Empire State has a rock-solid balance sheet, including a $1 billion cash position that it plans to use to take advantage of opportunities while the market is weak. In fact, the company just hired a chief investment officer for the first time ever.
  • Empire State focuses on traditional office tenants and has no exposure to coworking, which has been a major trouble spot for NYC real estate.
  • In addition to owning the Empire State Building itself, the company also operates the observatory on top of the building, which (in good times) is a lucrative and high-margin business. Just before the pandemic hit, the company completed an extensive $165 million renovation, and this could be a major driver of revenue growth as tourism ramps back up.
  • Empire State Realty Trust is an excellent income stock. At the current share price, the REIT's dividend yield is an impressive 6.2%, and the $0.105 quarterly payout is well-covered by the company's funds from operations (FFO).

Will the work-from-home trend cause serious problems?

Arguably, the biggest risk factor facing Empire State Realty Trust (and other office REITs) going forward is the work-from-home trend. And it's certainly understandable -- as a result of the pandemic, many companies have successfully transitioned their employees to remote work and some (particularly tech companies) have said that employees can continue to work from home even after the pandemic is over.

However, I don't think this will affect the need for office space in any significant way. A recent survey by Hibob found that 79% of employees want to work from a physical office, at least on a part-time basis. Just 21% said that they want to work from home regularly. Simply put, most workers find being in an office more productive.

Not only that, but some office landlords have even reported tenants asking to lease more space to be able to better accommodate social distancing concerns.

Good for a retirement portfolio, but with one big caveat

The bottom line is that Empire State Realty Trust has many of the characteristics of a solid retirement portfolio stock. It has a rock-solid balance sheet, top-quality assets, and the structure of office leases is designed for stability. Plus, the stock currently pays a dividend yield of more than 6% and there's no reason to believe a cut will be necessary anytime soon.

However, there's one big caveat. Empire State can make a great retirement investment if and only if you'll have no need to sell the stock for at least the next five years, and preferably longer. While the business should come out of the pandemic in strong shape, there's likely to be considerable volatility in the stock price until we know the true economic effects of the "new normal."

I'm 38, so I have more than two decades until I plan to retire and could see myself holding the stock as an income investment well beyond my retirement date. If you plan to buy and hold it for the long run as well, now could be an excellent time to add this high-paying office REIT with iconic and irreplaceable assets to your portfolio

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Matthew Frankel, CFP owns shares of Empire State Realty Trust. The Motley Fool owns shares of and recommends Empire State Realty Trust. The Motley Fool has a disclosure policy.

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