EUR 850.00 For Business Accounts Only

Morningstar | Empire State Realty Trust Is a Class B Turnaround Story

While Empire State considers itself a hybrid of Class A and Class B office and retail space, property pricing we’ve seen over its short-lived time as a public REIT skews toward the latter. The company has one of the best-positioned balance sheets in the REIT space, but we’re fearful that the company might have missed its opportunity as supply increases, developments become costlier, and cap rates are near all-time lows. Further, the company has shown little evidence that would paint the picture of a successful growth story. Its average rents have lagged growth in the general Manhattan Class B office market, while occupancy slightly outpaced the general trend since its IPO in late 2013. Ultimately, we think the properties are less marketable than those of peers and command a much lower price point. Much of the available space the company is attempting to lease is made up of fragmented floor space heavily skewed toward offices as opposed to open work areas, which is a tall order in terms of luring quality tenants. On average, Empire State caters to lower-tiered tenants than many of its high-profile Manhattan office and retail peers.A large part of the company’s success has been attributed to the Empire State Building along with its observatory, which has long been a tourist magnet. With estimates that tourism will exceed 67 million people a year by 2021, we see this portion of the business poised for growth based on the company's recent success with increased ticket prices and its ability to hold observatory costs flat. Overall, we view the portfolio as solid but largely dependent on the Empire State Building and have not seen much to get excited about between recent leasing activity and continually low occupancy as the company has undergone a significant amount of redevelopment with its properties. We are also hesitant about how the market will respond to this revamped Class B property going forward. To attract talent, companies have been placing increasing emphasis on their workplaces to create collaborative and attractive environments, so we anticipate that Empire State’s office space will remain low on the list when companies seek new space.