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Exclusive: NY Real Estate Mogul Tony Malkin Talks the Future of Office

Empire State Realty Trust chairman and CEO Anthony Malkin's Empire State Building is part of an extensive New York City portfolio that includes 13 other office properties and six stand-alone spaces that continue to be remade to attract top-tier tenants like eBay, FDIC, HNTB and Macy’s. We spoke to Anthony on a wide range of subjects in advance of Bisnow's national full day Office Leasing, Development and Investment event for which he'll be a keynote on Dec. 1 at 4 Times Square in NYC. 

Exclusive: NY Real Estate Mogul Tony Malkin Talks the Future of Office

Bisnow: What has been the secret to transforming the Empire State Building?

Anthony Malkin: The key to the Empire State ReBuilding has been the comprehensive view from the start that we needed to replace, repair and replicate all of the authenticity, which had been lost over the decades and generations, while at the same time transforming the building for the 21st century.

Bisnow: What’s the latest news at the Empire State Building?

Anthony: We continue to lease space that we vacate at the building at much higher rates than the expiring rates to great tenants with better credit on much longer terms. We also continue to consolidate the vastly over-tenanted floors into full floors, multiple floors, or pre-builts with spaces from 2,500 SF to 7,500 SF.

Bisnow: Empire State Realty Trust’s Q3 earnings were up significantly over the same period last year. Can you continue to fuel this growth and how?

Anthony: We continue to demonstrate that we can harvest the embedded, de-risked growth as we complete the redevelopment of the office floors throughout our portfolio and we also redevelop and retenant the retail opportunities throughout the portfolio. We know that we’ve demonstrated our ability to do so and continue to demonstrate our ability to do so, and that the market is very receptive to the 21st century improved product throughout our entire portfolio.

Bisnow: What is your strategy going into  Q4 and beyond into 2016?

Anthony: We’ve said publicly that we are very focused on the embedded de-risked growth in our portfolio, that executing on that redevelopment and retenanting is job one. We intend to maintain very low leverage on our balance sheets, stay disciplined and not to put out capital and do acquisitions in today’s very high-priced environment. Instead, we’re positioning ourselves for what we think will be terrific opportunities in cycles in the future.

Bisnow: Along those same lines, occupancy of your 7.5M SF Manhattan office portfolio slipped slightly. Is that a sign trouble’s ahead?

Anthony: I think you have to look at our occupancy from the vantage point of what we’ve said consistently since we became public. That is that as we vacate space to redevelop it and we lease that space, we then vacate additional space to redevelop that. I think it’s probably better to note that our overall occupancy has continued to trend up since we went public. There have been staggered steps along the way, but overall it is on the way up, number one. Number two, it is also good to look at our signed leases not commenced with quality companies with good credit that are going to be moving in. As we continue to lock in the potential of our portfolio—the embedded growth—we necessarily do vacate space and that creates vacancy.

Bisnow: How important is debt load for REITs—and other NYC office owners—at this point in the cycle?

Anthony: History has shown that REITs with lower leverage perform better over time, and yes, we have one of the lowest levels of any office REIT in the United States. We think that low level of debt, which continues to be low as we reinvest in our portfolio and achieve these terrific positive leasing spreads, provides opportunities for growth in the future when [acquiring] new assets seems more logical. With regard to debt loads in general for other New York City office owners, I think that really depends on their own style of operation, what level of risk they’re prepared to take and how much dry powder they want to deploy in the next cycle.

Exclusive: NY Real Estate Mogul Tony Malkin Talks the Future of Office

Bisnow: Cap rates in NY are shrinking to almost nothing, and some in the industry say that’s not sustainable. How should investors view the market—stay or go, or a third option?

Anthony: While cap rates are low, the bottom line is that fundamentals continue to improve throughout the market, so I think that values at these cap rates still have a way to go should cap rates be maintained and fundamentals continue to improve. When people are making the choices about whether or not to invest today, many investors in New York City have different objectives. In some instances, sovereign wealth funds are using fixed-income money and deploying that into real estate for what they think is a better risk-adjusted return. In certain instances, other people are looking to get a presence in New York City. In other instances, people are looking for capital safety in a market they know and believe will be resilient and protect their wealth. In putting these things together, I really think it’s up to everyone to make his or her own decision and we’ve clearly defined what our view is, which is getting 10% to 17% returns on investment when we reinvest in our own portfolio and re-lease that space. That’s what we think is logical for us to focus on for the foreseeable future.

Bisnow: You have some of the biggest name tenants out there: eBay, LinkedIn, among them. What’s your secret to success here other than the fact that the Empire State Building is such an iconic building?

Anthony: First of all, we have in our portfolio, including the Empire State Building, Coty, the fragrance and skin care company. We have the Federal Deposit Insurance Corp, Global Brands Group and HNTB. We also have in our portfolio Macy’s, Interpublic Group, as well as corporate offices of Kohl’s and Hatch Mott Macdonald. I guess the comment that I’m making is that we have a broad variety of tenants, not just tenants that are linked to the TAMI area. We believe our success is driven by our fantastic locations, our totally upgraded and renovated properties and the services we provide. Certainly, I think people come to us as well for our energy efficiency and sustainability leadership. We deliver this all at a very attractive price.

Bisnow: You’ve stated in past interviews that you won’t lease to WeWork. Do you view co-working companies as a threat to traditional landlords? TAMI tenants are sexy and therefore get a lot of press. Do you think the opportunity there is overblown?

Anthony: I think that there are businesses that are more mature and more likely to succeed in every industry category. We take a very hard look at credit quality for every tenant that comes to us as a prospect for a potential lease. I firmly believe that we are chosen by our investors to provide a bond-like return with capital appreciation potential, tax advantages and inflation protection, and that we should not put ourselves or our investors at risk of taking a risk on venture capital type tenants, high-growth startup tenants, which have risks of failure. And, if they succeed our only reward is that we collect rent. I think there are people who invest in venture capital and that’s great because if they succeed they get a venture capital kind of return. I think that a landlord taking a venture capital risk just to collect rent isn’t a good risk.

Bisnow: What does the office of the future in NYC look like?

Anthony: I can only tell you that our new offices, which we’re building at 111 West 33rd St, are, I think, a good example. We have no private office at all, including for me. We have a tremendous amount of private phone booths, breakout rooms and meeting rooms of all different sizes. We have a paper-free office that we’re designing, which will have a scanner room and very few printers in the office, so printing will be something where you have to get up from your desk and pick up your printing job. [The way the system is structured] is that if you don’t pick it up, it will eventually be dropped from the system. I think we spend too much time sending emails to the people sitting next to us. We want to see more discussion and interaction, and in our new offices we’ve designed a heat map to define interactions amongst different employees and participants at the office. That’s how we allocated space to different people in the building.

Bisnow: How will it be impacted by the affordable housing crisis?

Anthony: I think that all of New York has an interest in having adequate housing for the people in New York City that we need to occupy the spaces to do the jobs that are needed in order to make our city work, but I’m not in the residential business in New York City. I don’t have any informed comment, decision or informed input that I can put into that equation.

Bisnow: You commented to CO in June that you hoped your two sons did not join ESRT because it’s meant to be a “professionally run business.” What’s your view of nepotism in commercial real estate, an industry where family businesses are something of the norm? What’s the downside?

Anthony: Let’s be clear because I think you’re taking two things and taking them slightly out of context. What I said is this is not a family firm. This is a professionally run public company. If one of our children had an absolute calling for real estate and developed the chops and demonstrated desire to be in the real estate business, I suppose they could try to compete for a job here like anybody else who’s qualified. In my view candidly, I hope they don’t feel the need, the drive or the obligation to come to work in this business. It is not a family business and there is no nepotism in this company. That being said, I think there are different activities for different families and if you look at some of the great New York real estate families who really don’t have partners and have great family involvement throughout the business, I think that if that works for them that’s terrific. We always had a business of being fiduciaries for investors. The fact that someone is a child of the people who operate the business doesn’t automatically make them a great fiduciary who is well-placed for carrying that forward.

Bisnow: What are the other downsides of this?

Anthony: I think there’s always the risk of not getting outside experience and I think that outside experience is very important. I didn’t come into this business when I graduated from school. I worked outside of the business in private equity not even in real estate for four years before joining with the family business.

Bisnow: Could you share with us a Malkin-specific Thanksgiving tradition?

Anthony: We have a very large gathering of the direct descendants of Lawrence and Mae Wien, who were my grandparents. It’s a true family experience at a family member’s home. We actually have two meals. We have a meal with my immediate family and then we have a lunch with my extended cousins. It’s a wonderful family get-together. We celebrate our good fortune and our hard work, and we try to instill family values and trade family stories so that things carry forward.

Bisnow: What do you do in your spare time to blow off stress?

Anthony: I exercise and I listen to music. I listen to a broad variety of things, but to blow off steam I exercise a minimum of five times a week. Biking, swimming and playing tennis are my favorite things.

Bisnow: What do you consider the hallmark of a good leader?

Anthony: I think that a good leader has to have vision and the ability to motivate and build teams towards accomplishing that vision. There are all sorts of books about leadership, but the reality is that if you can’t identify a goal worth achieving and organize achieving that goal then you’re not a very good leader.