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Empire State Realty Trust Posts $12.3M Loss In Q3

The Empire State Building, New York

Empire State Realty Trust took a $12.3M loss in the third quarter, the New York real estate investment trust declared in its quarterly earnings, released Thursday. 

In the second quarter since the coronavirus pandemic took hold in New York, the real estate trust saw a stabilization in occupancy but a decline in rent as its suburban properties outperformed its Manhattan portfolio, which includes the Empire State Building.

“We are fortunate to be able to manage the challenges we face, with our flexible balance sheet, continued success with collections, successfully implemented cost reduction measures and new management team members," ESRT CEO Anthony Malkin said on the call. 

Total office occupancy across the company’s portfolio was at 85.9% on Sept. 30, down from the end of Q3 last year at 89.4%, but ticked up from Q2, when occupancy was 85.6%. 

The REIT said it signed 18 new leases and renewals totaling 247K SF across its New York City and suburban properties, down from a total of over 388K SF during the same period in 2019.

ESRT's 9.4M SF office portfolio is heavily centered in Manhattan, where it owns nearly 7.6M SF of office space, as opposed to its five suburban office properties in Westchester and Connecticut that span 1.8M SF. 

But its suburban properties saw proportionally far more activity, with almost 131K SF of office leasing in Manhattan in Q3, down from 267K SF in Q3 2019, and 105K SF of suburban up from 89K SF during Q3 in 2019. 

While the REIT was able to stabilize occupancy, it felt the brunt of rent decreases across its portfolio, reporting a $380K loss from straight-line rents in its Manhattan portfolio in Q3, a swing from a $1.7M gain in Q2. 

Malkin said on the call ESRT has shifted temporarily toward a percentage-rent system for its Manhattan retailers in order to help them survive occupancy still below 15% for the offices above.

Some of ESRT’s Manhattan office tenants relocated to the suburbs, ESRT Executive Vice President Thomas Durels said on the earnings call Thursday, but he still sees this shift toward suburban office space as short-lived.

“I wouldn’t call it a trend,” he said. 

ESRT's losses come as the Manhattan office market is taking a beating amid the economic downturn of the pandemic and the work-from-home revolution. Manhattan office rents saw their lowest rates since the Great Financial Crisis and sublet availability has soared to its highest level in a decade.

The largest lease it inked this quarter was in Manhattan: Hong Kong-based supply-chain management company Li & Fung at the Empire State Building signed a lease totaling 103,500 SF. Right now, Li & Fung occupies 253K SF across two of ESRT's properties — the Empire State Building and 1359 Broadway, according to the REIT's quarterly disclosure.

That's a marked decrease from its prior footprint with ESRT. In 2011, the company signed a 490K SF lease at the Empire State Building, The Real Deal reported at the time. Its global headquarters at 1359 Broadway spans three floors.

The REIT missed its projected ticket sales for its Empire State Building Observatory, which reopened during the quarter. It saw 6% of 2019's traffic, after projecting 10%.

Of the $4.4M the revenue generated by the Observatory — normally a cash cow for ESRT — in last quarter, $2M came from deferred revenue for unused tickets and $1.2M came from license fees for the gift shop. Observatory expenses for the quarter hit $5.9M.

"No attraction in any city has a higher brand value and international recognition than the Empire State Building Observatory, authentic and iconic," Malkin said. "We believe that when the pandemic passes, we will emerge stronger than ever, as the enduring branded icon of New York City and its resilience."

Another Manhattan-focused REIT, SL Green, reported its earnings last week, and it turned a $13.9M profit, although that figure was down from a $33.2M profit in Q3 2019.

Vornado, another REIT with a portfolio that is almost entirely Manhattan office and retail, will announce its earnings next week.