The iconic Empire State Building is set to take center stage in a new IPO called Empire State Realty Trust, Inc. (ESB). As part of a multi-property UPREIT, the 102-story landmark skyscraper once stood as the world's tallest building for 40 years (from 1931-1972). From conception, the speculative office tower was not profitable and and it took almost two decades before the initial $41 million investment (around $500 million today) became cash flow positive. It was not until 1951 when the legendary tower was sold to Roger Stevens and his partners for around $51 million - the highest sales transaction in history at that time. (Source: Wikipedia)
Outside of investment circles the Empire State Building is more known for its cultural representation. Just after opening, the building was featured in the 1933 film King Kong, in which the title character, a giant ape, climbs to the top to escape his captors but falls to his death after being attacked by airplanes. In 2005, a remake of the movie was released, set in the 1930s, including a final showdown between King and biplanes atop a greatly detailed Empire State Building.
Buying a Brick in History
The Empire State Building is the flagship property and it provides significant and diversified sources of revenue through its office and retail leases, observatory operations and broadcasting licenses and related leased space. However, the Empire State Property Trust (ESB) portfolio consists of 12 total office properties encompassing approximately 7.7 million rentable square feet of office space, which were approximately 79.9% leased (or 83.0% giving effect to leases signed but not yet commenced as of that date). Seven of these properties are located in the midtown Manhattan market and encompass in the aggregate approximately 5.8 million rentable square feet of office space, including the Empire State Building, the world's most famous office building. The Manhattan office properties also contain an aggregate of 432,176 rentable square feet of premier retail space on their ground floor and/or lower levels. The remaining five office properties are located in Fairfield County, Connecticut, and Westchester County, New York, encompassing in the aggregate approximately 1.8 million rentable square feet. The majority of square footage for these five properties is located in densely populated metropolitan communities with immediate access to mass transportation.
Additionally, Empire State Property Trust has entitled land at the Stamford Transportation Center in Stamford, Connecticut, adjacent to one of the office properties that will support the development of an approximately 340,000 rentable square foot office building and garage. Also, the portfolio includes four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing 204,452 rentable square feet in the aggregate.
Investing in the Big Apple?
The Empire State Realty Trust assets are anchored in or around the Manhattan market where many prominent investors have made a mark. And perhaps the IPO timing is good for investing in the big apple. Victor Calanog, Chief Economist of Reis, Inc (a New York-based real estate research firm) explains:
"Unsurprisingly, Manhattan property markets took a beating in 2009, being at the epicenter of the financial services meltdown. Effective rents for office space fell by 20%, a record drop, and more than twice the magnitude of decline recorded in the 12 months following 9/11. Since then, however, Manhattan rents have roared back, coming in second only to San Francisco for 2011. Effective rents rose by 4.8% in 2011, and vacancies fell to 10.5% by the end of the year after peaking at 11.7% in early 2010. Retail occupancies are mixed, reflecting overall national patterns of weakness for the sector, but prime ground floor space in Times Square or Fifth Avenue can still command soaring rents of anywhere from $1,000 to $2,000 per square foot."
Manhattan's office market is by far the largest in the United States, measured by total square footage, with approximately 393 million square feet of office space. Manhattan's sustained job growth, skilled labor force, excellent transportation access and broad range of service industries drive strong demand for office space through economic cycles. Correspondingly, the Manhattan office market commands the highest overall average gross asking rents of any market in the United States based on asking rents as of December 31, 2011. While the office tenant base is broad, several industries are more prominent than others, including financial services, legal services, media and publishing, advertising, communications and fashion/apparel.
In addition, the newly formed REIT will share a diverse retail tenancy including many of the brand names like Best Buy (BBY), Chipotle (CMG), Duane Reade (WAG), Ethan Allen (ETH), the GAP (GPS), JPMorgan Chase (JPM), Lowes Theatre, Ann Taylor, Bank of America (BOA), Nike (NKE), Panera Bread (PNRA), Sprint (S), Starbuck's (SBUX), TJ Maxx (TJX) and Walgreens. (Source: ESB S-11).
Risk-Aligned or Tourist Trap?
On the surface, it appears that this new REIT could become an attractively risk-aligned platform. The management (Malkin Investments) has decades of experience in the market and there appears to be value in consolidating the iconic tower with an attractive growth oriented strategy. The REIT will more than likely be considered a diversified growth play where the experienced managers will attempt to provide skillful lease-up and management services. And since the Malkin group will also become the largest individual shareholders there will be plenty of incentive for creating value by lease-up, redevelopment and development.
I contacted a spokesperson for Malkin Holdings and they provided the following comment: "With these filings, Malkin Holdings is continuing to move forward with its investors on its previously planned consolidation of certain of its supervised office and retail properties into a publicly traded REIT. The filed documents speak for themselves, and there is no additional comment to be made at this time."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.