Manhattan is the most exclusive real estate market in the
The tiny, 34-square-mile island is home to Wall Street, the
global headquarters of the United Nations and some of the most
powerful and influential companies in the world.
That exclusivity has driven big gains for one of Manhattan's
most prized properties. Since going public in the spring of 2010,
Madison Square Garden (NYSE:
is up a market-crushing 198%.
But if you missed out on that impressive run, don't worry. The
most exclusive real estate market in the world is setting the
stage for another big winner.
Clocking in at $1.3 billion, this company's recent IPO was the
second-largest ever for a U.S. REIT (real-estate investment
trust). It controls more than 8 million square feet of some of
the most desirable commercial real estate in the world. And it
also pays investors to own shares with a solid dividend yield
that is higher than the benchmark 10-year Treasury.
Empire State Realty Trust (NYSE:
went public in early October. The REIT owns 12 office properties
and six retail properties. The trust's prized asset is the iconic
Empire State Building, which is the second-tallest building in
New York City. Not only is the Empire State Building one of the
world's most recognizable buildings, but it's also located in one
of New York's strongest real estate markets, with the nation's
lowest local vacancy rates.
A report from leading global real estate specialist CBRE shows
Manhattan leasing rates are accelerating, with overall leasing
activity in September rising 16% from last year and 36% from just
last month while availability rates fell 20 basis points to
12.3%. Those macro tailwinds will continue to support leasing
demand in the Empire State Building and the trust's other
properties in Manhattan.
Not only is the Empire State Building one of the
world's most recognizable buildings, but it's also
located in one of New York's strongest real estate
markets, with the nation's lowest local vacancy
But the Empire State Building isn't just an investment in
commercial real estate. It's also a play on one of the most
popular tourist destinations New York City has to offer. The
Empire State Building generates 40% of its revenue from selling
tickets to its observation decks. That provides a nice source of
revenue diversification against any short-term weakness in
commercial real estate.
Even though the Empire State Building is the flagship asset
for Empire Realty Trust, one of the knocks against the building
is its lease rate of 78%, well below some of its neighborhood
peers trending between 94% and 96%.
But that subpar lease rate is set to climb as the building
continues to execute a $550 million investment project to upgrade
infrastructure, tenant suites and lower energy costs.
Johnson Controls (NYSE:
projects that the upgrade will cut the building's energy
consumption by 38% and save $4.4 million annually when finished
and lease rates accelerate. That will continue to attract new
tenants for the Empire State Building's smaller office spaces
that are in demand from the large number of media and technology
startups operating in Manhattan.
As a REIT, Empire State's new corporate structure will also
increase profitability, reduce its cost of capital and drive
operational efficiencies. And since REITs are required to pay 90%
of their income as distributions to shareholders, it also sets
the stage for a solid dividend yield that is projected to be
around 2.6% in an income-starved market.
Risks to Consider:
The Empire State Building is the crown jewel of the Empire
Realty Trust, but that can also be a double-edged sword with a
high percentage of revenue concentrated in one building. The
observation deck revenue also poses a threat in the event it
would be closed due to terroristic threats.
Action to Take -->
Manhattan commercial real estate is amongst the most coveted in
the world. And with its recent IPO, Empire State Realty is in
position to cash in on that strong demand. ESRT is a potentially
powerful source of growth and income for investors looking for
exposure to the most exclusive real estate market in the
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