The Empire State Building, New York’s most famous office skyscraper, has come to reflect much of what ails the city and its commercial real estate during the Covid-19 pandemic.

The tower looks vulnerable to losing office tenants as more companies embrace remote work or cheaper satellite offices outside city centers. Some in the industry say it is worse off than many peers because the building relies on smaller office tenants, which tend to be more at risk during a downturn. Its retail tenants face challenges with many of the building’s employees not back to work. Tourism, a major source of revenue, has all but dried up.

Executives at Empire State Realty Trust, which owns the skyscraper and 19 other properties, said the company’s low debt and high occupancy rate will help sustain it through tough times. “I don’t think we’ve ever been as prepared for a down cycle as we are now,” said Anthony Malkin, Empire State’s chief executive.

But stock-market investors are expressing concern. The company’s share price has dropped by more than half year-to-date, making it the worst performer among the major, public New York-focused office owners.

Empire State Realty Trust gets more than 40% of its revenue from the 1931 office building in normal times, and it lost $19.6 million in the second quarter. That more than reversed an $18.9 million profit a year earlier.

Much of that drop is because of the tower’s observation deck and museum, which reopened to visitors on July 20. Last year, 3.5 million people visited the observatory. In the second quarter, it made $86,000 in revenue, down from $32.9 million a year earlier. Business remains slow. Instead of bustling crowds, on Friday about a dozen visitors had the 86th-floor lookout to themselves.

Some investors predict that competition from new observation decks at Hudson Yards and One Vanderbilt in Manhattan will eat into the Empire State Building’s revenue—even after tourists return—and that companies will need less office space.

“We’re not putting the work-from-home genie back in the bottle,” said investor Jonathan Litt, whose company is betting the stock price will fall.

While the pandemic poses problems for most Manhattan office properties, the Empire State Building has particular vulnerabilities.

Smaller tenants, which occupy a large share of its space compared with newer office developments like Hudson Yards, are more likely to go out of business if their revenue falls because they lack the financial resources “to sustain operations through a longer period of lower demand,” said Bradley Tisdahl, chief executive of Tenant Risk Assessment.

The nearly 90-year-old building’s age is another concern. Old buildings tend to face stiff competition during office-market downturns as new buildings lower their rent, said John Kim, a stock analyst at BMO Capital Markets. “With any downturn there is usually a flight to quality in office,” he said.

The tower’s owner has been addressing some of these issues. Over the past decade, it said it has spent heavily renovating the skyscraper, making it more energy-efficient, adding advanced air filters and other technology that can remove viruses from the air, and installing modern, fast elevators, among other changes.

More than two-thirds of office space is occupied by companies that lease an entire floor or more, Mr. Malkin said, and he is marketing the tower’s cheaper rents to tenants from more expensive buildings.

The company also completed a $165 million renovation of the observatory, and Mr. Malkin projects that visits to the observatory will be back to normal by 2022. The tower has added a number of corporate tenants in recent years, including LinkedIn and Shutterstock. Some small tenants are divisions of larger companies, making them less likely to default on their leases, Mr. Malkin said.

Office-rent collections across the company fell to 83% in June but rose to 91% in July, according to the latest quarterly earnings report. Prospective tenants have started touring office space again, Mr. Malkin said.

Many of the bigger tenants are locked in on long-term deals. Shutterstock signed an 11-year lease in 2013 for its headquarters in the building, according to the company’s general counsel, Heidi Garfield. Although Shutterstock’s employees are working remotely for now, Ms. Garfield said the company hasn’t discussed leaving the property, which she called “iconic and incredibly vibrant.”

Still, rents are likely to fall across New York. A prolonged economic slump would increase the risk that tenants stop paying rent or don’t renew leases.

Employment attorney Matthew Blit, whose law firm of about 20 people has an office on the 40th floor, said only about three people now use the space on a typical day and most work from home. His business has been hit hard by the recession and no longer makes enough monthly revenue to cover all its expenses. Mr. Blit said he asked the landlord for a rent discount but was rebuffed.

He is paying rent and other bills with the help of the law firm’s savings, and he is optimistic that the firm will be profitable again soon.

“As long as we can afford it, we will stay,” he said. “But if there’s another shutdown, that changes everything.”

BY KONRAD PUTZIER | WSJ | Augut 19, 2020


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