Empire State Realty Trust Stock Forecast

Empire State Realty Trust Stock Forecast: Investing in real estate can be a huge risk. If you buy a single property, or even a handful, you risk the property value for that area going down, having your holding costs eclipse any profit from the sale or lease of the properties, or necessary repairs eating up the value of your holdings. One strategy that some investors like to do is invest in a real estate investment trust instead.

Also called REITs, these investments own and operate real estate and assets that generate regular income. They may lease space in a shopping mall, own office buildings, invest in hotels, or own apartments.

Normally, the real estate investment trust does a combination of these things as part of its investment portfolio.

Invest In REITs Has Its Pluses, But…

Putting your money in a real estate investment trust lets you benefit from income-producing property without being directly responsible for the holdings yourself.

While some REITs are private, you can find many that are publicly traded. However, there are certain risks to this type of investment of which you should be aware. Always do your research before buying stock in a real estate investment trust.

Let’s take a closer look at Empire State Realty Trust [NYSE: ESRT].

Empire State Realty Trust Oversees 10 Million Sqft

Empire State Realty Trust is an REIT that focuses on Manhattan and other locations in the NYC Metro area. The company itself has been around for nearly 80 years. ESRT has been listed on the NYSE since 2013.

Empire State Realty Trust owns 14 office buildings, including the Empire State Building. All told, it has over 10 million square feet of rentable space in its portfolio, as of September 30, 2019.

The company recently entitled land in Stamford, CT which is adjacent to one of the properties it owns. This development will add another 380,000 square feet of rentable space including the building and the attached parking garage.

Is Empire State Realty Trust Stock a Buy?

One thing to note about Empire State Realty Trust is that the REIT is heavily focused on Manhattan and the surrounding area.

This narrow focus does introduce some risks, but it also assuages some. By centering its efforts on a particular niche (office buildings) and location (New York City), this REIT can focus all of its efforts on a single market.

This could help the company learn the expertise necessary to price its properties more effectively and develop brand recognition within its target market.

The company appears to be strong financially. In December 2019, it announced a $500 million stock repurchase and that one of its biggest clients, The Interpublic Group of Companies, was expanding its rental space.

The client company expanded its footprint by 15,086 square feet to 127,781 square feet, marking the third time it had increased its rental space with ESRT.

Earlier that year, in October, Empire State Realty signed its eighth expansion lease with LinkedIn. Since 2011, LinkedIn has grown its presence to occupy 501,600 square feet in the Empire State Building. The October expansion added 188,653 square feet over three and half floors to its lease.

The main factors the expanded client companies noted were the building-specific amenities available to tenants and the desirable location of the respective properties. This combination of factors is something that Empire State Realty does well, but the company does face some risks.

Risks of Buying Empire State Realty Trust?

Probably the most obvious risk associated with Empire State Realty Trust is that its property portfolio is centered on Midtown Manhattan and the larger metro area. The economic risks of investing in Empire State Realty are completely different than that of another REIT that has a portfolio with more geographic diversification.

New York City may feel like the center of the universe but if that were ever to change or if people wanted to be located elsewhere on the isle of Manhattan, the properties that ESRT owns may not be considered that desirable.

Likewise, if there was a series of major layoffs in New York City, if several businesses opted to branch out of the city, or if the property taxes goes up considerably, Empire State Realty is going to take a hit.

Concentrated Portfolio Risk

Look at the company’s portfolio too. Just six properties account for 72% of the REIT’s income.

If something happened to one of those properties and it was materially damaged, the loss could be devastating to Empire State Realty.

Also, the Empire State Building alone brings in almost 32% of its rental revenues. If tourist trends change and people stop visiting the “Most Famous Building in the World,” the REIT is going to take a hit there too.

Furthermore, while Empire State Realty Trust [NYSE: ESRT] focuses its business on office buildings, it does own retail spaces as well. A strong economic downturn could mean that many of its leases are forced to cease operations or downsize its presence. Many other REITs are more diversified, so this specific risk is less of an issue.

Financing & Interest Rate Risks

Next, consider ESRT’s ability to borrow money. In order to grow and remain profitable, the REIT needs to be able to access financing at terms that allow it to make money.

The company needs fresh influxes of cash to purchase new properties, improve existing spaces, and develop land. If interest rates go too high or the company is deemed a risk, there may not be enough margin left to actually make money on its holdings.

Similarly, if ESRT is unable to secure financing at the right price, it may be unable to keep up with its competitors in terms of properties features or the ability to offer attractive lease terms. Either situation could be detrimental to Empire State Realty’s operations.

Finally, keep in mind that ESRT has some properties under development and those ventures cost money. There is always a chance that those investments will not play out.

Empire State Realty Trust Stock Forecast Summary

Empire State Realty Trust [NYSE: ESRT] has some very positive attributes, including its ownership of the Empire State Building, but no investment is without risks – this one included.

Before you invest, make sure you have a strong understanding of how the REIT makes its money and what factors could limit its ability to be profitable.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.