July 15, 2020

Empire State Building Owner on New York City’s Re-Opening

An Interview with President, Chairman and CEO of Empire State Realty Trust, Anthony E Malkin

CNBC: Meantime, New York City is expected to begin its phase 3 reopening on Monday, but mayor Bill de Blasio says that will not include indoor dining anymore, as was originally scheduled. And as we head into a new month it also means a new round of rent payments for real estate giants like my next guest who owns more than 10,000,000 sq.ft in Manhattan and parts of the tri-state area, including the world famous Empire State Building. For more on the path forward for real estate, I am joined by Anthony Malkin he is chairman and CEO of Empire State Realty Trust. It’s great to have you back and I guess we will just start with, you know, are they paying the bills for July?

Anthony E Malkin: So we’ll disclose our actual final update for the next quarter earnings, at the same time what I can tell you is since the last time we spoke rents have continued to come in and our rent collections have continued to improve. July rents aren’t actually due until literally the 1st, however I can just tell you steady improvement over our collections prior to this point.

CNBC: What do you think of the mayor’s decision not to open indoor dining? How does that affect you and what’s going on with the observation deck, which is such a big part of the Empire State Building’s revenue.

AEM: So let’s hit the observation deck first, it is closed but I’ll tie that into the second point which is indoor environmental quality. This has been a major focus of us throughout our renovation of all of our buildings in the past decade, the fact that indoor environmental health is absolutely critical. So we have put in such things in all of our niche spaces including the observatory, as Merv-13 filters, Atmos Air which kills off viruses including Coronaviruses, Merv-13 filters capture viruses, and the third most important thing, ventilation. So, in our offices at 111 West 33rd St, we replace the air in our office completely once every hour. That’s what happens at the observatory, and the difficulty with a lot of this indoor dining is that’s not the way that those air conditioning systems and cooling systems are designed. Similar to those buildings which have these very large tied in central systems, they just re-circulate the air.

CNBC: So, it’s interesting because Governor Cuomo brought up the same issue and said he wanted, you know, restaurants to have these kinds of filters that can kind of capture or in your case, as you said, kill Coronavirus. Can you tell us about the cost though, I mean you are a property manager, this is obviously an investment that you need to make? But, if you are a restaurant, is this financially feasible?

AEM: Well it’s interesting, you know, our restaurants at the Empire State Building have this already, the Merv-13 filters and the Atmos Air as part of our basic design build and everything that we do in our buildings. And as I said, we were focused on this before when it was an issue of indoor environmental quality, asthma, volatile off-gassing materials. To retrofit for Merv-13 filters and to install Atmos Air, it’s not a big burden. To incorporate ventilation is harder, and that needs to be part of a design change. So I think you have the one hand to clear out what’s re-circulating in the air, and then the other hand is to bring in fresh air and that is more of a challenge unless you’ve planned ahead.

CNBC: Yeah, and I imagine that’s what all these restaurant owners are struggling with trying to whether that investment is going to be worth it for them, or just to close up. You know since we last had you on we spoke with Jonathan Litt who is reportedly shorting companies including yours and thinks ESRT might bare the full brunt of this storm because of the observation deck being 25% of net operating income, you’re smaller tenants, older buildings, more apparel oriented. I’m sure it’s not the first time you’ve had to address these concerns but what would you say to investors like Litt, who are worried about your future?

AEM: Well look, everybody’s entitled to take a position in the market, that’s the benefit of markets. I think that anyone can report on what is happening today, I think you have to look at the longer term. First of all, our buildings are older but they’ve all been modernized for the 21st century, we spent over a billion dollars on our entire portfolio to do that in New York City and that’s why we have those Merv-13 filters, Atmos Air, and ventilation in our new installations, in our observatory, in our building lobbies, in the retail components of our buildings, number one. Number two, we greatly transformed our tenant make-up, expanded it to much bigger buildings. LinkedIn is our largest tenant, followed up by other tenants, some of them have exposure to the garment industry. But what I would say is you gotta look at the longer term, gotta look at the balance sheet, we have a huge balance sheet disclosed in March, we have over a billion dollars, that gives us runway, the opportunity to grow and expand. How are we going to create value over time and how are these landlords positioned over the longer term against the Greenhouse Gas Emissions Bill, a local law in ’97 in New York City where we are leaders in this. So I think that, look, markets are made by people going long and people going short, and my view is very simple, we’re built for the long term, we feel comfortable about our position.

CNBC: And there’s one, also, long term trend I thought was interesting that you aren’t a big believer in. You actually aren’t a big believer in work from home because you believe that people have tried it before, it hasn’t worked, and all of the trend stories about how this is going to be the new normal are off the mark. You don’t think it’s going to be different this time?

AEM: You know, there’s a great article in the New York Times that came out on Sunday that specifically addressed this. All of the different companies that have tried this, from IBM on, have always gone back to bring people back into the office. The other thing about work from home is that it is incredibly discriminatory. People feel isolated and abandoned, socioeconomically if you are at the bottom of the stack trying to work your way up, this is very prejudicial, very prejudicial against minorities and the whole Black Lives Matter. It’s amazing that people would say we’re going to take these people who are strivers and we’re going to keep them away from where they can learn, away from where they can form teams, away from managers who can teach them and make progress, very discriminatory against working parents. You lose the value of hallway validation, the people who are 35 and under want to be in the offices, and they want their bosses there, not in the Hamptons, not in the Catskills, not out in Colorado. So I think it’s a bright, shining penny, I think it’s a great story for people to write about. Over time, the statistics are already coming in, people who are working from home are starting to fall off as far as productivity. The fact that businesses want to offload the cost of having an office on people and on their homes and keep them away from building teams and culture to me is unbelievable, it won’t last and it won’t work.

CNBC: Very, very interesting, Anthony Malkin thanks for coming back we appreciate all your thoughts.

AEM: Thank you very much, have a great July 4th.