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The Real Estate Philosopher


Shorting the Empire State Building? Not This Real Estate Philosopher!

Dec 14, 2021

I just read this article in Saturday’s Wall Street Journal entitled:
 
            Shorting The Empire State Building
 
It was a full page spread in big letters.  Land and Buildings Management (Jonathan Litt) and Polpo Capital (Daniel McNamara) are quoted as proponents of this view, both saying that their investment funds are shorting the stock and giving their reasons for doing so. 
 
It kind of got my blood up a bit.  Of course, there is nothing wrong with shorting a stock you think will go down, so I have no rational reason to be upset, except that, well, I really like New York City and don’t like negativity on it unless it is deserved. 
 
Well, we philosophers are not supposed to be emotional, so enough of that.  Now for good old-fashioned rational analysis. 
 
I think those who short the Empire State Building – or NYC office buildings in general -- will end up with a very bad bet.  Let’s think it through.
 
I start by referencing my past Real Estate Philosopher articles – and my book The Real Estate Philosopher’s Guide – where I have proponed time and again that NYC and office are by no means dead and in fact will be just fine.  My confidence in NYC has never wavered a bit, through the Global Financial Crisis, or throughout COVID, and it is not wavering now either.
 
In fact, the rebounding of NYC is already happening right before our eyes. Multifamily rents are up up up.  Luxury and non-luxury condos are selling briskly, some for record prices.  Anecdotally, I was in Times Square last week to get some dinner on a random Tuesday night, and it was a crazy crowd that I almost had to fight my way through.  And try making a dinner reservation.  New York City is already back big time.  Just like Jerry Seinfeld and I predicted back in March. 
 
Office building owners like Vornado and SL Green both sport fat dividend yields of about 5% each.  All of this when office occupancy is only about 30%. 
 
However, Mr. Litt is quoted as saying he believes the value of NYC office buildings will fall by “40% from pre-pandemic levels.”  However, for this to happen it would mean that the demand for office space would have to fall significantly, permanently or close to permanently, from pre-pandemic levels. 
 
Although I respect other opinions of course, my view is that this simply won’t happen and office workers will return strongly once the ‘all-clear’ bell is sounded, which, yes, might be still a few months away. 
 
So I have zero concern about office buildings in NYC in general.
 
But looking more specifically, Messrs. Litt and McNamara are referring to the Empire State Building and presumably other office buildings.  And, here I acknowledge that the more legitimate concern about the Empire State Building is that it is old, and everyone will want new space.  So, the theory goes, these old buildings will take it on the chin since they are not up to current tenant desires.
 
I admit this is more worrisome on its face, but I don’t think things will play out that way, and here is why.
 
I will start by telling you exactly what was going on in my mind just this very past week.  I was thinking that our lease expires in a few years and wouldn’t it be ‘nice’ if we could move to a brand new building.  Sigh…
 
And then I brought myself up short.  I can’t disclose my current rent or our internal finances, but I can say the following:

  • We are in the center of the NYC world – right across from the former Sony Building at 55th Street and Madison Avenue. 
  • That brand new space – maybe Hudson Yards?  Is renting in the 100’s per square foot.
  • It will cost my firm – a lot – a real lot – extra to go with new space instead of my current space—multiple millions of dollars. 
  • And that is material to my partners and me, so I am not sure the new space is in my firm’s financial interest after all.

Now I admit I am sluffing over some issues here to make a point, i.e., perhaps the new space could be more efficient, the new building would be cooler, etc., but one thing is for sure: it will cost a lot more.
 
Now, if you have a company printing money hand over fist – think Google and Apple and those companies – you won’t care about a few million dollars of rental cost, which is pocket change.  But if you are like a large percentage of us NYC denizens and you can get a phenomenally well-located property in the center of NYC for a lot less, you are going to take that very seriously. 
 
So now, finally, look at the Empire State Building – stock symbol ESRT.  Its price today was approximately $9.00 per share.  It peaked at about $21.50 roughly four years ago.  It is now down more than 50%.
 
Along the way, it bears mention that a good chunk of the revenue for the Empire State Building is its world-famous observatory deck.  I still recall going up there when I was four years old.  It is unforgettable.  Of course, there is competition for it now with other observation decks and there may be more coming in the future and tourists are scarce right now.  However, KKR (certainly not known for foolish investments) just paid $500M for Related's observatory deck in Hudson Yards, Edge.  That is a new observation deck, to be sure, but the entire market capitalization of ESRT today is only $1.55B. 
 
I am not a financial analyst or capable of deep analysis of ESRT.  I don’t have that skill set.  That would involve an assessment of the value of the building and its internal financial statements, and I am smart enough to know what I don’t know. 
 
However, I am confident that, in general, that NYC office buildings are overall smart investments – and this includes both first-class buildings and second-class buildings as well. 
 
It hasn’t paid to bet against NYC for the past three hundred years and, without doubting the financial savvy of Messrs. Litt and McNamara, I don’t think this is a good time to start that kind of bet today.
 
And, if Mr. McNamara or Mr. Litt would like to make a bet, I will bet the following:
 
If we look at ESRT stock one year from today, i.e., roughly 12/31/2022, I wager that it will be higher at the end of that day than it is today.
 
The bet can be lunch anywhere in NYC – the loser pays.
 
Finally, full disclosures: (i) I currently own some call options on ESRT that (alas) are out of the money and will expire worthless in a few weeks since timing is everything, (ii) I currently own other NYC REIT stocks, and (iii) this is NOT investment advice – I am not qualified to give such advice – so please do not rely on me for that purpose.
 
Bruce Stachenfeld aka The Real Estate Philosopher™

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As the Chairman of Duval & Stachenfeld – a law firm in mid-town NYC known as The Pure Play in Real Estate Law – I am inviting you to join The Real Estate Philosopher™. This will consist of my thoughts and also thoughts of friends and colleagues.

It will not be published in any traditional media – it will go only to friends of our firm. The purpose here is very simple – to put forth thoughts in the real estate world that are different, provocative, and challenging of accepted wisdom. Hopefully, nothing said here will be mainstream thinking.

You may be wondering how I am qualified to write on these topics since I am “just” a lawyer. However, I have an unusual place in the real estate world. As the Chairman of The Pure Play in Real Estate Law (one of the largest real estate law practices in NYC), I interact with an incredible number of real estate players. This ranges from small real estate shops with nothing but a gleam in their eyes, to some of the largest real estate institutions in the world, and everything in between. This gives me a unique and global perspective and allows me to act as an amateur philosopher in the real estate world. This has always been my hobby and it is what I love doing.

Regards,

Bruce Stachenfeld
a.k.a The Real Estate Philosopher™

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