Unlike most New York tycoons, Anthony Malkin fought to transfer his family’s real estate empire to public ownership. The Empire State Building’s owner tells Jack Sidders why REIT status trumped a closely held structure
Two years ago the world’s best-known office block was at the centre of a high-profile and controversial tussle for ownership.
The Empire State Building’s long-term family managers were attempting to take the tower public as the cornerstone asset in a new REIT that
would own a portfolio of 20 buildings.
The Empire State’s complex ownership structure meant approval from thousands of unit holders would be required for the $1bn (£641m) IPO to take place – the second-largest public offering by a REIT in US corporate history.
And although most agreed to the plan, several court challenges ensued. The drawn-out battle also enticed off-market bids for the asset, which some investors felt would generate a higher price if sold separately.
Ultimately, though, the IPO succeeded and the property company owned by the Malkin family, one of New York’s great real estate dynasties, became the Empire State Realty Trust.
So, two years on from the IPO, what has public ownership meant for the iconic office building and the once family-run company that owns it? And does the experience signify a long-term power shift away from the great tribes that have long dominated the New York real estate business in favour of public companies?
A family business
Real estate has traditionally been a family business in New York. The city’s power families, from the Dursts to the Rockefellers, have built huge portfolios handed down from generation to generation. But over the past five to 10 years, their power has been waning.
Huge real estate investment trusts such as Vornado and global private equity firms such as Blackstone are snapping up the best assets in the Manhattan market, challenging long-held family companies to adapt or die.
The Wien and Malkin family rose to prominence in New York real estate in the 1960s by syndicating deals to thousands of small investors. Most famously, it bought into the Empire State Building in 1961, raising more than $30m from 3,000 small investors, each of whom paid $10,000 for a unit in the building.
But after five tumultuous decades of managing the iconic asset on behalf of investors, Malkin Properties – then run by the third generation of the family, Anthony Malkin – decided to take the company public. The decision was prompted by the huge capital outlay required to update the building and the hugely complicated ownership structure that had built up around the company’s assets thanks to its history of syndicating deals.
“Going public has made it easier to execute on our turnaround plan,” says Malkin, chairman and chief executive of Empire State Realty Trust.
“It gave us access to capital markets, streamlined corporate governance and promoted self-management and a more direct ownership of the relationship with our tenants.
“It also put us in the position of accessing debt far more easily, and made for more streamlined decision-making.”
That was vital considering the turnaround plan for the Empire State Building alone involved a $550m capital outlay to bring the 84-year-old building’s 2.6m sq ft of office space into the 21st century.
The rigours of public ownership have had other benefits too, says Malkin, who is sceptical about the long-term future for private family-run real estate firms.
Dynasties in decline
“I think it is difficult for family companies,” he says. “There is a natural decline. You might have an entrepreneur or a couple of siblings who built these companies quite large, but what happens is that these people reproduce.
“And the power of dispersion is huge. It is very difficult to maintain a solid base from which to operate when you are dealing with the realities of people’s desires for capital. It makes long-term decision-making difficult. Inevitably, these families reproduce to such an extent that it is very difficult for them to be cohesive and coherent.”
Malkin says the decision to shed the family name when forming Empire State Realty Trust was very deliberate.
“We are a professionally run firm,” he says. “I am the only person in the family who gets a pay cheque. There is no family member on our board other than me.”
The family remains the largest shareholder in the business, with voting rights to match, but Malkin says he is much more focused on the company’s future as an asset run by professionals rather than as a family business.
So when it comes to succession planning, he is clear that the firm will look to recruit from outside the family, despite the fact that his children are extremely capable in their own right – Anthony’s brother Scott founded Value Retail, owner of the highly successful Bicester Shopping Village in Oxfordshire, UK.
But he insists they are not being groomed for ESRT.
“There are members of the family who get groomed but they are not getting groomed for this,” jokes Malkin. “Everyone bathes and gets his or her hair cut. I’m the only one that doesn’t shave. So this is absolutely a professionally run business.”
Evidence of transformation
Two years on from going public, the evidence of transformation is plain to see. A tour of the Empire State Building reveals an office building of the highest modern standards – 80 years young as opposed to 80 years old, as Malkin puts it.
The lobby has been overhauled, and ultra-modern lifts installed. The building has been awarded a platinum rating for its wiring – the highest available – and its retrofit has made it one of the most environmentally friendly buildings in the world.
And the results have attracted high-calibre tenants. LinkedIn now occupies almost 280,000 sq ft in the building, joining other tech tenants such as Shutterstock, whose space includes massage rooms, a yoga suite, a library and state-of-the-art fit-out.
When the company went public, the building was around 80% let. Today it is more than 90% occupied, despite the fact that as much as 2m sq ft of space was vacated during the refurbishment.
“In spring of this year, we announced that we had leased to two tenants four floors that were previously 42 suites, so it is just a completely brand new transformation that’s taken place,” says Malkin.
It is the same story elsewhere in the portfolio, which includes nine Manhattan offices and five more in Fairfield county, Connecticut and Westchester county, New York, plus six standalone retail assets.
The improved cash flow and better access to finance has been directed into upgrading almost all of the company’s 10m sq ft portfolio, which, in turn, has brought in better tenants.
The company’s TAMI (technology, advertising, media and information) occupiers often attract the most headlines, but in fact Malkin says they still represent well under 10% of the total rent roll.
Instead, he cites renewed interest from private equity firms and professional services occupiers as proof of the upgraded portfolio’s success.
The small pool of TAMI tenants is very deliberate. Malkin worked in private equity before joining the family business and he says the flood of venture capital into tech companies is one of his greatest concerns for the future health of the economy.
“We don’t have that many [TAMI tenants] because there aren’t that many that are credit worthy,” he says.
Proven business models
“We have Shutterstock, we have a division of eBay, we have LinkedIn and we have a company called OnDeck Capital. The common theme is that they make a profit, they have proven business models. I’m not taking that risk.”
So, with the company’s transformation plan now well under way thanks to its new public ownership structure, will Malkin look to expand?
“We are not looking at any broadly marketed transactions at this time in the market,” he says. “In general, our view is that things are very highly priced. We are making a 10-15% return on equity in the investment that we make in our existing buildings, so why would we dilute that return with another acquisition at this time at today’s market rates?”
But with the company carrying just 26% debt to market capitalisation, it would be well positioned to swoop if the market turned.
“It is not if, but when,” says Malkin. “And we are absolutely in the position of doing that.
“I think we have another couple of years left in the cycle – either two or three years.”