Empire State Realty Trust Q1 2025 Earnings Report

Empire State Realty Trust EPS Results

• Actual EPS: $0.19
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Empire State Realty Trust Revenue Results

• Actual Revenue: $154.54 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Empire State Realty Trust Announcement Details

• Quarter: Q1 2025
• Date: 4/29/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, April 30, 2025
• Conference Call Time: 12:00PM ET

Empire State Realty Trust (NYSE:ESRT) (NYSE: ESRT) is a NYC-focused REIT that owns and operates a portfolio of modernized, amenitized, and well-located office, retail, and multifamily assets. The company is the recognized leader in energy efficiency and indoor environmental quality. ESRT's flagship Empire State Building - the "World's Most Famous Building" - includes its Observatory, Tripadvisor's 2023 Travelers' Choice Awards: Best of the Best the #1 attraction in the US for two consecutive years. As of September 30, 2023, ESRT's portfolio is comprised of approximately 8.6 million rentable square feet of office space, 0.7 million rentable square feet of retail space and 727 residential units across three multifamily properties.

Empire State Realty Trust Q1 2025 Earnings Call Transcript

Key Takeaways

• In Q1 2025, ESRT’s leasing team secured approximately 231,000 sq ft of new and renewal leases, driving Manhattan office occupancy to 93% and marking the 15th consecutive quarter of positive mark-to-market rent spreads.
• The Observatory generated $15 million of NOI in Q1 despite seasonal weather headwinds and holiday timing shifts, grew revenue per capita by 5.9%, and management reaffirmed its 2025 guidance.
• ESRT repurchased $2.1 million of shares, repaid its $100 million Series A notes and cleared its revolver balance, resulting in a 5.2× net debt/EBITDA ratio and no material maturities until late 2026.
• The multifamily portfolio achieved 99% occupancy with 8% year-over-year rent growth, while the retail segment remained over 94% leased with a weighted average lease term of 6.5 years.
• For 2025, ESRT expects core FFO of $0.86–$0.89 per share and anticipates a moderate decline in second-generation CapEx as high leasing percentages reduce commissioning and improvement needs.

Presentation

[Operator]

Greetings, and welcome to the Empire State Realty Trust First Quarter twenty twenty five Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Heather Houston, Senior Vice President, Chief Counsel, Corporate and Secretary. Thank you. You may begin.

[Heather Houston, Senior Vice President, Chief Counsel, Corporate and Secretary at Empire State Realty Trust]

Good afternoon. Welcome to Empire State Realty Trust First Quarter twenty twenty five Earnings Conference Call. In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation were posted in the Investors section of the company's website at esrtreit.com. On today's call, management's prepared remarks and answers to your questions may contain forward looking statements as defined in applicable securities laws, including those related to market conditions, property operations, capital expenditures, income expense, financial results and proposed transactions and events. As a reminder, forward looking statements represent management's current estimates.

[Heather Houston, Senior Vice President, Chief Counsel, Corporate and Secretary at Empire State Realty Trust]

They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward looking statements in the company's filings with the SEC. During today's call, we will discuss certain non GAAP financial measures, such as FFO, modified and core FFO, NOI, same store property cash NOI, EBITDA and adjusted EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website.

[Heather Houston, Senior Vice President, Chief Counsel, Corporate and Secretary at Empire State Realty Trust]

Now I will turn the call over to Tony Malcolm, our Chairman and Chief Executive Officer.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

Thanks, Heather. Good afternoon to everyone. Yesterday, we reported ESRT's first quarter results. We started the year with solid first quarter earnings, continued leasing momentum and Observatory performance, and we reaffirm our outlook for the remainder of 2025. We are not the first reporting public company to state today's world has a wide range of potential macroeconomic outcomes, and some of those could have an adverse impact on our business.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

That said, as we have mentioned so many times, we do not seek to predict the weather, rather we have an arc, and that arc allows us to remain on our front foot. ESRT receives a substantial portion of our cash flows from long term leases, has high lease percentages, diverse income streams, a diverse tenant base, and a flexible balance sheet, and that puts us in a strong position from which to act. The leasing environment in New York City remains active for our top of tier product. The haves, buildings like ours, which have been modernized, are well located near mass transit, our sustainability leaders have great amenities and are owned by financially stable landlord, will outperform in any environment. In the first quarter, our leasing team put points on the board with approximately 230,000 square feet leased, which included the successful conversion of 77,000 square feet of previously unknown 2026 expirations into renewals.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

Our Manhattan office portfolio is 93% leased, and we retain our guidance and expect to have leasing and occupancy gains for the full year. We achieved our fifteenth consecutive year of positive New York City office mark to market rent spreads. We have not changed our Observatory guidance for 2025. The first quarter is our lightest quarter seasonally in the Observatory and saw an abundance of visibility impaired days concentrated over the peak holiday periods of Presidents and Martin Luther King weekends. The Observatory was resilient in the first quarter and produced NOI of $15,000,000 Visitation was down or 0.6% year over year after adjustment for the shift of the Easter holiday to the second quarter.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

Consumer confidence, geopolitical tensions and currency exchange rates can have an impact on tourism and consumers in the remainder of the year. That said, our Easter holiday performance was solid and will be reflected in second quarter results. We grew revenue per caps by 5.9% in the first quarter. We continue our digital marketing initiatives to enhance revenues, optimization of our pricing strategy, reservation based cost controls, and above all delivery to our customers of an excellent experience. There has been a lot of discussion around tourism and the potential impact on businesses like Observatory Decks.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

Today, roughly 50% of our visitors are domestic. Our international exposure is broad based. No one region contributes more than 10% of our total visitation. We adjust our marketing efforts to focus real time on sourcing trends. Our Observatory Deck remains the leader and is named the number one attraction in the world in TripAdvisor's Travelers' Choice Awards.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

Our Observatory has proven to be resilient over time through cycles. The maintenance of a best in class balance sheet allows ESRT tremendous flexibility to lease, maintain our portfolio to the highest standards, and transact opportunistically to create additional value for our shareholders. Our entire organization remains laser focused on the company's five priorities: to lease space, sell tickets to the Observatory, manage our balance sheet, identify growth opportunities, and achieve our sustainability goals. Tom, Christina, and Steve will provide more detail on our progress and outlook for the balance of 2025. Tom?

[Thomas Durels, Executive Vice President of Real Estate at Empire State Realty Trust]

Thanks, Tony, and good afternoon, everyone. We continue to build off strong momentum from 2024 and are happy to report another healthy quarter of leasing results to kick off 2025. We leased a total of 231,000 square feet in our commercial portfolio in the first quarter, including an eleven year seventy seven thousand square foot renewal lease with Garrison Lehrman at 1 Grand Central Place, a ten year thirty nine thousand square foot renewal and expansion lease with Workday at the Empire State Building, an eight year thirty three thousand square foot renewal and expansion lease with Carolina Herrera at 5017 Avenue, and we signed leases for 12 prebuilt office suites, which totaled 60,000 square feet. In the first quarter, we signed 177,000 square feet of renewals and 43,000 square feet of new leases in our Manhattan office portfolio, where we have only 160,000 square feet of remaining lease expirations to address for the balance of 2025. Our Manhattan office portfolio stands at 93% leased compared to 94.2% last quarter.

[Thomas Durels, Executive Vice President of Real Estate at Empire State Realty Trust]

On our earnings call last quarter, we said that this would happen as many of our known move outs were scheduled for the beginning of the year. We have a healthy pipeline of leasing activity and we retain our guidance that our leased and occupancy percentages will increase by year end 2025. Our healthy pipeline includes approximately 160,000 square feet of leases in negotiation and over a few hundred thousand square feet of proposals exchanged with tenant prospects in various industries, including finance, professional services, Tammy and others. This is consistent with the same time last year when we had a similar amount of new leases in negotiation and proposals issued. Our tour volume remains strong in the face of reduced availability with no slowdown in recent weeks.

[Thomas Durels, Executive Vice President of Real Estate at Empire State Realty Trust]

In fact, several tenants have competed for space and we currently have leases out on four full floors. We remain on track with our full year guidance, which contemplates an increase in our occupancy rate between 8991% by year end. We speak consistently about haves and have nots. And our ESRT portfolio is clearly one of the haves. There are fewer tenant options for quality buildings owned by strong landlords that offer amenities, leadership and sustainability and convenient locations.

[Thomas Durels, Executive Vice President of Real Estate at Empire State Realty Trust]

Availability of high quality halves office space in Manhattan's better buildings continues to shrink. We have increased rents and reduced concessions. We just completed our fifteenth consecutive quarter with positive mark to market lease spreads in our Manhattan office portfolio, where blended mark to market lease spreads increased by over 10% in the first quarter. Our average lease duration was eight point four years, and we have $57,000,000 in incremental cash revenue from signed leases not commenced and free rent burn off, as shown on Page 10 of our supplemental reflects that reflects our leasing success. Lastly, our multifamily portfolio continues to excel, benefiting from robust market fundamentals, strategic property improvements and improved operations.

[Thomas Durels, Executive Vice President of Real Estate at Empire State Realty Trust]

The portfolio was 99% occupied and achieved 8% year over year rent growth in the first quarter. Thank you. And now I'll turn the call over to Kristina.

[Christina Chiu, President at Empire State Realty Trust]

Thanks, Tom. Before Steve covers our 2025 outlook, I'd like to set the stage with a discussion of the broader environment we operate in today and how ESRT is well positioned to navigate through it. New York City has significantly outperformed other gateway cities in terms of vibrancy and full recovery from COVID. Within New York City, ESRT owns a high quality portfolio that is well diversified across sectors and sources of income that benefit from live, work, play, and visit. We are well leased across each property type.

[Christina Chiu, President at Empire State Realty Trust]

Our New York City office assets are 93% leased. Our retail is over 94% leased. And our multifamily is 99% leased. All three sectors benefit from a backdrop of very limited new supply today. This should persist for at least several years given the high and rising costs of new construction and long development timelines.

[Christina Chiu, President at Empire State Realty Trust]

Our portfolio was built to withstand and perform in all cycles. We offer a great value proposition that targets the deepest and broadest segment of office tenant demand in Manhattan, and that should play well in the current environment. Our goal has always been to get the best deals in good times, get the deals in challenge times, and draw consistent leasing volumes through cycles. Our tenant base is well diversified in terms of both industry type and size, and demand for our properties has been solid as demonstrated by our leasing progress as we have picked up nearly 600 basis points of positive lease rate absorption in our Manhattan office portfolio since the end of twenty twenty one. The supply picture is now even more favorable as replacement costs continue to increase amidst tariffs and the impact on labor from shifts in immigration policies.

[Christina Chiu, President at Empire State Realty Trust]

While we monitor any shifts in demand, we continue to have constructive discussions with prospective tenants and build our future leasing pipeline. In times of economic uncertainty like we have today, our portfolio stands out against the competition because of the value proposition and our financial stability to ensure we will deliver on our promises, which is paramount to brokers and tenants today. Shifting to the Observatory, we have always said that the Observatory business is a great complement to our property portfolio business. It features low capex, high operating margins, and dynamic pricing with better potential to adjust with inflation. We recognize we are in a period of heightened uncertainty, and there could be headwinds in the balance of the year to the extent macro risks and geopolitical tensions result in lower economic growth and reduced tourism.

[Christina Chiu, President at Empire State Realty Trust]

Our focus is to continue to run the operations well, cultivate our brand, control expenses, and be transparent with the market as these external factors play out. The addition of multifamily to our portfolio has been great and adds to the resiliency of ESRT's cash flows. Fundamentals remain strong. There is virtually no new supply. Replacement costs remain high, and frequent rent resets relative to office allows cash flows from this segment to better adjust with inflation.

[Christina Chiu, President at Empire State Realty Trust]

We remain happy with our well located, high foot traffic retail portfolio that includes a balance of everyday retail and our growing street retail portfolio on North Street in Williamsburg, Brooklyn, where in place rents are well below market. Our retail portfolio is well leased with a six point five year weighted average lease term. Across our retail portfolio, we have a roster of strong credit quality tenants that are also well positioned in an uncertain environment. Importantly, we have a great balance sheet that enables us to weather any environment. We manage our balance sheet in a proactive manner with strong liquidity, no floating rate debt exposure, a well laddered debt maturity schedule, no unaddressed debt maturity until December 2026, and the lowest leverage among all New York City focused REITs at 5.2 times net debt to EBITDA as of quarter end.

[Christina Chiu, President at Empire State Realty Trust]

During the quarter, we repaid our $100,000,000 Series A unsecured notes and the $120,000,000 revolving credit facility balance. Subsequent to quarter end, we opportunistically repurchased $2,100,000 of shares at an average price of $6.92 per share through 04/28/2025. We continue to consider share buybacks as part of our capital allocation strategy. That said, buybacks will be measured given the uncertain environment and our focus on operating runway and continued flexibility to be in a position to go on offense when attractive investment opportunities arise. The transaction environment became more active at the end of twenty twenty four through early twenty twenty five, but we will monitor how that shifts with more market uncertainty today.

[Christina Chiu, President at Empire State Realty Trust]

We continue to actively underwrite deals across three sectors in which we target: retail, multifamily, and office, with a focus on New York City. We are prepared to act when we see opportunities to enhance growth, either through expansion or further recycle of capital. And now I'll turn it over to Steve to discuss our first quarter results and outlook for the remainder of 2025.

[Steve Horn, EVP , CFO and Chief Accounting Officer at Empire State Realty Trust]

Thanks, Christina. For the first quarter of twenty twenty five, we reported core FFO of $0.19 per diluted share. Same store property cash NOI was up 0.4% when you exclude the $1,500,000 of nonrecurring revenue items recognized in the first quarter of twenty twenty four. Expenses were up approximately 5% year over year, driven by real estate taxes, payroll costs, and repair and maintenance costs. These expense increases were partially offset by higher tenant reimbursement income and growth in rental revenue driven by cash rent commencement.

[Steve Horn, EVP , CFO and Chief Accounting Officer at Empire State Realty Trust]

In our Observatory business, we generated net operating income of approximately $15,000,000 7 percent year over year change is largely attributed to the shift in the Easter holiday season from the first quarter of twenty twenty four to the second quarter of this year, as well as bad weather days this year, which are concentrated over the holiday weekends. Now onto our outlook for 2025. We continue to guide to core FFO of $0.86 to $0.89 As Tony mentioned at the top of the call, our Observatory NOI guidance range of $97,000,000 to $102,000,000 is unchanged at this time. This NOI range assumes Observatory expenses of approximately 9,000,000 to $10,000,000 per quarter on average. We will monitor and update our guidance as warranted.

[Steve Horn, EVP , CFO and Chief Accounting Officer at Empire State Realty Trust]

Other key assumptions are also unchanged and include adjusted same store property cash NOI growth, excluding lease termination fees and non recurring items, to range from up 0.5% to 4%. Within this range, we expect positive cash revenue growth, which assumes commercial occupancy of 89% to 91% by year end 2025 and driven by cash rent commencement and manageable lease expirations in 2025. On the expense side, we expect an approximate 2% to 4% increase in property operating expenses and real estate taxes, which will be partially offset by higher tenant reimbursement income. Operating expense and real estate taxes will fluctuate throughout the year based on the timing of our planned maintenance work, utility expense seasonality and the timing of real estate tax abatements. In particular, we expect an increase in operating expenses in both the second and third quarter of this year due to the timing of our repair and maintenance work.

[Steve Horn, EVP , CFO and Chief Accounting Officer at Empire State Realty Trust]

Lastly, I'll cover our expectations for CapEx in 2025. Over the past few years, our CapEx has reflected CIs and leasing commissions associated with the meaningful increase in lease percentage for our portfolio of around 93% currently. While CapEx will always fluctuate due to factors such as the pace of our leasing volume, the mix of new versus renewal versus early renewal turnkey and prebuilt leasing, and the timing over which the tenant improvements are completed, we expect a decrease in twenty twenty five second gen CapEx relative to 2024, which takes into account the following: first, consistent level of TI spend in 'twenty five relative to 2024 based on strong leasing activity, which resulted in nearly 600 basis points of positive lease rate absorption in Manhattan office since the end of twenty twenty one. As a reminder, this spend is often led as we recognize the cost of the TI allowances as the related work is performed to prepare space after leases are signed. Second, an expected reduction in leasing commissions relative to prior years, which we generally recognize at lease signing as the portfolio has achieved a high lease percentage level.

[Steve Horn, EVP , CFO and Chief Accounting Officer at Empire State Realty Trust]

Third, an expected decrease in building improvements, which were elevated over the last few years as we prepared our assets for the aforementioned strong leasing activity. The first quarter is a good go forward run rate for building improvement spend in 2025. With that, we now turn the call back to the operator for the Q and A session. Operator?

[Operator]

Thank you. We will now be conducting a question and answer session. Our first questions come from the line of Steve Sakwa with Evercore ISI. Please proceed with your questions.

[Steve Sakwa, Senior Managing Director at Evercore ISI]

Yes, thanks. Good afternoon. Maybe, Tom, just maybe flush out a little bit more on the leasing side. If you think about the different types of tenants that you're talking to, financial services, law firms, maybe folks in retail, How are those conversations unfolding with the tariffs in terms of their desire to move forward, maybe higher apprehension? Is there anything you've noticed by, I guess, tenant category over the last maybe thirty to sixty days?

[Thomas Durels, Executive Vice President of Real Estate at Empire State Realty Trust]

Yes. Steve, thanks for the question. Actually, the last sixty days, we have noticed absolutely no change in any of our lease negotiations underway with any tenant throughout our entire portfolio. And that is quite noticeable. In recent speaking with all of our leasing staff, all of our agents, there is not a single deal that has been put on hold or put on pause in the last sixty days.

[Thomas Durels, Executive Vice President of Real Estate at Empire State Realty Trust]

And so I think that that's quite remarkable. Our pipeline tour volume is really strong relative to reduced availabilities. And we have activity really with a variety of industry types, TAMI, consumer products, professional services, legal and some finance.

[Steve Sakwa, Senior Managing Director at Evercore ISI]

Okay. Thanks. And I guess, Christina or maybe Stephen on the CapEx, I mean, one of the biggest questions that we get from investors is obviously that elevated level of CapEx and how that number should trend down over the next couple of years. I know we've had some conversations, but can you just sort of help us size where you think I know the timing of that is a little bit hard, but what do you think the right run rate would be roughly on average for the portfolio when you get to a stabilized and normalized occupancy level?

[Steve Horn, EVP , CFO and Chief Accounting Officer at Empire State Realty Trust]

Yes. Thanks, Steve. So from a we bring it down into three categories being TI, leasing commission and building improvements. So from a TI perspective, we mentioned we had about nearly 600 basis points of lease rate absorption in Manhattan office. So we still see that spend come through.

[Steve Horn, EVP , CFO and Chief Accounting Officer at Empire State Realty Trust]

In fact, over 70% of our planned TI spend in 2025 is coming from prior year leasing. So you can see the impact of that flow through in '25 and see some of that continue into '26 as well. So once that flows through the portfolio, you'll see a reduction in an overall run rate from TI spend. That will have a longer tail on it, as I mentioned in my remarks. From leasing commissions and building improvements, that's a different story because that is more aligned to now. We've reached a high level lease rate, so less leasing to be done from that perspective. And so lower leasing commissions from that. And similar to building improvements, we spent the CapEx previously to prepare for that leasing.

[Steve Horn, EVP , CFO and Chief Accounting Officer at Empire State Realty Trust]

And so we look at the first quarter where we had about 5,000,000 in CapEx and building improvements. We expect that to be a good run rate going forward from there, as the as I mentioned, that the work was already done.

[Operator]

Thank you. Our next questions come from the line of John Kim with BMO Capital Markets. Please proceed with your questions.

[Regan Sweeney, Equity Research - Senior Associate at BMO Capital Markets]

Good afternoon. It's Regan Sweeney here with John. Thank you for the question. I guess just first kind of on leasing. How is the Williamsburg leasing going?

[Regan Sweeney, Equity Research - Senior Associate at BMO Capital Markets]

There's the progression on the one vacant unit. I saw there was a slight uptick in the leased rate and the average rent this quarter. Just wanted to dive in there.

[Thomas Durels, Executive Vice President of Real Estate at Empire State Realty Trust]

Yes. Thanks for the question. We've got really good activity in Williamsburg. As you know, just on the one space availability of about 2,400 square feet. The activity is coming from, I'd call it household brand names, very recognizable brand names.

[Thomas Durels, Executive Vice President of Real Estate at Empire State Realty Trust]

So we're really excited about the response that we've seen in Wiegnberg. We're very early in the of the processing there, but really excited and really pleased with our acquisition. On an overall front, we're 94% leased on our entire retail portfolio. We only have seven vacant stores throughout the entire retail portfolio and we have four leases in negotiation, three are new deals and one is a renewal.

[Regan Sweeney, Equity Research - Senior Associate at BMO Capital Markets]

Great. Thank you. And then just one other one shifting to capital allocation. How do you rank the capital allocation opportunities in the market just between acquisitions and then additional buybacks while you're currently trading at about an 11% implied cap rate?

[Christina Chiu, President at Empire State Realty Trust]

So we opportunistically did some share buybacks. But as mentioned in my remarks, will be measured. We are balancing against an environment that is highly uncertain and definitely want to be mindful of that. Within that uncertain backdrop there could also be more potential investment opportunities and we want to be prepared to be able to go on offense if those opportunities arise. And of course as we operate in the normal course of business, we want to maintain our portfolio well, pay for leasing CapEx and have plenty of operating runway.

[Christina Chiu, President at Empire State Realty Trust]

So when we think about the prioritization, it's definitely operating runway and the ability to go on offense coupled with if there's an opportunity to do some buybacks, we'll do that along the way.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

Do you have The only thing I'll add to that is we do see opportunities out there. And as the cycle moves on, we see more. So we acted in a prudent and logical way during that 10b5-one period and acquired stock.

[Regan Sweeney, Equity Research - Senior Associate at BMO Capital Markets]

Do you have a preference over multi versus office or retail in those opportunities as they arise, or kind of just whatever whatever comes up?

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

We are omnivorous opportunivores. So we like multi, we like retail, we like office. It depends on basis, it depends on structure. We are open to inventive deal structures. We're open to assist lenders with working out assets to commit new capital to work out assets.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

Really we just try to be a good, disciplined local sharpshooter and do what would deliver the best result for our stakeholders.

[Regan Sweeney, Equity Research - Senior Associate at BMO Capital Markets]

Great, I appreciate it, thank you.

[Operator]

Thank you. Our next questions come from the line of Blaine Heck with Wells Fargo. Please proceed with your questions.

[Blaine Heck, Executive Director & Senior Equity Research Analyst at Wells Fargo Securities]

Great. Thanks. Good afternoon. Just following up on that last question. You guys have previously commented on looking for some higher yielding investments in the near term following the multifamily and retail deals, which were more core opportunities.

[Blaine Heck, Executive Director & Senior Equity Research Analyst at Wells Fargo Securities]

I'd assume you'd kind of need to look to office for those higher yields. So I was hoping you could talk about the ideal kind of investment profile if there is one, whether it's a core opportunity that may just be mispriced for one reason or the other or something with lease up needs or renovation needs, even conversion opportunities. I guess I'm just wondering how far out on the risk spectrum you would go on an office investment in the current environment.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

So Tony here and then open up to any comment from anybody else in the room. We define risk, we think, in a way different from the way others do, because we have unique capabilities to redevelop assets. We are in the market with a unique component of the market, our top of tier, older properties, modernized, amenitized, energy efficient, and good environments with the right floor plate sizes. So I think a lot of people might look at investment and activity and office like that and say, wow, that is a really risky thing to do. Whereas for us, we think it's very de risked.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

So our view on risks have more to do with what for what do we try to solve. And we put up fresh dollars we try to solve for a better return. We also look to solve when you mentioned those core acquisitions for 1031s. And that's a different appetite for a different type of transaction where the risk is in the execution itself. And we don't want necessarily to take on additional risk on top of that.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

So from our perspective, absent 1031s, we do look for better opportunities for returns in areas that other people might think are riskier to undertake. And for us, we think with our capabilities and experience and presence in the market are de risked. We also will look at opportunities where we can combine our assets and resources with other people's resources. So that's another way in which we might approach the delivery of a good hurdle return for ourselves as we look at how we want to go forward.

[Blaine Heck, Executive Director & Senior Equity Research Analyst at Wells Fargo Securities]

All right. Very helpful commentary there. Just shifting to the Observatory. Tony, you touched on this, but clearly some headlines are suggesting the weakness in the stock market combined with, you know, the rising political tensions could impact tourism. So I'm wondering first whether you even agree with that assessment and whether you're seeing any of that decline in tourism today.

[Blaine Heck, Executive Director & Senior Equity Research Analyst at Wells Fargo Securities]

And second, what specific steps out of all those that you covered in the prepared remarks, what levers you think you can pull that are going to be most effective and kind of overcoming any softness in volume and still achieving that guidance target?

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

So we look to operate in a very disciplined way on the observatory. We have not detected any significant shifts in demand that we can't ascribe to logical events, like really bad weather over key periods during what is a very light quarter for us, typically that first quarter, particularly with Easter not present. So we really hesitate to extrapolate too much from bad weather impacting our highest volume periods in a low volume period for the year. So with that said, with all that noise in the data, we fall back on, all right, how do we do over Easter? Solid.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

What are our opportunities given the mix? Direct more marketing towards our domestic customers, potential customers, more in market activity. What do we do as far as cost controls? Well, we operate by our reservations model. We know when people come through and we control our costs.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

And outside of that, do we think that there's opportunity for change in the world out there based on macro factors? But we're in a pretty unique environment right now. Historically, as you look at our investor presentation, through depressions, wars, all sorts of new attractions, we performed very well. I think everyone can agree that we're in a unique set of circumstances. And we just recognize that could have an impact, and we don't feel like now is the time for us to call it.

[Blaine Heck, Executive Director & Senior Equity Research Analyst at Wells Fargo Securities]

Great. Thanks, Tony.

[Operator]

Thank you. Our next questions come from the line of Seth Berge with Citi. Please proceed with your questions.

[Seth Bergey, Senior Analyst at Citi]

Hi, good morning or good afternoon, rather. Thanks for taking my question. I just there's an article that New York is considering raising payroll taxes to cover some of the MTA budgets. Are there how you guys kind of think about the impact of something like that or any other policy changes on demand for New York?

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

Next to Toronto, as was recently published I think in an article in the Wall Street Journal, New York City was the largest population growth and over the prior twelve months in North America, as far as inbound population growth. That's the article I'll cite. New York City is the number one target and destination for college graduates. New York City is the number one destination for desks for major TAMI companies with a presence in New York City, meaning given a choice of where they'd like to be, this is the number one destination. New York City is the best performing CBD of any in The United States right now as far as performance relative to recovery from COVID.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

We no longer talk about is it back to work in the office or not. It just is back to work in the office. So we look at all that and we say, we're hopeful that the political powers that be recognize that what they do has impacts potentially on how things happen. That said, New York City is in demand. We're very happy we're here.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

And as I've said so many times on these calls, I'm very happy that my ancestors didn't have enough money to move any further than the Lower East Side when they got to The United States.

[Operator]

Thank you. Our next questions come from the line of Dylan Brzezinski with Green Street. Please proceed with your questions.

[Dylan Burzinski, Senior Analyst, Office at Green Street Advisors, LLC]

Hi, all. Thanks for taking the question. I think earlier this year you guys mentioned taking your final suburban asset to market. Is that still the case? And if so, have you seen any disruption from that process associated with some of the volatility in capital markets?

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

We're in the market. It's been broadly marketed. And the process to date is equal to other processes we've entered into out in the suburbs.

[Dylan Burzinski, Senior Analyst, Office at Green Street Advisors, LLC]

Great and then maybe if you can touch on sort of net effective rents obviously the portfolio as well as today you guys talked about not seeing any disruption in terms of the level or depth of tenant demand over the last several weeks, call it, since Liberation Day. But are you starting to see any hesitation on being able to push net effective rents as you guys continue to lease up the portfolio?

[Thomas Durels, Executive Vice President of Real Estate at Empire State Realty Trust]

Sure. It's a great question. But let me give the backdrop of what we're seeing is that the availability of high quality office space in Manhattan's better buildings continues to shrink. There are simply fewer options for tenants in better buildings that are modernized with turnkey space, amenities with good landlords. And so in the face of that, we increased our asking rents.

[Thomas Durels, Executive Vice President of Real Estate at Empire State Realty Trust]

We increased our rents last quarter. We increased our rents at the start of the year and we just recently went to another round of increased rents just as late as yesterday. We are we've reduced our free rent concessions where we used to see maybe a year ago a month per year lease term. We saw that decline and we've seen that steadily decline over the last five quarters. So look, we're pushing rents across the portfolio.

[Thomas Durels, Executive Vice President of Real Estate at Empire State Realty Trust]

We have tower floors at Empire and 1 Grand Central Place, where we're achieving rents in the mid to high 80s, 80s per square foot. And overall, we're seeing less resistance on price, free rent and term.

[Dylan Burzinski, Senior Analyst, Office at Green Street Advisors, LLC]

Great. Appreciate that color. Thank you.

[Operator]

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Tony Malkin for any closing remarks.

[Anthony Malkin, Chairman & CEO at Empire State Realty Trust]

ESRT remains focused on our five priorities lease space, sell tickets, the observatory, manage the balance sheet, identify growth opportunities and achieve our sustainability goals, all for the purpose to create shareholder value. We will continue to take advantage of opportunities as they arise and are confident in our ability to execute and drive further value for shareholders going forward. We thank you all for your participation in today's call. We look forward to the chance to meet with many of you at non deal roadshows, conferences and property tours in the months ahead. The team here is front footed and feels good. Onward and upward.

[Operator]

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

Participants

Executives

• Heather Houston, Senior Vice President, Chief Counsel, Corporate and Secretary
• Anthony Malkin, Chairman & CEO
• Thomas Durels, Executive Vice President of Real Estate
• Christina Chiu, President
• Steve Horn, EVP , CFO and Chief Accounting Officer

Analysts

• Steve Sakwa, Senior Managing Director at Evercore ISI
• Regan Sweeney, Equity Research - Senior Associate at BMO Capital Markets
• Blaine Heck, Executive Director & Senior Equity Research Analyst at Wells Fargo Securities
• Seth Bergey, Senior Analyst at Citi
• Dylan Burzinski, Senior Analyst, Office at Green Street Advisors, LLC