Earnings Call Transcript - ESBA Q2 2025

Operator, Operator

Greetings, and welcome to the Empire State Realty Trust Second Quarter 2025 Earnings Call. 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 M. Lawson Houston, Senior Vice President, Chief Counsel, Corporate and Secretary

Good afternoon. Welcome to Empire State Realty Trust's Second Quarter 2025 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, finance results and proposed transactions and events. As a reminder, forward-looking statements represent management's current estimates. 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 those 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. Now I will turn the call over to Tony Malkin, our Chairman and Chief Executive Officer.

Anthony E. Malkin, Chairman and Chief Executive Officer

Good afternoon everyone. Yesterday, we reported ESRT's second quarter and year-to-date results. We delivered strong office leasing, and we had a more challenged quarter for the Observatory. Our progress in our core office portfolio reflects the value of our proposition and Observatory performance was impacted by adverse weather and lower demand from past programs which are predominantly international. On this call, the team will walk through our adjusted full year outlook to reflect Observatory performance. ESRT is purpose-built for strength and agility across all cycles. Our long-term leases, high occupancy, diversified income streams and flexible balance sheet are a solid foundation for consistent performance and strategic options. In New York City, demand for our top-of-tier office space remains robust. Our modernized, well-located near mass transit, amenity-rich portfolio is supported by our sustainability leadership and strong financial position. This clear differentiation leads the market and we can thrive in any environment and continue to deliver long-term value. In the second quarter our leasing team continued to put points on the board with approximately 232,000 square feet leased which includes 202,000 square feet of new Manhattan office leasing at double-digit positive mark-to-market leasing spreads. As we stated would happen in our last call, our Manhattan office portfolio is 93.8% leased and we expect further leasing and occupancy gains for the full year. We achieved our 16th consecutive quarter of positive New York City office mark-to-market rent spreads. Our Observatory generated $24 million in NOI in the second quarter in the face of the visitation decline of 2.9%. Revenue per capita increased 2.3% year-over-year. More than half of our visitors are domestic and our international audience remains well diversified with no single region accounting for more than 10% of total visitation. The Observatory is resilient across all cycles. Our best-in-class balance sheet continues to be a key strategic advantage for ESRT. It gives us the flexibility to lease space, maintain our portfolio to the highest standards and act opportunistically to create long-term value for our shareholders. Sustainability continues to be a cornerstone of ESRT's business philosophy and we are the leader in environmental stewardship and healthy building performance. Our sustainability work that we began in 2007 has always been focused on business outcomes and we continue to engage actively with our tenants to help them achieve their own sustainability objectives. Our entire organization remains laser-focused on the company's 5 priorities to lease space, sell tickets to the Observatory, manage our balance sheet, identify growth opportunities and achieve our sustainability goals. Steve, Tom and Christina will provide more detail on our progress and outlook for the balance of 2025, Steve?

Stephen V. Horn, Chief Financial Officer

Thanks, Tony. For the second quarter of 2025, we reported core FFO of $0.22 per diluted share. Same-store property cash NOI was down 3% year-over-year after the exclusion of lease termination fees and approximately $2 million of nonrecurring revenue items recognized in the second quarter of 2024. Operating expenses were up 8.8%, primarily due to increases in real estate taxes, cleaning-related payroll and repair and maintenance work that included approximately $1.4 million of nonrecurring repair work in the quarter. With the exclusion of the aforementioned repair work, operating expenses were up 6.7% year-over-year. These increases in operating expenses were partially offset by higher tenant reimbursement income. In our Observatory business, we generated approximately $24 million of net operating income in the second quarter or a 4.3% decline year-over-year. Observatory expenses totaled $9.8 million and revenue per capita continued to improve year-over-year. Turning to our outlook for 2025. With visibility on the full first half of the year, we have revised our Observatory NOI guidance to a range of $90 million to $94 million. Last quarter, we acknowledge the headwinds the Observatory could face this year, including reduced tourism. During the first 6 months of 2025, the Observatory was impacted by bad weather, particularly on the weekends in May and June, and lower demand from our past program business, which is predominantly international. As a result, we revised our NOI guidance for the Observatory for our year-to-date results and a more conservative outlook for the remainder of 2025. During the first half of 2025, our NOI declined by 5.3% year-over-year. As a result of this adjustment, we now expect 2025 core FFO to range between $0.83 and $0.86 per share. All other components of our guidance are unchanged. To reiterate my remarks from our last earnings call, we expect operating expenses and real estate taxes to fluctuate quarter-over-quarter, influenced by the timing of planned advanced work, which is expected to be heavily concentrated in the third quarter, seasonal utility usage and the timing of real estate tax abatements. Lastly, we expect Fed CapEx to trend lower in the second half of 2025. The building blocks I discussed in our last call with regard to TIs, leasing commissions and building improvements remain intact. There will always be CapEx fluctuations quarter-to-quarter depending on the volume of new versus renewal leasing completed, where renewals typically have lower costs and the timing of related TI spend generally falls into later periods. In 2Q '25, our leasing volume was heavily weighted towards new leases, which drove higher leasing commissions in the quarter which I recognized immediately. And the TIs associated with these leases are expected to be recognized over the remainder of 2025 and into 2026. And with that, I'll now turn the call over to Tom. Tom?

Thomas P. Durels, Executive Vice President

Thanks, Steve, and good afternoon, everyone. We had another strong quarter with 232,000 square feet total leasing at 7% positive mark-to-market rent spreads in our commercial portfolio that includes a 14-year 40,000 square foot expansion lease with an investment firm at One Grand Central Place, a 12-year 39,000 square foot new lease with Elsberg Baker at the Empire State Building, an 11-year 25,000 square foot new lease with Mott MacDonald at the Empire State Building, a 12-year 24,000 square foot expansion lease with SLCE Architects at 1359 Broadway, and we signed leases for 11 prebuilt office suites, which totaled 77,000 square feet. In the second quarter, we signed 222,000 square feet of new and renewal leases in our Manhattan office portfolio where we have only 93,000 square feet of remaining lease expirations to address for the balance of 2025. Our Manhattan office portfolio stands at 93.8% leased, an increase of 80 basis points compared to last quarter and an increase of 630 basis points since the fourth quarter of 2021. Occupancy is now at 89.5%, and an increase of 140 basis points compared to last quarter. We have a healthy pipeline of leasing activity, which includes approximately 160,000 square feet of leases in negotiation and a few hundred thousand square feet of proposals exchanged with tenant prospects in various industries including finance, professional services, TAMI and others. Our tour volume and leasing activity remains strong. We expect to further increase our leased percentage for our Manhattan office and we remain on track with our full year guidance for an increase in the occupancy rate of 89% to 91% by year-end. In today's bifurcated office market of haves and have-nots, ESRT stands out as a clear have. Demand is concentrated in high-quality assets and tenants prioritize buildings which are top of tier, modernized, well-located near mass transit, sustainability focused, amenity-rich and backed by a financially sound owner who will provide quality services and a high level of execution. ESRT's portfolio checks all these boxes. The supply of such top-of-tier office space in Manhattan continues to tighten, which creates a favorable supply/demand dynamic that allows ESRT to capture outsized value and market share. We have increased our asking rents, reduced concessions and seek longer lease terms throughout our portfolio. We just completed our 16th consecutive quarter with positive mark-to-market lease spreads in our Manhattan office portfolio where spreads were positive 12.1% in the second quarter. We continue to see stable trends in TI packages in the marketplace. During the first half of 2025, our leasing costs including TIs and leasing commissions were consistent with our full year 2024 adjusted for term. Our mix of new and renewal leasing will fluctuate from quarter-to-quarter, and new leases typically require higher leasing costs than renewals. In the second quarter, over 90% of our Manhattan office leasing was for new or expansion transactions, which demonstrates strong demand for our high-quality office space. Additionally, our net effective rent increased by 2% over last quarter due to longer average lease term of 10.1 years and higher starting rents compared to the prior quarter. We have $50 million in incremental cash revenue from signed leases not commenced and free rent burnoff as shown on Page 19 of our supplemental that reflects our leasing success. Our multifamily portfolio continues to excel, benefiting from robust market fundamentals, strategic property improvements and improved operations. The portfolio was 99% occupied and achieved 8% year-over-year rent growth in the second quarter. Lastly, these outstanding results are a testament to the exceptional work by our talented and seasoned leaders in the real estate group. This includes Ryan Kass, our Senior Vice President of Leasing; Pete Sjolund, Senior Vice President of Design and Construction; Mike Prunty, Senior Vice President of Property Management; and Dana Schneider, our Senior Vice President of Energy and Sustainability. These senior executives lead a dedicated team of professionals who consistently deliver top-notch service to our tenants and deliver excellent results. With that, thank you, and I'll turn it over to Christina.

Christina Chiu, Executive Vice President

Thanks, Tom. I'd like to provide additional color on 3 key areas today. The performance of our Observatory, our recent retail acquisition and overall commentary on Williamsburg and the current dynamics of the investment market. Our iconic Empire State Building Observatory remains a resilient asset and a meaningful contributor to our overall business. With high operating margins and dynamic pricing that adjusts with inflation, it is structurally advantaged within our portfolio. While first half performance was hurt by external headwinds, including an unusually high number of bad weather days, particularly on weekends, and lower demand from our past program business, which is predominantly international, the Observatory remains a positive contributor to cash flow and earnings. Long-term fundamentals of this business continue to stand out. Importantly, we remain focused on the things we can control, the enhancement of our guest experience, the execution of targeted marketing campaigns and driving operational efficiency. Our distinct position as the iconic and authentic New York City experience anchored by an iconic global landmark sets us apart in a competitive market and positions the Observatory for sustained long-term growth as external conditions normalize. Our acquisitions and entry into the prime retail corridor on North 6th Street in Williamsburg, Brooklyn over the past 2 years aggregate approximately $250 million. This reflects our disciplined and strategic approach to capital allocation and value creation as this represented a redeployment of capital from our suburban asset dispositions with lower growth and higher CapEx and into North 6th Street retail with higher long-term growth prospects and lower CapEx. At the end of June, we closed on the previously announced acquisition of a prime retail asset on North 6th Street in Williamsburg for $31 million. 86-90 North 6th Street is approximately 15,000 square feet of ground retail space on the strategic corner of North 6th Street and Wythe Avenue adjacent to our existing holdings. We plan to redevelop and reposition the asset. We now own 3 key street corners on North 6th Street in one of the most dynamic and sought after retail corridors in Williamsburg. This prime location benefits from high foot traffic, a strong local demographic and growing interest from both national retailers and institutional investors. The increased presence of institutional capital in the area further validates our thesis and enhances the long-term value of our holdings. These acquisitions position us to capture outsized returns as the neighborhood continues to evolve and mature. We continue to see increased activity in the investment and acquisitions market with more transactions beginning to take place, especially as interest in New York City is strong, given favorable operating fundamentals, pricing expectations have adjusted and institutional capital re-engages. We remain well positioned to act with discipline and agility. We will continue to pursue opportunities where we see attractive pricing and clear potential to add value through our expertise in operating and repositioning assets. Our strong balance sheet gives us flexibility to be opportunistic. We manage our balance sheet proactively with strong liquidity, no floating rate debt exposure, a well-laddered debt maturity schedule and no unaddressed maturity until December 2026. Our leverage remains low relative to our New York City focused peers with net debt-to-EBITDA at 5.6x as of quarter end. This positions us well to support both our leasing initiatives and capital allocation priorities, and we are confident in our strategy and fundamentals and continue to execute with discipline across our platform. That concludes our prepared remarks. With that, I'll turn it over to the Q&A session.

Operator, Operator

Our first questions come from Blaine Heck with Wells Fargo.

Blaine Matthew Heck, Analyst

Just starting on the Observatory, I guess, can you talk about the visitation trends you've seen thus far in July? And how you came to the revised guidance targets for that asset? I guess do you feel as though this is now a relatively conservative range and there's more upside bias? Or are there scenarios in which you think you could hit the low end or below. And I guess, what would drive that?

Anthony E. Malkin, Chairman and Chief Executive Officer

I'll let Christina explain our guidance and how we arrived at it. It's important to avoid focusing too much on either end of the range, as we aim to exceed expectations whenever possible. In the first quarter, we mentioned experiencing a higher-than-normal number of bad weather days, which were mainly on weekends, and this trend continued into the first two months of the second quarter. We recorded 21 bad weather days in the second quarter of 2025 compared to 8 in the same period of 2024. Having so many consecutive bad weather days, especially on weekends, prevents us from seeing visitors, who typically stay in New York City for around 3 days. We have also noticed a decline in demand from our previous program, particularly among international visitors who are more budget-conscious. Historically, 60% of our net operating income comes in the second half of the year, and we recognize the challenges facing Brand America. However, New York City remains a robust tourism destination. Therefore, we continue to adapt our strategy to enhance our results. Christina, would you like to elaborate on how we formulated our guidance?

Christina Chiu, Executive Vice President

Sure. We provide a range that says if the first half experienced some slowdown due to a combination of weather and visitorship, especially from international without any incremental information if that were to persist, this is roughly a range. And as Tony mentioned, we focus on outperforming wherever we can and the factors that we can control which is to provide a great experience and continue to target our audience, but we're takers in the market, and some of it is the market environment, but we'll obviously seek to outperform where we can.

Blaine Matthew Heck, Analyst

Okay. Great. That's very helpful. Maybe returning to Tony, I guess there was a pretty clear negative initial reaction to the Democratic primary results, but it seems as though the leasing commentary on this call tends to remain generally positive. So I wanted to get your thoughts on your general view of any potential headwinds that could come from the results of the Mayoral race? And whether you've seen any signs of hesitation from prospective tenants to sign significant leases driven specifically by concern around those changes at City Hall.

Anthony E. Malkin, Chairman and Chief Executive Officer

So first of all, no. And as Tom mentioned, business is strong. Our leasing activity remains strong. We have a healthy pipeline of activity. We're always concerned about New York City's quality of life and opportunities for growth. At the same time, we don't do politics, we do policy. We've worked with the success of New York City administrations, and we'll work with the next. We just like to throw in our clear comment that priority of every New York City Mayor should be in New York City State streets, schools, and businesses and every New York City Mayor needs to respect all of its residents. So with that in mind, we don't see anything except for perhaps a slight pause in the transaction market of buying and selling of properties and business is strong. Tom, do you want to throw anything else in there?

Thomas P. Durels, Executive Vice President

Blaine, there's good momentum in the market, and we're seeing strong demand for top-tier products and location services, with no change in tenant behavior. As I've stated before, there's a dwindling supply of good quality buildings and spaces for tenants to choose from. The demand remains strong, and we see no change in momentum or tenant behavior.

Anthony E. Malkin, Chairman and Chief Executive Officer

Good quality buildings, good quality landlords, correct pricing for us, we're absolutely top of tier in our pricing range and 16 consecutive quarters of mark-to-market growth. We feel very good. Is it possible that we are unusual? Maybe. Like we can only tell you about what we see.

Operator, Operator

Our next questions come from the line of Steve Sakwa with Evercore ISI.

Stephen Thomas Sakwa, Analyst

Maybe to follow up on Blaine's question on leasing. I guess, Tom, like 94% leased. I mean, do you sense the tenants, I don't know the word, panic is probably too strong a word but do you sense that there's concern on their part about space and renewing deals? And are you sensing that tenants are coming to you a bit earlier in the process now that maybe the tide is shifting a little bit? And are you doing anything differently, I guess, on the leasing strategy?

Thomas P. Durels, Executive Vice President

Well, we're certainly focusing on leasing the vacant space that we have, and we've got a good pipeline of activity. We got some 14 leases in negotiation for about 100,000 square feet of leases that include prebuilt and full floors. In past quarters, we have done some early renewals and we continue to focus on that, didn't do any this quarter, but our team is focused on expirations in 2026 and '27 to lock in tenants where we can. I think tenants are being advised by the brokers that they should move quickly because there will be continuing reduced supply of quality space. Again, quality is defined by amenitized, modernized, good, solid landlords, good location, sustainability and leadership, and we check all of those boxes. And so I think that, again, there's really good momentum in the marketplace, and we just have not seen any slowdown or change.

Stephen Thomas Sakwa, Analyst

Okay. And then maybe just on the transaction market. I don't know, Tony or Christina, obviously, your stock is traded at a fairly high implied cap rate, maybe the multiples are somewhat elevated because of CapEx. But I guess, how are you sort of thinking about making new investments? Have you changed sort of your hurdle rates, I guess, given where the stock is? And I know share buybacks were fairly minimal in the quarter. But just how are you sort of weighing the buybacks versus new investment opportunities? And I guess, how wide is the landscape and deal flow today?

Anthony E. Malkin, Chairman and Chief Executive Officer

I think we can start by saying that we are still very focused on leveraging our existing portfolio for growth. Additionally, we maintain a high standard for what we expect from new investments. Currently, we do not have an immediate need for a 1031 exchange, but we do have a property for sale. Recently, we observed some intense bidding activity in the multifamily sector, although that has slowed down a bit. There is also a transaction taking place for a company that is undergoing a process. We evaluate every opportunity to determine what could be valuable for us and our investors. Christina, do you have anything to add?

Christina Chiu, Executive Vice President

No, I think you covered it. We continue to look at the landscape, focus on New York City, recognize where the share price is, recognize buyback, definitely still part of the equation. And when we look at the market, we continue to have discipline and underwrite a lot of opportunities and make sure that we don't get caught up with chasing down, we want an appropriate return. And as a reminder, we distinguish between capital recycling, as well as use of fresh balance sheet capital for new investments, which we want a higher return.

Operator, Operator

Our next questions come from the line of Seth Bergey with Citi.

Seth Eugene Bergey, Analyst

Can you just talk about kind of the return expectations for the Brooklyn acquisition?

Christina Chiu, Executive Vice President

Sure. So as mentioned, it was a property that's located in a very strategic location. One of the key corners along North 6th Street, it's adjacent to our other assets. So we viewed it as both a unique opportunity in and of itself as well as adding to the value of our existing assets and overall to the street. So it made a lot of sense. As we think about a redevelopment opportunity, we think of roughly sub-7%. Within a couple of years, we've already seen strong leasing interest and we look forward to announcing more to the market when the time comes.

Seth Eugene Bergey, Analyst

Great. And just for the second question, you kind of mentioned the increase in transaction activity. Is there any update on the marketing process for the suburban office asset? And any change in financing or the buyer pool or anything that would impact kind of pricing of that?

Christina Chiu, Executive Vice President

That asset remains on the market. We'll provide an update when it's relevant. We continue to have discussions. So that's on that piece. And I think overall comment on the financing market, financing is available. There'll be some look at what the asset is and sponsor and specific debt metrics that can be supported by the asset. But I'd say financing is definitely available and out in the market. And you can see from transactions that are in the marketplace, either closed or near close, it has picked up. There's definitely institutional capital and New York City has moved from simply office carriers to actionable. So that bodes well for the market. We continue to look for our spots. But I think overall in the marketplace, we should expect to see a pickup in activity.

Operator, Operator

Our next questions come from the line of Dylan Burzinski with Green Street.

Dylan Robert Burzinski, Analyst

So it sounds like activity in New York office still continues to be very strong. I mean, are you seeing any change with regards to the amount of tech tenant demand within the market? Or are things still being largely driven by sort of the traditional financial services and legal services type tenants?

Thomas P. Durels, Executive Vice President

It's really broad-based. And it's a good thing about our portfolio, we've always attracted tenants from a wide variety of industries. Right now, we've got activity with tenants in consumer goods, the fire sector, finance, legal, professional services, some nonprofit, some engineering services, but we have a good amount of tech tenants in our portfolio. And I would not be surprised if we get some activity in the coming few months. So it's pretty broad-based candidly. But right now, we're seeing a heavier weight in certainly, the fire sector and professional services.

Operator, Operator

Our next questions come from the line of Jamie Feldman with Wells Fargo.

James Colin Feldman, Analyst

Great. I just wanted to get your thoughts on the potential investment pipeline, a lot of private credit investments out there. A lot of talk around where they were priced at much lower interest rates. Here, we are in a higher rate environment, but people want to recycle capital and start putting it to work. So can you talk more about just what you may be seeing ahead in terms of real estate opportunities as people try to recycle capital and put it to work in fresh investments?

Anthony E. Malkin, Chairman and Chief Executive Officer

Well, that's interesting. Certainly, the opportunity in Williamsburg presented itself for us when we needed to address our 1031 exchange. We are currently reassessing our debt situation. Rents have been appealing, and rent growth has been strong for us. One factor contributing to this attractiveness and growth is that we are in a strong position financially, which includes having a solid balance sheet. We are actively in the market and capable of conducting business, allowing us to lease without needing lender involvement in the transactions. We have the capital to move forward. It seems that previously, the perspective was to survive until 1995, but now many people have a mindset focused on surviving until 2005. I apologize for my reference to the savings and loan crisis; that is just how long I've been in this field. However, a second round of issues is currently unfolding, and many things that may have been deferred in 2023 and 2024 are likely to emerge in 2025, potentially creating more opportunities for us. We believe this is not just a recycling of resources but rather an exit for people where the debt holders may regain their capital instead of the property owners. Tom, Christina? Please go ahead. I'm sorry, could you repeat the question?

James Colin Feldman, Analyst

I'm curious about whether the geographic location, property type, and the assets associated with that type of debt are within your investment criteria when considering the current market.

Anthony E. Malkin, Chairman and Chief Executive Officer

We've gotten close. We'll see where we get. We definitely have made efforts. And we've made efforts in this on retail and office and resi and we will continue to make efforts. We have to be disciplined about what we do and the returns that we should see in order to commit capital.

Christina Chiu, Executive Vice President

We've gotten close enough, but we really are keeping a discipline about the returns that we want to hit when we invest in new opportunities, especially as we think about making sure we have a high return for new investments versus capital recycling.

Operator, Operator

Our next question has come from the line of John Kim with BMO Capital Markets.

John P. Kim, Analyst

Regarding 86-90 North 6th, how long do you expect it will take to sign a lease there? I understand you mentioned a 2-year timeframe to achieve a sub-7% yield. What are your expectations for rents in that area compared to the current rents in your vacant space in Williamsburg versus the existing rents at 141?

Thomas P. Durels, Executive Vice President

Yes, John, first of all, that we're going to redevelop the entire building with a new facade, a new storefront and create a spectacular ground floor retail presence there with 2 stores, one in corner and 1 in line. With this acquisition, we now control 4 of the 8 key corners on North 6th Street. We had underwritten a year of redevelopment and then some downtime for leasing. But even before we've begun our redevelopment, we've already got very strong tenant interest. And so I won't be surprised if we announced something well ahead of our projected time frame for lease-up and ahead of our completion of the building redevelopment. And then we expect stabilization somewhere around 2027, it could be earlier based upon what I just said. Rents for the corner would be north of $500 a foot and in line in the high 3s.

John P. Kim, Analyst

And can you just provide an update on where you see the mark-to-market on the Williamsburg retail portfolio?

Christina Chiu, Executive Vice President

Roughly 25%, 30%, but we have a good amount of lease term. So we focus not too much, it's few years out, but it's definitely there, and that's why we see this investment, though going-in yields were core in nature with rents that are significantly below market. And the area continuing to evolve and improve, it provides a lot of upside in defensive characteristics over the long term.

John P. Kim, Analyst

Okay. On your multifamily performance, it was up 14% year-over-year. I think you got some benefit from additional units from your Williamsburg acquisition, I'm assuming. But can you just discuss the same-store performance of that portfolio? And you mentioned also pricing was competitive. Where would pricing be today for products you're looking at?

Stephen V. Horn, Chief Financial Officer

Sure. So I'll start with the multifamily performance this quarter. So starting with the units we've picked up at 86-90, there's 11 units there, but we acquired that at the end of the quarter so there's really no contribution from those units yet to our NOI. What you're seeing in that outperformance is really the 8% growth of base rents and also a big decline in concessions year-over-year. That's what's driving that performance there.

Christina Chiu, Executive Vice President

And then asset valuations, there were not a ton of transactions but of those that have traded, we still see pretty strong valuations as well as institutional demand. So seeing around a 5 cap or sub-5 depending on the type of asset is not completely uncommon and people do show up. So the fundamentals are very strong. There's not a lot of available product. And with all the changes in what's going on in New York City, one outcome is lack of visibility that creates lack of new supply. And so that backdrop is very favorable.

Operator, Operator

We have reached the end of our question-and-answer session. I would now like to turn the call back over to Anthony Malkin for any closing comments.

Anthony E. Malkin, Chairman and Chief Executive Officer

At ESRT, we remain steadfast in our focus on our 5 strategic priorities: lease space, drive Observatory ticket sales, maintain a strong and flexible balance sheet, and identify and pursue growth opportunities while, of course, continue to advance our sustainability goals, which really help differentiate us and attract tenants. So each of these pillars supports our overarching mission to create long-term value for our shareholders. We're well-positioned to capitalize on opportunities as they emerge and remain confident in our ability to execute with the discipline needed to deliver continued value in the quarters ahead. Thank you all for your participation in today's call. And we look forward to the chance to meet with many of you at non-deal roadshows, conferences and property tours in the months ahead. So onward and upward, folks, we'll get back to work here.

Operator, Operator

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