Good day, and welcome to the Equity Residential Third Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Marty McKenna. Please go ahead, sir.
Thanks, Nick. Good morning, and thanks for joining us to discuss Equity Residential's 3rd Quarter 2019 Results. Our featured speakers today are Mark Perel, our President and CEO and Michael Manelis, our Chief Operating Officer. Bob Gershana, our CFO is also with us for the Q and A. Please be advised that certain matters discussed during this conference call may and will constitute forward looking statements within the meaning of the federal securities laws.
These forward looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I'll turn it over to Mark Correll.
Thanks, Marty. Good morning and thank you for joining us today. Continued solid demand for our product is driving absorption of new supply and our excellent people and properties have produced record high resident retention and this all resulted in same store revenue growth that is in line with the expectations we shared with you on our July While we are not giving precise guidance at this time, we do want to share the basic building blocks and thought process that we are undertaking to determine next year's same store revenue guidance. Important inputs to our process include expected supply, Our embedded growth, which for us that means the growth inherent in our rent roll headed into 2020, and most importantly and most difficult for us to handicap, Our perspective on demand, which influences both our occupancy and rate growth estimates. A new factor this year is the negative impact that regulatory changes California and New York will have on our same store revenue numbers.
In a moment, Michael Manelis, our COO, will give you color on our Q3 operating performance and revised full year same store operating guidance and discuss our 2020 building blocks, and then we'll open the call up to your questions. Moving on to investments, with the exception of New York, where activity since the new rent control law in June It's too limited to draw any conclusions on the product we own. We have seen cap rates modestly decline across our markets, Pushing up values. Bidding tents are more crowded and competition among buyers is fierce. This is especially true for B and C quality assets where a value add play may exist.
As we have stated previously, this has compressed cap rates between new and older product. Our response to this has been to accelerate the sale of older or less strategic assets and the purchase assets that better fit our long term During the Q3, we were busy acquiring 4 new properties consistent with this strategy and selling 7 older assets. Three properties we acquired are in California. These are new properties, so they will not be subject to the new rent control law for almost 15 years. The first property is a 237 Unit Property in the Little Tokyo submarket of Downtown Los Angeles.
This asset was built in 2017, and we bought it for a purchase price of approximately $105,200,000 and at a cap rate of 4.4%. With a walk score of 96, the asset is a short walk to multiple transit hubs and is proximate to both extensive employment concentrations and interesting entertainment options. The second is a 398 unit property built in 2017 in the Koreatown submarket of Los Angeles at a purchase price of approximately $189,000,000 and at a cap rate of 4.3%. The property, which is a retail component, has excellent access to both public transit and freeways with abundant nearby entertainment options and sports a 97 walk The 3rd asset we acquired is a 137 Unit Property on the Peninsula in the San Francisco Bay Area, which was acquired for approximately $108,000,000 at a 4.3% cap rate. This property is very near a Caltrain station is in close proximity to many large technology employers.
Our last acquisition was the purchase of a 312 Unit property In the Denver suburbs, this asset was built in 2016. We bought it for a purchase price of approximately $88,000,000 and at a cap rate of 4.7%. This property is an example of the kind of well located suburban elevator building and is likely to make up about 30% of our portfolio in Denver. During the Q3, we also sold 7 assets. One was Park at Pentagon Row, a 30 year asset near Amazon's HQ2 that we discussed on last quarter's call.
The other 6 sales were the vast majority of our portfolio in Berkeley, California. These were 6 smaller buildings that totaled 343 units and were sold for an aggregate price of approximately $187,000,000 These buildings are about 20 years old and have significant student populations, making them operationally intensive to operate. The 7 properties sold during the quarter had an average disposition yield of 4.7% and generated an unlevered IRR of approximately 7.6%. We also completed 2 developments during the 3rd quarter, We'll offset Kendall Square 2 in Cambridge, Massachusetts. This is an 84 unit property, built at a total development cost of approximately $51,400,000 that we expect will generate a stabilized yield of 5.4%.
This property was developed as a second phase of our existing in Kendall Square Lofts Asset and is an excellent addition to our portfolio in the booming Cambridge Life Sciences area. We are particularly pleased with the speed of our lease up at this property. We also just completed our 137 Unit Chloe on Madison project in Seattle. The total cost of this project was approximately $65,300,000 and we expect that we will generate a stabilized yield of 5.4%. This asset was built adjacent to our Chloe on Union asset in the Pine Pike Corridor of Seattle.
Switching to new development, The capital availability story is somewhat different than for existing assets. We continue to hear from reputable local and regional developers with good projects, Unable to put their equity stack together in light of escalating construction costs and shrinking build to yields. We have been pursuing a few of these opportunities as joint ventures I believe that investing our capital in shovel ready deals and sound deal structures that provide some protection to our capital is a good way to source new properties while managing some of the risk inherent in development. We started 2 developments during the quarter. Arrow Apartments is a 200 Unit Mid Rise Property that we're developing in a joint venture with a prominent regional developer.
This property is part of a master planned community on the site of a former Naval Air Station and will have dedicated ferry service to San Francisco. We expect to build our 200 units for a total development cost of approximately $117,800,000 and we expect to produce a stabilized yield of 5.3%. Our other new development is 4,885 Edgemoor Lane. This is a 154 unit property in Downtown Bethesda, adjacent to an existing EQR asset. This is a ground lease deal where we have the right to acquire We will develop this 15 storey high rise for a total cost of approximately $75,300,000 and expect to produce a stabilized yield of 5.9%.
We think the recent increase in office space in Bethesda will create more demand for rental housing and that this well located property will capture new office workers who want to live conveniently to work while having excellent access to the metro and entertainment entities. On the capital markets front, as you saw in the release, we took advantage of the very favorable environment and issued $600,000,000 in unsecured debt with a yield of 2.56%. There was tremendous demand for the issuance and we couldn't be more pleased with the execution and I congratulate the team for it. Finally, before I hand it over to Michael, I want to make a comment on rent control. With California recently passing AB 1482, Both that state and New York have introduced new regulations on rents.
The new laws are complex and will create compliance challenges for all landlords, while also acting as a powerful disincentive to building the new affordable apartments needed in these two states. We agree that there is a shortage of workforce Affordable housing in many places in our country, but believe the actions taken in New York and California will not help solve this problem. These new housing laws would discourage the production of new housing and do not materially address the root causes of housing production shortages, like zoning regulations that prohibit construction of multiunit housing and other excessive governmental regulation. We also think that over time, it will lead to the deterioration of the existing affordable housing stock. Through our trade associations, we'll continue to encourage policymakers to embrace Actions like zoning reform and the removal of regulatory barriers to new housing construction as well as programs that create incentives for private market developers to build the affordable housing units our cities so badly need.
I'll now turn the call over to Michael Manelos.
Thanks, Mark. So I'd like to begin with a shout out to all of the employees of Equity Residential. The 3rd quarter represents our busiest leasing period of the year With just over 1 third of the entire year's transactions taking place, the team's focus on delivering remarkable experiences to our new customers and current residents continues to pay off and allowed us to achieve our highest recorded resident satisfaction scores, while increasing our all time high online reputation scores. Favorable operating fundamentals continued through the quarter with strong occupancy of 96.5%, which is 20 basis points above Q3 of 2018 record low resident turnover delivering a 5 achieved renewal increase for the quarter and strong demand to close out the peak leasing season. While we reported strong occupancy this quarter, We anticipate that the balance of the year will moderate in line with normal seasonal declines, a process that has already begun and should result in our full year same store occupancy ending up at 96.4%, which supports our 3.3% same store revenue.
Today, our portfolio is 96.2 percent occupied, which is exactly where it was this time last year. Base rents are up 2.7% year over year. Renewal performance continues to be very stable with expected achieved renewal rate increases around 5% for the balance of the year. Heading into 2020, the following represents a few top level inputs that will serve as building blocks for our guidance Processed. Most markets will deliver relatively the same amount of new supply with the exceptions being New York, which will have considerably less and Boston, which will have more.
We expect demand for our high quality and well located assets to be relatively the same as 2019, which should equate to similar occupancy next year. Revenue growth in both our California markets and New York 15 to 20 basis point impact to our 2020 same store revenue growth. We also anticipate starting the year with better embedded growth than we had entering into 2019. So overall, assuming these inputs hold, we would expect New York, DC, Seattle and San Diego to deliver equal or better revenue growth next year and Boston, San Francisco, LA and Orange County to be less. We are in the early stages of our budget process and we will be updating our models throughout the balance of this year and we will issue specific guidance on our January call.
So on to the markets. Let's start with Boston. Full year revenue growth expectations have been raised to 3.9% from 3.5% as the results for the quarter were better than expected. The reprieve from head to head supply delivered strong rate growth and most notably And occupancy of 96.4 percent that was 70 basis points better than the Q3 of 2018. On the supply front, after a quiet 2019, we're starting to see new competitive supply return to the city of Boston.
We are tracking about 5,800 units being delivered in 2020 with roughly 60% of those units in the city of Boston heavily concentrated in the Seaport. Demand remains strong, bolstered by large corporate expansions and relocations. It also helps that strong demand and increasing rents for office and lab space Seems to be tilting the highest and best use for development parcels away from multifamily in the Seaport District. While we've only seen a few of these deals shift, this could create more renters and less supply in future years. The New York market continues to demonstrate strength in overall operating fundamentals and its performance during the quarter was in line with expectations.
There is no change to our full year same store revenue growth projection for New York of 2.5%. Overall, we continue to see good economic activity and Strong demand for our product in this market. The impact from changes associated with the rent regulations that went into effect in the middle of June are playing out exactly as expected, with approximately a 50 basis point reduction to achieved renewal increases in the second half of the year and about a $400,000 reduction in application and late fees. Combined these changes to the regulation We'll reduce our expected New York Metro market revenue performance by approximately 20 basis points in 2019. A similar impact from rent regulations is expected next year.
On the supply front, next year we'll deliver just over 4,300 units in our competitive footprint, a 50% decline from 2019. While we still see some pressure, The overall competitive nature of this supply will be much less, which should allow us to absorb the impact from rent regulation changes. Washington, D. C. Continues to demonstrate strength despite the elevated deliveries.
With our full year revenue growth projected to be 2.5%, Results for the quarter were in line with expectations. The market unemployment rate of 3.3% remains below the national average and job growth remains healthy with gains being driven in a large part by the professional and business service sector concentrated in Northern Virginia. Deliveries of 10,000 and Seattle's office absorption is the highest it has been in a decade. Gains in job growth were widespread, not In the technology sector, overall demand for our product remains strong, which has allowed us to maintain high occupancies while pushing rate. On the supply front, the concentration shifted to the east side in 2019, which has allowed pricing power to return to the CBD where we have several assets.
Suburban submarkets have yield greater rental income growth over the last several years, but that trend reversed for us over the summer as the downtown submarket rent growth led the pack for the Q3. Overall deliveries in 2020 will be similar to 2019 with just over 8,000 new units coming online. The concentration will continue to be weighted to the east side in the first half of the year and will then shift back to the CBD Beltown submarket in the second half of the year. As I move to the California markets, let me start by providing color on the These new regulations go into effect on January 1, 2020, and we have 97 properties or about 70% of our California portfolio subject to the new restrictions next year. The most pronounced impact will be on renewals as there will be a cap on increases equivalent to CPI plus 5% on all properties that are 15 years or older.
The law allows vacancy de control, meaning upon move out, rents can increase the market pricing without a cap. If these regulations have been in place for 2019, they would have reduced our renewal growth rate by about 50 basis points and our same store revenue growth in these markets by about 20 basis points. So moving to San Francisco, We now expect full year same store revenue growth to be 3.8%, which is 20 basis points lower than our July guidance. During the Q3, we were unable to maintain both occupancy and rate at the levels high levels we anticipated. We had continued strength in July August, but September traffic was a little lighter than expected.
Today, our San Francisco portfolio 95.5 percent occupied, which is 10 basis points lower than the same week last year. While reduction in occupancy at this time of the year On the job front, the Bay Area topped 4,100,000 jobs with 10 straight months of employment gains. It's possible that the rate of job growth is slowing, but these gains are still strong. Heading into 2020, we're tracking 9,800 units being delivered, which is similar to 2019. The East Bay will deliver less units and the concentration will shift to the South Bay.
Moving down to Los Angeles. Full year same store revenue growth projection is 3.8%, which is 10 basis points lower than our July guidance. As we stated last quarter, we anticipated deceleration due to pressure from new supply that was back half loaded and had a difficult occupancy comp for the second half of twenty eighteen. Occupancy remained strong at 96.3%, but we didn't quite get as much pricing power as expected, resulting in softening rate growth to maintain the needed leasing velocity. Continuing the trend on supply, roughly 2,800 units of deliveries were pushed from 2019 into 2020.
These units were originally scheduled to deliver towards the end of 2019, but the story remains the same. With labor shortages and construction delays. This shift results in both 2019 2020 having approximately 9,700 units being delivered. Downtown LA, West LA and the San Fernando Valley are the highest supplied submarkets in 2019. There are still about 3,900 competitive units under construction scheduled to complete by the end of the year, which will continue to put pressure on rates.
Moving into 2020, the supply will be concentrated in West LA, Hollywood and the San Fernando Valley. Downtown L. A. Is expected to see a reduction to only 1200 units being delivered, which should benefit our pricing power and performance in the back half of the year in a submarket that is close to 20% of our LA revenue. Orange County delivered 3rd quarter results, which were better than we expected, primarily driven by 40 basis points of stronger occupancy than this time last year.
Our full year revenue growth guidance has been increased by 20 basis points to 3.8%. As I've stated before, we have a diverse set of properties in Orange County and not all of it competes head to head with the 2019 supply. 2020 is expected to be similar with just over 2,700 units being delivered. San Diego performed as expected in the Q3 and there is no change to our full year revenue growth guidance at 3.4%. Overall, the newer product downtown continues to pressure our pricing power as we think about next year supply will be lower with just over 2,100 units being delivered.
On the initiatives front, we continue to make great progress towards the sales and service roadmap that was shared in our June investor update. On the sales front, we will have just over a third of our communities on our artificial intelligent ELEAD platform by the end of the year. We'll have deployed self guided tours at over 25% of our communities. On the service side of the business, During the quarter, we launched our new resident portal and app. Our app adoption has grown to 55% of households.
As with our original portal, residents will continue to pay rent and service requests online, but now have many additional features that will allow them to engage with We can already see them taking advantage of self-service functionality in the portal to reserve amenities, register guests and leverage the social platform to facilitate gatherings and post items for sale. We hope that this continues to increase resonant satisfaction and stickiness. The evolution of our operating platform is underway. The new technology will enable continued centralization and digitization to further enhance The resident and employee experience. Over the next few quarters, we expect to provide more detailed updates on the financial and customer impact from these and other initiatives.
At this time, I will turn the call over to the operator to begin the Q and A session.
Thank
And our first question comes from Nick Joseph with Citi. Please go ahead, sir.
Thanks. Maybe just starting with guidance. Historically, for the Q4, you've seen an acceleration both in terms of Core FFO and also same store NOI growth in this year seems to be an exception. So I'm wondering if you can walk through What's the variance of that versus historical years? Yes.
Thanks, Nick. It's Bob Yaurich Hanna. It's really 3 fold items Overall, as it relates to the NFFO guidance, the $0.03 identified in the press release, the first of which is really timing of transaction activity. During the Q4, Our guidance incorporates about $300,000,000 in dispositions. And in the Q3, we had a similar amount of dispositions, but actually had 500,000,000 roughly of acquisitions that Mark went through front end loaded.
So that's about a penny of the delta. It's also timing of other items, predominantly corporate overhead and some other expense items as well. And then that's another penny. And then the last penny is related to same store. So you're right.
As you look at sequential same store revenue, it typically does decelerate between the 3rd Q4, which is what we have embedded in our guidance today. That mod is kind of traditional deceleration that you see from seasonal activity. You usually also see some expense seasonality and you see expenses actually decline from the 3rd quarter to the Q4 in a pretty material amount historically, and we don't expect to see that as much this year, and that's largely driven by the Timing of some tax real estate tax appeals and some other items. And so that's really driving that last penny that we identified in the release. Thanks.
And then, Mark, you're active with California Acquisitions. I know the recent law doesn't impact those assets. But has your underwriting standards
Thanks for that question, Nick. Yes, we've talked, I think, more than ever before, and we've always had a regulatory component To our underwriting, but it has been a bigger discussion, we've done things like sensitized exit cap rates. We generally Think about asset hold periods and our pro form a is 10 years. So 10 years from now, these assets will be closer to the end of their protected period. So we have sensitized those cap rates at the end, those exit cap rates a little and thought about them in a few different ways, so that we would be more thoughtful about maybe how those assets might trade 10 years from now.
Again, mostly we do generally hold assets longer than 10 years, but we need to be a little bit more mindful. So we did that analysis and we were still happy to hold the assets. It generally changed our IRRs from Mid 7 IRRs to high 6 IRRs by doing that, Nick.
Thanks. Thank you. Our next question comes from Nick Yulico with Scotiabank. Please go ahead, sir.
Thanks. So you had this unusual dynamic This quarter for new lease growth where strengthened on the East Coast and it weakened in California. You talked about some of the California issues, but It also looks like your new lease growth stats were weaker than some of the industry stats we're looking at in California. So just hoping to get a little bit more info How new lease growth turned negative in the Q3 for the California markets?
Yes. So this is Michael. So I guess first I just want to call out that I think we've talked about before that looking at any of these stats for the standalone quarter on new lease change, It's probably not the best way to think about it. It's probably more indicative to think over long term of the year. But specific to the quarter, I guess I want to call out what we report on Page 15 in that release is really the impact from all lease terms, meaning regardless of what lease was in place when the resident moved out to the replacement rent.
When we tend to when we isolate the leases that were just Like term or just 12 month lease to 12 month lease, we see about 100 basis point improvement in the results for the quarter. So I would say that we started, we understood that we were going to see deceleration. I think I mentioned it on the previous call. But if you look specifically like at LA, LA instead of reporting the negative 20 basis points would have reported 80 basis If I just isolate it out to the light term or the 12 to 12 and that would have been a positive. The quarter actually performed pretty consistent With what we expected, we knew we were going to face back half pressure on supply and you can see that in San Diego and you can see that in LA and the areas that we have supply have the most pronounced kind of pressure on that new lease change.
As I said in my prepared remarks, I mean, Downtown LA Actually, it's going to see a reduction in supply next year, so we would expect some pricing power to return to us there. Okay. That's helpful. So it sounds like
the read through here is that you're not expecting these the new lease growth numbers in
Well, I guess I'll tell you as we hit the 4th quarter, They will most likely be negative. They typically are negative. And I've talked about that before that there's a seasonality component to these stats, which is why when you isolate any 1 quarter, it's not always indicative of the full year.
Okay, thanks. Just last question. Mark, I guess, how are you thinking about doing more acquisitions, right? EQR hasn't been a net acquirer in a while and Your stock price is looking more attractive. Would you issue equity to do that?
What is kind of the size of the Opportunities that you're looking at, is this something that you would be considering at all?
Thanks, Nick. No, we're certainly open To getting larger, I think the market is giving us a growth signal. I would start by saying, as I said in my prepared remarks, the transaction market The kind of quality assets we want is extremely competitive. So it's not like we have a whole bunch of things that have piled up that we'd love to acquire. I mean, we're buying pretty well everything again that fits into the window that we're comfortable with on price.
So I would start by saying there isn't a lot left that we haven't done To begin with, I'd also point out that if you were to use, for example, the ATM, the implied cap rate on the stock as compared to the kind of asset Cap rates we have is not going to create a great deal of accretion at least immediately for the company. I would say we're more interested potentially in issuing debt And buying assets, I mean, I think we have a pretty modest leverage profile. We're not suggesting we're going to pile the debt on, but I think we're in a position where we could Certainly spend a considerable amount of money and fund it with debt to buy assets if we could find enough good assets to buy. So Definitely, that's top of mind for us, Nick, but it's probably more of a debt play at this point than it is use of the ATM or some discrete secondary.
Thank you, Mark.
Thank you.
Thank you. Our next question comes from Shirley Wu with Bank of America. Please go ahead.
Hey guys, thanks for taking the question. So just a follow-up to Nick's earlier question on the run regulation AB-fourteen eighty two. So with your most recent question, did you guys see any impact to the transactions market or in terms of, let's say, hesitation to jump into those markets, Just given that new regulation has been in place?
Yes. Hey, Shirley, it's Mark. Thanks for the question. We have not. California has really just kept going.
I mean, cap rates have generally kind of been steady to declining for our kind of assets. So we have not seen I think that's because California was so well discussed to the credit of the policymakers, The activists representing the tenant groups, the companies like ours and the owners, everyone was involved in this conversation about rent control and rent reform. And so when this all came to pass, everyone understood it and the regulations made sense and the market digested it. I contrast that to New York where it was done, as I've Before sort of in the dark of night, it probably wasn't as well thought through. And I think the implications are harder to understand of the transaction market in New York.
But in California, everything feels about the same to us.
That's great to hear. But there is talks of a new ballot initiative that It kind of brings back the previous conversation about repealing Costa Hawkins in 2020. Have you heard anything in terms of update and use on that front?
Sure. So this is what the industry has been calling Prop 10 2.0 and the proponent put out a press release recently saying as we expected But they have enough signatures to put this on the ballot. Again, that's what the industry anticipated. I'll tell you, we're very well organized. I've been in industry meetings about this.
We beat this by about 20 percentage points back in November, educated the public, educated policymakers is just a bad idea. We think the same approach is justified here again. We intend to be very much aggressive and out there having these conversations in the public space about how this sort of repeal of cost to Hawkins is going to do the exact opposite of what people want. There'll be less supply. There will be less investment in existing stock of housing, both single family and multifamily, by the way, and we're going to have that conversation and be very forth So at this point, I feel pretty good about our, again, our organization in the industry to oppose that measure.
Great. Thanks for the color.
Thank you. And our next question comes from Rich Hightower with Evercore. Please go ahead, sir.
Hey, good morning guys. Hey, good morning.
Good morning. So Mark, I want to go back to a couple of your comments in the prepared remarks around Developer equity appetite and
just in
the sense of the portion of the cap stack required from the equity or the cost of capital. And maybe wondering if there's something of a disconnect there between public and private in the sense that the apartment REITs are obviously trading very well and have opportunity that comes from that versus what you're seeing On the private side and how does that lead to opportunities for EQR? I know obviously at least one of the developments That you guys started in the quarter was a joint venture and just wondering what the opportunity set might be that emanates from some of this phenomenon?
Yes. We have a few other. Thank you for the question, Rich. We have a few other, of these sort of opportunities we're talking to. We've just seen and we Telegraph this on a prior call is just more inbound call volume.
Developers we know, regional folks, Reputable local folks that have had no problem getting equity, and now do. And we think some of that is just, again, build to yields have gotten low. A lot of folks have made a lot of money on development, maybe they're a little anxious about where they are in the cycle. A lot of people that are building, they build for a window. So These developers are building needing to deliver as merchant builders in a window and things need to be great in 2022 or 2023 or they don't make money.
That is not the way we think about development. We want to like our unit cost and our per square foot cost and our location in the long run. So I think we do have an advantage right now at the moment where we're able to take a longer view, where we do have ample capital. And these opportunities, again, you can put in front of you The capital of the developer, they're out there taking the completion risk initially. Now again, these developers have capitalization, not as significant as ours and they have experience and we watch over their shoulders.
So we think we get a little risk mitigation and there's a little bit of an opportunity right now to Kind of jump into deals that are ready to go. So I do think there's a little bit of a window here for us.
Okay. Great. That's great color.
And then maybe just a second question here quickly. You know what, I lost where I was. Oh, no, 2020 Supplies. Sorry about that. So Obviously, the numbers we look at coming from Axio or other sources seem to change every single quarter, and it's very hard to get a grip What's really in the pipeline?
What's really likely to open by a certain date? So how much flex do you guys put into your forecast in that regard?
Yes. I mean, so we have a process, right, where we have boots on the ground kind of validating this stuff. I mean, it's pretty hard right now To think that in most of these markets that anything can get delivered in 2020 that we're not aware of. As you start to get to these shoulder periods, especially like Q3, Q4, you could see things shift from what we thought was going to be a completion in 2019 shift into 2020. We've seen that now in LA consistently occurring.
So I think as you get to these shoulder periods, it's normal to see some of this stuff shift. And I think on average, we see about this 10% to 15% shift. In L. A, we started seeing it to be a little bit more pronounced, like 20%, 25% of the unit shifts. But as far as the total quantity, the process that we go through, with our local investment team in the market Trying to understand the competitive nature of supply in our competitive marketplace.
The deals don't kind of come and go.
Yes. I want to add one thing, Rich. This stuff becomes competitive even earlier. So before the CFO comes, they're out there pre That pressures operators and people like us with properties in the area. So sometimes moving from December to January looks like something to all of us from a distance.
But from the operator perspective, it's meaningless. And I also point out, when you have 20% of LA moved from 2018 to 2019 and 20% moved from 2019 to 2020, Nothing really happened. I mean, all that happened is we have done some good interesting analytical work where we see the pattern. And really, this is the point where the numbers, for example, for 2020 are their highest. And from here, they'll just decline because deals will keep getting pushed or moved or changed in some regards.
So there is a bit of a pattern here where I think we all start looking at numbers that end up being much lower in the long run because stuff just naturally Got it.
Thank you very much.
Thank you.
Thank you. And our next question comes from John Pawlowski with Green Street Advisors. Please go ahead, sir.
Thanks. Mark, apologies if I missed this. Can you just give us on the development opportunities, What do you expect a reasonable development pipeline size to look like for EQR next year?
Thanks, John. So I would probably put it in terms of spend, if that's helpful. So the way we've talked about it with the Board is we feel like we can Spend $500,000,000 a year on development, which would consist of the $300,000,000 of excess cash flow that we have every year after all our CapEx needs are met, as well as, call it, dollars 200,000,000 of additional leverage from the growth in EBITDA. We do that. We don't need to sell assets.
We don't need to access the capital. We don't need to do anything. We can just sort of self fund and in that case then we think that's the best, safest way to do it. So I would expect our goal is to get close to opening starting say $500,000,000 in 2020. We have one large deal on the West Coast we're working hard on that would be half of that.
So and there's a number of other plays that are really interesting that are density plays, where we're knocking down, say, 40 or so Garden units and replacing them with 200 to 250 mid rise units. And we have a number of projects like that going on, on the West Coast that we hope to start next year and a few going on in the East that may take a little longer. So I mean that's where you should see in terms of a range probably a spend $300,000,000 $400,000,000 $500,000,000 a year, and us looking to use both JV developments, some of this legacy land bank we still have of lower priced land and the density plays that we think are interesting.
Okay. And Michael, can you give us some more specifics about Your opening remarks about weakness in traffic, foot traffic in San Francisco are not And just what are you seeing on the ground in terms of leading demand indicators for your San Fran portfolio?
So I mean it's really it's submarket specific. So even if I just think about the results in the quarter, like the Downtown portfolio produced 6% revenue growth compared to the East Bay at 2.5%. When you start looking at the traffic patterns, our traffic is down. But like I said, it was strong July August, and then in September, we started to see that shift. We went back and we kind of just looked against all of our available units.
The volume of traffic we're getting just as a ratio and compared it. And when you look at it, it really seems to be following more of like a 2017 Pattern versus the 2018, we're going to really defy kind of a seasonal decline. So I think right now, the demand is really just Kind of overall, it's mixed. It's definitely kind of following a normal seasonal decline, but I haven't seen anything that suggests it's not It's going to be anything greater than normal. Does that help?
Is it Oakland Supply starting to suck out demand or?
Yes. So it's interesting. So at the backdoor, meaning people leaving us and giving us forwarding addresses to Oakland, we see very little of that Less than 2% of our kind of move outs give us that forwarding address. But you can look at the Oakland assets that are coming online right now and they're performing well. Their concessions are reasonable.
They're what you would expect from a lease up. So they are probably siphoning off some demand on the front door right now. Okay, great. Thank you.
Thank you. And our next question comes from Richard Hill with Morgan Stanley. Please go ahead.
Hey, guys. Quick question on the leasing spreads. I thought your comments about like for like leasing spreads were around 100 basis points higher was pretty I hope that hopefully I got that number right. I'm curious, are you seeing tenants ask for longer leases? Because it seems like Your commentary would suggest so.
And the reason I ask is, one of the consequences of rent regulation was maybe tenants Stay in their leases for longer. So I'm curious, are you seeing leases longer? And is that intentional on your part? And how are you thinking about it?
So you are correct, first of all, that the spread is about 100 basis points improvement in new lease change when you isolate to the 12 to 12. Haven't really seen much from a demand standpoint changing in the willingness to take long term leases. We've done some stuff in LA. We do some stuff strategically in front of some of the supply to try to get some longer leases in place. But we haven't seen anything whether that be New York or California yet that would suggest consumers are looking for longer term leases.
Or that turnover has changed. I mean, New York turnover, for example, one of my questions was just whether we'd see a difference between our market rate and our rent stabilized portfolio in terms of turnover and they both are moving in the similar way. So maybe I think that's just 1 quarter of data and we'll see, but My expectation was that the rent stabilized portfolio would start to have even lower turnover than the market rate portfolio, but that has not yet proven to be true.
Got it. Got it. And look, I mean, everyone focuses on the negatives of rent regulation, but I think there were some Foreign investors that would argue that there's and there's any consequences of restricting supply and accelerating rents. Could you Comment about how you think about that maybe over the medium to long term in either California or New York?
Yes, it's Mark. We certainly have talked on several occasions of the fact that these rent control rules in the long run are going to reduce And even though the affordable New York program, for example, wasn't specifically changed, these sort of rules have a chilling effect on capital going into development. And so for an owner like us, the properties that already have a relatively low basis because we've owned them a long time, in a lot of regards, the government has now been Our partner in reducing supply and increasing the competitive moat. But and we also have opportunities on expenses that we've talked about, whether it's leasing and advertising because again we're more highly occupied, turn costs and the like. But I have to be fair about this and I've said this before, Rent regulation, when it reduces the amount of supply of housing, ultimately reduces the dynamism and vibrancy of a city, and that's not good for us.
We'd rather see and take a little bit of pain in the short run, but see these neighborhoods continue to build out and our existing assets become even more popular and there'll be even more entertainment options and more of everything. So I would suggest that rent control is I think we can manage through and to this point has been not as significant as maybe some folks have thought it would be, but it's hard for me to say that it's a positive in the long run
because I
think it's very damaging to the cities.
Got it. And just one follow-up question. The 4.4% cap rate that you cited, I think some would say that that's pretty compelling against the global macro backdrop where we stand right now. Is 4.5 Cap, just sort of steady state for where you see cap rates right now? I guess, I'm not asking you to tell me where they're going forward, but is 4.5% cap representative where you think you And let's just say the LA market for instance.
Yes, I think that's probably fair or maybe a little bit lower. I mean, I think the range we're operating in is 4.3 to 4.7 with markets like Boston near the low end of that cap rate range, where it's just super competitive and a market like Denver more towards the higher end of that range.
Got it. Helpful color, guys. Thanks very much.
Thank you.
Thank you. And our next question comes from John Kim with BMO Capital Markets. Please go ahead.
Thank you. This quarter, your dispositions were very targeted in Berkeley. And as we get Prop 10 2.0, as you call it, coming back. Are you looking to reposition out of certain markets within California? Or is age really the primary factor of gas
Certainly, the regulatory scheme, the pressure we feel, The welcome frankly that the city puts out for us is a factor. The Berkeley assets had both asset characteristics and City characteristics that made them worth selling. So I'd say we're aware of places where it's more difficult to do business and we factor that into our decisions to sell.
Okay. And sticking to the markets, do you have any commentary on Google and Facebook and potentially other tech companies investing billions of capital into the housing market in San Francisco. Is there any potential for you to partner with these companies on the developments or to participate in their incentive program?
Sure. Well, we welcome those sorts of conversations certainly, and I know we try and engage in those sort of dialogues. I think this is great. I think Facebook's announcement, I believe, was $1,000,000,000 and I think that equated to about $50,000 a unit. So clearly, there's something else going on here in terms of the government Matching or contributing land or doing some other things, I think it's great to alleviate some of these housing shortages.
I think it's very thoughtful for big office users to also be thinking about housing. And I think this is just another ingredient in the solution that the government can utilize if it sees fit.
But can you queue our partner with them or is it not really? Sure. Sure.
We're open to that. We're absolutely open to that. In a lot of cases, they're making If they're building a project that's employee specific, if a tech company is building what amounts to a dormitory for their employees, that's probably a little less interesting for us. If they're building properties where and along with maybe the city contributing land and they're contributing capital and we're in a partnership and we're building it, that's all, that's very interesting. Those kind of opportunities would be very worthwhile for us.
Thank you.
Thank you.
Thanks. And our next question comes from Derek Johnston of Deutsche Bank. Please go ahead.
Hi, everyone. With cap rates currently low and development yield targets hard to justify, we expect continued and We accelerated capital recycling going forward. I think you guys have mentioned that. Will you be focusing on Denver? I think that's certainly a key market, but currently a pretty small earnings contributor.
So what is the target NOI contribution you'd like to see from that market?
Yes, great question. So our goal, as we mentioned in Denver, is to get it up to, call it, 5% of our NOI. Right now, it's about 1.5%. That's probably funded with some incremental capital, but probably some recycling out of places like Washington, D. C, where we like the market, but we have a significant concentration and where There's been some serious supply issues over the years, as well as maybe some money from some of the other markets here and there.
So I think you can expect us to continue to acquire in Denver. We acquired one asset the past quarter. We have almost $600,000,000 invested in that market and I'd like to see that number closer to 2,000,000,000 And our concentration closer to 5%.
Excellent. Helpful. And then what is the new low end requirement on development yields from your perspective, just given the environment today. I think you mentioned a projected 5.2% on an asset, I think was in San Francisco during the opening remarks. So what would the low end be?
Well, the way you just spoke to that is really the merchant builder thought process. And that's fine, but that's not our thought process. I mean, The fact that we can build something in a place, for example, that's very hard to build like Boston, the fact that we can build a tower there And maybe and we've said this, we have slightly lower than 5% current yield on that property mark to market, if you mark the land to market On that deal, that doesn't bother us in the least because we really like our basis in the asset. It's hard to buy. It's a location we really like.
We like everything about the demand and supply dynamics. So I don't have a number. If it was a 4.5 cap rate on current rents, we're done. I don't feel that way. I think as we talk about it as a group, as a management team and with the Board, it's about how protected is that market?
What are the demand dynamics? How do we feel about our basis on a per square foot and unit basis? So for us, it isn't just I got to deliver it at a 5.5% cap rate 2 years from now because I got 1 year to sell it or else my equity will wipe me out as a developer. That's just not the kind of deals we do. So For us, I think it's a little bit different of a thought process and it isn't a minimum.
It's just part of the ingredients of the thought process. All right,
we'll move on
to our next question. Yes. Thank you.
Thank you.
And our next question comes from Rich Anderson with SMBC. Please go ahead, sir.
Thanks. Good morning. So on the cap rates, can you just those are economic cap rates that you cite in the Acquisitions and dispositions?
Yes. They are after our normal thought process on CapEx for these types of assets.
Okay. So Is it what do you assume on the buy side and what do you assume on the sell side from a CapEx perspective?
Well, it depends. I mean, some of the older assets we sell, it's got a higher CapEx load to them. I'm not
I have
some of this stuff in front of me, but I'm not sure I'm in a position to give you exact numbers. We talk about in our Disclosures are material, John. Go ahead, Bob.
So on Page 27, I think we define for you acquisition Capitalization rate or cap rate and gives you a sense of kind of what the underwriting looks like from an in unit replacement CapEx, etcetera, and how that's kind of conditioned. That might give you some color, Rich?
All right. So I guess my point is very little, if any, dilution from these Trades, but if you were to go to the FFO line, not saying that's more important, but if you were, what would the spread be or do you have that number available to you if it's 30 basis points on an economic basis.
So do you mean FFO or AFFO, kind of after the replacement reserves and everything else, for Yes, like Park at Pentagon Road, that's a good thing to talk about for a second. I mean, we looked at the buyers numbers as best we can. And again, that's not what we disclose. And we put in $200 a unit for that per year. I can tell you that number is way low.
We also put $200 a unit in some of the 2017, 2018 product we bought in California, and I think that number is just fine on stuff that was built a year to 18 months ago. So I think when you start to get to where the rubber meets the road on what your replacements really are, a lot of the stuff we're doing isn't accretive in the long run. It's accretive right then and now.
Yes. Okay. All right. And then shifting to California, 48% of your portfolio, Housing shortage, regulation, business unfriendly, wildfires, earthquakes, school funding issues, out migration of population. There's a lot of things going on in California and yet you're showing signs of continuing to grow there.
Would it be fair to say that You're not going to get smaller in California, but younger. Is that the basic game plan? Or do you see yourself sort of whittling down your exposure to rent control Inclusive of New York City, which brings you up to about 63% exposed to rent control situations.
Well, I mean, there's so much to unbundle in that. I mean, I just want to start by saying, you do have the plague of horribles you mentioned in California, but there's a lot of positives We would know and I know as a you're a veteran guy, you know that. I mean the job creation machine in California, the company creation machine, the whole Employment picture in the United States is to some extent driven by what's going on in California in terms of technology and going on in the West Coast and now spread everywhere throughout the So I would say we like a lot of the dynamics there and things that would scare us about California are mostly about those job dynamics Changing. That sort of demand stuff would be most concerning to us. And we don't, as Michael said in his remarks on San Francisco, we just don't see that yet.
I'd also say that Prop 13 and remember the split roll initiative doesn't affect us in the apartment business. Having your largest single expense Significantly lower, I mean, we have a lot of markets where outside of New York, where property taxes are going up 5%, 7% a year And in California, they're considerably lower. That's a huge advantage, Annie, to us in terms of what our return is. So I'd say there's still plenty of positive things about California notwithstanding some of the elements of the plague that you mentioned earlier. And I think you hit it on the head in terms of the California strategy.
We do not want to have more NOI in California than we have now. I think we're about right, maybe a little lower would be okay too, but I think we do want to be younger. I think we have some older assets that even notwithstanding We want to sell and I think we'll continue along that play and you'll see us sell some of the stuff that's a little bit older in the portfolio and Try and keep our portfolio in California particularly young.
Perfect. That's all I got. Thanks.
Thank you, sir.
Thank you. Our next question comes from Drew Babin with Baird. Please go ahead, sir.
Hey, good morning.
Good morning.
I wanted to expand on Rich's question. Demand growth in California, obviously, there's a bit of a north heavy element to that. And with L. A, with the revenue growth expectations coming down to shade despite some supply being pushed out into next year, I guess, is the demand picture in L. A.
And I guess Southern California generally been somewhat disappointing. I know it had kind of a slow start to the year, kind of came back. Can you talk a little more about that trajectory as it applies to Southern California and what we might expect for next year.
Yes. So I don't say that Southern Cal is disappointing at all on the demand I think what you're seeing right now in our numbers and what we've talked about even in the previous quarters is we knew deceleration was going to be coming just based on the supply coming right on top of us. So even though while there was that shift of supply kind of moving, the supply is on top of us in Downtown LA right now, and we feel that. But the demand is still strong for our type of product. It's just we're not having as much pricing power.
And as I think, as you go into 2020, just in my prepared remarks, We recognize that we're still going to have that pressure sitting on us in the 1st part of the year in LA. So I think it's clear to say that it's not that the demand is shifting, it's really more just the pressure that we're feeling from the supply.
Okay. Appreciate the color. And then one more shifting to the East Coast. New leasing spreads, if you kind of average of that over the full year have gone Negative in some cases are flat kind of to what I'll call maybe inflationary levels. Given the current national employment backdrop, wage growth trends, Homeownership trends, demographic trends, all the things you look at, I guess, how do you feel about the potential for those leasing spreads to maybe So you'd maybe go to like a CPI plus type of territory, in the near term based on everything we know right now, kind of the steady state economy?
Well, I guess I would tell you, I kind of opened it up, which is what we thought about kind of next year at the high level for some of those markets. But I would say the momentum for the East Coast markets has been strong, but you got to factor in just like I said for next year with Boston, We're starting to see the supply come back on us in Boston, which means just like the conversation we had in LA, we will experience some Pricing pressure that we haven't had to deal with this year, but the overall demand picture and the overall momentum that we feel On new lease growth and renewal growth is really good in the East Coast markets.
I appreciate all the color. Thank you.
Thank you.
Thank you. And our next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Hey, I guess it's still good morning out there. Good morning. Good morning. Two questions. You gave some color On revenue, the other element obviously is our expenses, which have outpaced revenue this year.
So as you think about next year and what you're seeing on the different elements that fall into OpEx, Do you think that this year's sort of outpacing revenue that's going to continue next year? Or are there some initiatives or abilities for you guys to contain such that OpEx We'll grow inside of revenue next year.
Hey, Alex, it's Bob. Obviously, we're very focused On reducing that number overall, I think if you look at our 10 year history, we've generated something that's well under 3% on Expenses and we'd like to get to that arena again. One of the things that we've talked about on these calls many times that is a Challenge for us is the 421a assets. We've made a lot of progress in the sales that we've had in reducing that rate of growth, but It does to overall same store expenses on average contribute 60 basis points of incremental growth. So nipping away at that It could obviously present some opportunities.
Michael has talked about in the past initiatives and opportunities that we will focus on there, but it's Hard to get over that real estate tax piece, although we've done a lot to make that better.
Right, right, right. But I mean looking across, all your items are sort of 3% plus. So it's not just the real estate tax, it's
No. It's not just real estate taxes, right? There are some things that I Certain things that are one time in nature, for instance, that are in 2019 or might be one time or less frequent, like the ground lease revaluation that's in other expenses and the HOA kind of holiday that was in other expenses that you wouldn't expect necessarily to recur. We're not giving you 20 2020 guidance, so I got to say that in 2020, there might be some things that pop up that aren't, that could go the other way. You heard us and others talk about the benefit in real estate taxes that we saw in Seattle this year, that may not repeat itself.
We're very focused on making sure that we can manage those
And then the second thing is, and Mark, appreciate your upfront comments on Rent Control in New York. As you look to next year, it seems like Albany is taking that CPI plus rent cap to try and have a Market rate rent control, so which would not have as best as we can see from the press reports, We're not of all the flexibility that California has. What do you guys see differently and how you and the industry would approach Albany in the upcoming legislative year versus what happened in the prior year.
Well, I'll start by saying
I don't think anyone on this call, myself included, is in any position to Predict what a politician will do or what the political system will do in Albany or elsewhere. So it's hard to say. I've read the same things you've read, Alex. And we're working with our advocates in New York. So what I'd say is, I think there needs to be more dialogue than There has been so far and we're working to do that.
I know that the people we have on the ground talk a lot to policymakers, but I'm not sure those channels couldn't be open even wider. I do know that there's been some conversations even from the Mayor's office about whether the first stage of rent control is working very well in New York. I think there's already things that make you wonder about whether this is such a great idea, and I would hope that policymakers would take that into account before considering or passing new rules on top of the already onerous regulations passed back in June. So What I hope for the most is to have the industry have a seat at the table for that dialogue and that's what as a member of the industry and as a big owner in New York will push for. Thank you.
Thank you.
Thank you. And our next question comes from Hardik Goel from Zelman and Associates. Please go ahead, sir.
Hey guys, thanks for taking my questions. We've heard a lot about cost controls In terms of on the personnel side where you essentially have less employees, maybe you pay the remaining ones more and you essentially are leveraging technology to achieve that. You talk a little bit about how much of that you're doing and what you see the future of that over the next 2 years? How does that play out?
Yes. So I think I said over the course of the next couple of quarters, I think you'll see us talk more specifically around some of the financial Kind of impact from some of these initiatives. I would say sitting here right now, it's pretty clear that several of these initiatives combined We're ultimately going to create some operating efficiencies in the portfolio. For us, the goal of doing all these initiatives has really been around better Experiences for our employees and residents, and we expect that the efficiencies that we gain on the operations staff that will impact staffing level Well, really just happened through attrition in the workplace. The initiatives on the sales side of the business are already starting to show time saved, Definitely offering our customers and flexibility and convenience.
And on the service side of the business, right now, our expectation is that our dependency and reliance On contractors and overtime that we pay out should start to be reduced over time. So I think it's clear in the next couple of quarters, we'll start putting Some more financial numbers in front of you guys. But over the course of the next couple of years, the operating efficiencies will start to
And just a quick one on utilities as well. Which line items will this affect overall, I guess? And then a little bit on utilities, are you guys doing anything to cut the
Yes. So just to make sure I understood the question, kind of what's driving the utility costs in the quarter year to date. And that's mostly it's been pretty self contained In the gas and electric component, most of the increase we were slightly higher in the Q3 was coming from some garbage and trash related expenses, which is predominantly from the West Coast, from a couple of markets in the West Coast.
Got it. And then I meant to ask which line items are most affected by the efficiency savings over the next 2 years that you mentioned?
Yes. So the to what the payroll, obviously, which Michael alluded to, but also repairs and maintenance is where you tend to see most of that contract labor Flow through and oftentimes that's a line item where you might see some of that as we on the service side. I Michael, if you have anything else? Yes.
I think, look, some of the initiatives around the smart home technology or even smart thermostats being put in the unit It can help reduce some of the vacant electric costs associated with it, but those aren't significant dollars for us That are going to really equate to anything meaningful for us to be talking about.
Yes. On the utility side, because you did call that out specifically, We've done almost every LED type lighting project we can do. So some of the low hanging really all the low hanging fruit is gone. We have a lot of solar installs, and some of which are actually going to be pushed into the beginning of next year that we're going to do in this quarter and Q4. That stuff will benefit us too.
But Yes. On the utility side, it's this sort of the sustainability thought process we have that we just put a new report out on our ESG efforts. There's a lot in there about it. That's going to help us on the utility items, but it takes some time to kind of get through the numbers. But again, I think we've done all the easy stuff and now we're on to things like solar and Cogen and other things that will save us money and be good for the environment, but take a little time to manifest.
Thanks guys. That's all.
Thank you.
Thank you. And our next Question comes from Wes Golladay with RBC Capital. Please go ahead.
Hey, good morning guys. So you sold about $1,000,000,000 this year, that's the plan and you still have some non core assets to sell, but you did mention potentially using leverage to buy assets. I'm trying to get the magnitude, if you will be an acquirer next year. Is it Is it fair to assume that you've done the heavy lifting on selling the non core assets this year?
Yes. I mean, we when you have a $40,000,000,000 There's always an asset or 2 that is becoming obsolete for whatever reason where the neighborhoods change, the dynamics change. So there will always be an asset here or there that needs selling, but it isn't significant. It isn't like we have this incredible burden where we're carrying a whole market we don't want to own or anything like that. It's just not the And you can evidence that most by seeing how little dilution in this case, and this year none that we have, because we're basically buying and selling in the same markets and Just buying newer product versus the older.
So next year, will we buy more than we sell? We'll see and that mostly depends on the competition. It isn't that we've been hesitant to start raising debt and buy assets. It's just that we haven't been able to find enough good product at prices we're willing to pay in order to fire up that acquisition machine. So it's really more about us spending the next 2 or 3 months Seeing if there's enough in the pipeline, for us to really buy in order to kind of have a net acquisition year in 2020.
Okay. And then looking at the turnover, that just continues to trend lower. It could kind of surprise a lot of people. And when I look to next year, I'm thinking, well, the smart home technology is going to be more robust next year, more people are going to adopt it. Does that actually drive turnover lower?
Is that too aggressive of an assumption on my part?
No, I don't think the correlation is there. I think lifestyle changes of our resident base is really the probably most Significant catalyst to the reduction in turnover. And we've proven time and time again that turnover is correlated to resident satisfaction. So as we keep focused on Precinct our overall resident satisfaction, we should still continue to see reductions in turnover. How much lower it can go?
I don't know. I would think that it stabilizes here at some point, but like I said, every quarter we continue to inch that down a little bit. Thank you.
Thank you.
Thanks. And our next question comes from Nick Joseph again with Citi. Please go ahead.
Hey, it's Michael Bilerman here with Nick. Yes, Mark, you mentioned Prop 10 2.0. You had, I think it was $4,500,000 Last year that you spent on that campaign, you added that back to normalized FFO, even though I would argue You're in the business and you spend money to advocate for your business, that's a business cost. Putting that part aside, because that's in the past, I would assume your costs are going to continue as rent control initiatives and it's going to happen next year in California and it's going to go across the U. S.
How should we think about the money you're spending? How much it could be? And how you're going to treat it?
Yes. Good question. Thank you for that, Michael. So you can see on Page 25 that the amount we've spent this year on advocacy is $200,000 versus a number last year that I think approached 5 actually at the end of the day, mostly California related. So there's great variability.
It's like a lawsuit. We sometimes settle a lawsuit and get money. We sometimes settle a lawsuit and pay money. They're not important to the core operations of the business. They're not I don't think you're I don't think you can get
any money back on this one.
Yes, yes. Yes, they're not. We're just telling you right there. So what I'd tell you is what we'll do And what we'll promise to do is be very clear like we are on Page 25. We'll tell you what we're spending.
Whether it's in or out of norm FFO, we'll convene our Chief Accounting Officer, our very capable CFO and our Audit Committee will decide what we're going to do next year. But I agree with you that at some point, if you have large recurring every year costs, and they are just part of your business. For us, this has been unusual. Last year was I don't remember any year like that and I've been at the company for 20 plus years. That's when we call out something is when it's unusual and to us not affecting the run rate of our cash flows.
It's a
good question.
Thank you.
And then as we think about the acquisitions, and you've been fortunate that you've been able to match them perfectly with Dispose and not have any dilution which you had in years past, where you've been calling higher cap rate assets. You mentioned early on about IRRs and thinking about rent control and how the deals that you bought are going to pencil in the high How what is in that IRR analysis over the next, let's call it, 5 years from a fundamental Can point there, we're obviously extraordinarily long in this economic cycle. There's a significant amount of Caution flags that are out there right now from an economic and a global perspective, are you modeling any sort of slowdown In that IRR and when are you doing it?
So the way we think about and I'm going to use rent growth As revenue growth is the kind of biggest thing you're thinking about, biggest variable, we have a good sense of what will happen in the next We know the markets we're going into. We know if there's a bunch of supply. We know if the prior owners run the asset well and whether rents are too low, maybe they've been They have nominally high rents, but high concessions. So we understand the existing rent roll in the market and then you'll get a number that's very specific as a result of that. So I'm looking, for example, at our underwriting for Denver and our number for rent growth in year 1 is slightly negative.
And it's slightly negative because we understand what's going on in that submarket and we have priced the deal to that. Over the long haul, we pick a number that we think It's appropriate. We don't pro form a a year that's going to be negative even though we know there's one there, just like we don't pro form a year when it's 6%, even though we know there's going to be one of those. So in the near term, what we do Michael is we really think hard about what's going on and for the 1st year or 2, we feel pretty good about that on revenue growth. After that, we're putting an average out there.
It's usually somewhere around 3, saying to ourselves there'll be years we'll be way low on that number, it'll be years we'll be way high and this will be a good average. Now we spent a whole bunch of time thinking about the cap rate at the end of the deal and that's kind of the thought process that the team has.
And then I want to just come back on your financing comment about maybe using some additional leverage. Do you think the debt markets Not only availability of capital, but the cost of that capital being so low, both on the secured and the unsecured side Is perhaps driving, uneconomic decisions that could come back and bite us from a basis perspective?
So if you're talking about us specifically being EQR, I'd say no, with the thought being that we're talking about relatively small amounts of money relative to the size of the company. Do I think there's excesses in the sovereign debt market or in what the central banks are doing? I think There's a lot of people that think that's true. I mean, there's a lot of interesting and unusual things going on in those markets, in the short term funding market, things like that. But I don't feel like we're putting the company at any risk adding several $100,000,000 of debt to the balance sheet and adding 100 of 1,000,000 of high quality assets.
That feels fine to me.
Yes. I should know whether there was excesses that you see in the apartment acquisition market given the amount of Cheap financing available, where you're seeing assets trade at levels that, perhaps you would want to own them long term?
I wonder if some of that isn't the equity. I mean, I hear you on the debt, though the debt has been cheap for a while. This isn't like a new factor really. I think what really is going on is you got a hard asset class with stable to good operating performance, good demographics that's easy to understand and we are to some extent a safe haven. We're also a substitute for fixed income.
And I think a lot
of people look at apartments and the private side is all over it because they feel all those things. So I think a lot of the positive you see and that may be why development Capital is a little less available equity because that is perceived correctly as considerably more risky, whereas buying a stabilized asset in a great market at a 4.5 cap rate Feels like good trade, not going to turn out bad.
Okay.
Great. Thanks for the color and we'll see you in a few weeks.
Yes. Thank you.
Thank you. And our next question comes from Haendel Juste with Mizuho. Please go ahead.
Hey there. So I had a
few questions. First, I guess, given the low cap rates you cited and the challenge of putting capital to work for new acquisitions here in your core markets. What's your current view today or more recently with the Board on expanding the portfolio here to perhaps Some vibrant secondary markets that offer higher returns, not too dissimilar from say Denver, maybe Austin, Portland, Salt Lake. And then what type of yield or IRR premium would you require to go into those markets versus say your more established core markets?
Yes, great question. Thank you for that. We had our regularly scheduled Board meeting a few weeks ago and at that meeting we talked about market allocations. And I think you've been around a while. So in our book we have a Page, usually it's Page 16 of our investor book.
We talk about other markets, our markets and other markets and their relative attractiveness. And the example you gave of Austin, Austin screens particularly well. The issue to date has been that Austin trades as good or better at the moment as some of our other primary markets do. And we're not sure that makes a lot of sense and that IRR is defensible. So, would we go into another market?
Is that possible? Sure, that's possible. But in the near term, what we're trying to do is Do things that make sense both on the real estate side, but are good on the FFO side. And the buy, there's an asset that traded recently in Austin. It was a good asset that's a sub-four percent cap rate.
I don't know why that's a good idea from our perspective. So for us, it's both having these great demand and Good supply, statistics like Austin has, especially on the demand side, but it's also just a matter of price. There may be markets we'd like to be in. They're just Price for our entry yet, they're just too expensive. So I can't give you an exact premium, but there is a cost to us going into a new market because until we have a good enough Size, we don't have as good a coverage.
We don't have the same number of people in that market doing maintenance items, for example, and oversight. We have people on-site doing their jobs, but just we don't have an on-site human resources manager for Denver. Those sorts of things, there's travel costs And then as you build it out, you have those people on-site. So I would tell you that it'll need to just get to be a market with a little higher Cap rate for it to be more compelling.
Got it. That's helpful. Thanks, Mark. And then I guess the perceptual Potential risk of going maybe back into some market that you exited in 2015, I believe. I know that you had a largely suburban older portfolio And I think you're a bit more concentrated or focused on more urban locations, but just curious how that weighs into the consideration as well.
Well, I mean, the good news is this team has been here a long time. Some of us are newer to our jobs, but none of us are new to the company. So We know that thought process. We understand it. Some of the markets we exited, many of them were delighted to have exited.
We were in Austin many, many years ago with a very different suburban portfolio. And to me, that's an argument like Denver. We didn't leave the Denver market. We left The specific Denver assets we own. So I feel like if the market's changed, its circumstances have changed and we can explain it to ourselves, to the Board and to you, then we go back into that market.
And if we can't, we wouldn't and nothing would change our minds on that.
Okay. Okay. And One last one, I think you mentioned $500,000,000 of potential new development starts on an annual basis, at least near term. I guess I'm curious, Should we assume these will be all within the existing core markets? And then given the development challenges, the rising cost, yield compression you outlined earlier, How confident are you of meeting that figure?
And then should we be expecting similar low 5 stabilized yield on that? Thank you.
Hi. Well, next year, we'll see whether we get to 500,000,000. It was more of a spend number. So we have existing assets under construction, especially the Alcott Deal in Boston that are going to be a significant amount of cash next year as we get closer to completing it. So whether we start exactly 500 I'm not sure, but we expect to start modestly more development than we have, say, this year and last year.
But I can't tell you, it won't be outside our markets. It's not a great idea from our point of view to have our first asset in the new market be a development deal. We'd rather buy some stabilized assets, make sure we understand what's going on. And then there's a development opportunity. Like Denver, we're open for business to do development for sure in that market.
But I don't expect this to enter a new market by doing development.
Thank you.
Thank you.
Thank you. And our next question comes from John Guinee with Stifel. Please go ahead.
Hey, all. Good morning. This is Aaron Wolf on for John Guinee. I just had one you provided a great amount of commentary on your Development pipeline and your project list and you may have covered this and I apologize if you have. Does the $489,000 a unit For the Edgemoor project, does that include a capitalized ground lease?
So it does include a ground lease, but let me give you Some statistics, just bear with me a minute as I find the correct pile here. But I gave you a cap rate, I believe, was about a 5.9% cap rate. And that cap rate would go down to a 5.1% if we had bought the land. So I'm going to take that question in a different way. Imagine we had bought the land, the Per unit cost of the land would have been about $100,000 a unit in our estimation, and that would have driven down the yield from 5.9 to 5.1.
So that gives you an idea. We always think about ground leases as financing tools. So the answer is yes, it's in our numbers and it's correctly accounted for as a GAAP matter. But when we think about it at the investment side, we're thinking about it as a financing and making sure we're comfortable that if we had bought the land in fee, it's Still a good transaction.
Okay, great. Thank you. That was my one question.
Thank you.
Thank you. And we have no additional questions at this time.
Thank you very much. We appreciate everyone sticking with us on the call and we'll see you around the conference circuit.
Thank you all for your attention. This concludes today's conference. All participants may now disconnect.