Good day, and welcome to the Equity Residential 3Q Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Marty McKenna. Please go ahead, sir.
Thank you, Jonathan. Good morning and thank you for joining us to discuss Equity Residential's Q3 2018 operating results. Our featured speakers today are David Nethercutt, our CEO Michael Manelis, our Chief Operating Officer Mark Grauerl, our President and Bob Perrozana, our Chief Financial Officer. Please be advised that certain matters discussed during this conference call may constitute forward looking statements within the meaning of the federal securities law. 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.
And now, I'll turn the
call over to David Nettercutt.
Thank you, Marty. Good morning, everyone. Thanks for joining us for today's call. As we reported in last night's earnings release with the primary leasing season in the rearview mirror, We're pleased to now expect to deliver same store revenue growth for the full year of 2.3%, which is at the very top of the guidance range we provided Our most recent earnings call in late July. Achieving this level of growth is the result of a couple of primary drivers: The continued strong demand across the board for rental housing and the relentless attention to customer service delivery each and every day by standing property management teams.
These two factors combine to maintain very high levels of occupancy, record setting resident retention and very strong renewal rates, All despite elevated levels of new supply across our markets. We could not be more proud of our teams across the country for the outstanding jobs they do, making living with Equity a remarkable For each and every one of our residents, I'll now ask our Chief Operating Officer, Michael Munoz, to go into greater detail on what we are seeing across our markets today.
Okay. Thank you, David. So let me begin with a huge shout out to our On-site teams. The 3rd quarter represents our busiest activity period with just over onethree The entire year's renewal and new leases taking place. The team's performance and relentless focus on delivering remarkable experiences to our residents Delivered outstanding results for the quarter.
With just over 24,000 transactions completed during the Q3, We achieved a 5.1% increase on renewals and a 1.2% increase on new leases signed. This, along with maintaining our occupancy at 96.2%, has delivered 3rd quarter revenue growth of 2.3%, Which, as David said, now gives us the confidence that our full year 2018 revenue growth will be 2.3%, which is the top of our previous reported range. I would also like to highlight that the 16.4% turnover for the quarter It's the lowest Q3 turnover reported in the history of our company. We renewed just over 500 more residents in the Q3 of 'eighteen Versus the Q3 of 2017 with roughly the same number of expirations in each period. During the Q3, we also achieved our highest Service related surveys completed in the Q3 came in with an average rating of 4.8 out of 5, And year to date, we have increased our all time high online reputation scores with both Google and Yelp.
Both of these are by far the most important customer review platforms to our prospects. Bottom line is that service and leasing teams have been focused delivering remarkable experiences and their efforts are paying off. Before I move to specific market commentary, I would like to Start by saying that the overall trends we discussed last quarter have continued. Our average resident tenure currently at 2.2 years Continues to grow as a result of our exceptional renewal process, great service and the macro trends of millennials deferring life Change events like marriage, children and buying homes. Strong demand fueled by good job growth and record low levels of unemployment in our market That's aided in the absorption of the elevated supply.
So let's start with Boston. Full year revenue growth Expectations of 2.4% is slightly above the expectations we shared with you on our second quarter Yes. Our Q2 call primarily due to stronger base rent growth, which has continued into October and stronger renewal increases. This performance happened at the same time that the majority of the 2018 new supply was delivered in the urban core And went head to head with most of our NOI. Our revised assumptions for 2018 include occupancy at 95.8%, A negative 0.8 percent on new lease change and achieved renewal increases of 4.9%.
Deliveries will be light in the urban core over the next year, which should continue to bring modest pricing power to the market. Moving to New York. Our current expectation for full year revenue growth has improved to 70 basis points. This is 50 basis points higher than the expectations we shared with you on our last call. This outperformance is a large contributor To us achieving the high end of our overall company's same store revenue guidance.
Our full year assumptions for New York Include occupancy at 96.5%, a negative 2.2% new lease change and achieved renewal increases of 3%. Concession use in our portfolio remains extremely targeted and is well below both last year and all expectations throughout the year. During the Q3, we had move in concessions being issued to less than 10% of our total applications in New York. This resulted in only $260,000 in concessions in the quarter as compared to $830,000 in the Q3 of 20 20 19 deliveries will be significantly lower than 2018 with more than a 50% decline expected. The deliveries will continue to be concentrated in Long Island City and Brooklyn, where to date, we have not seen a significant impact to our operations.
In fact, our base rents in New York today remain strong, and sitting here in the last week of October, they have not yet started their normal seasonal decline. As we think about DC, there is not much news to report. Positive economic conditions continue to aid the absorption of new supply, The overall market continues to demonstrate very little pricing power. We have no change to our full year expectations of 1.2% revenue growth. Our assumptions include full year occupancy at 96.2%, a new lease change of negative 2.1% And achieved renewal increase of 4.2%.
2019 will mark another year of elevated supply with just over 12,000 units expected. Moving over to the West Coast. Seattle is expected to deliver 3% revenue growth for the full year, Which is in line with the guidance we issued in July. Our full year assumptions for Seattle include occupancy at 95.7, A negative 1.8 percent new lease change and achieved renewal increases of 5.7%. Seattle Supply is expected to slightly increase next year to just over 8,000 units.
But the CBD, where we have approximately 40% of our NOI, Should experience some relief in 2019 as the concentration of the supply shifts to the Bellevue Redmond submarket where we have 24% of our NOI. On the previous calls, I mentioned the outperformance of the San Francisco market being a contributor to the upward revision of our revenue guidance. Not much has changed. We expect full year revenue growth to be 2.9%, which is consistent with our July call. Our full year assumptions for San Francisco include 96% occupancy, a positive 0.3% new lease change And 4.9 percent achieved renewal increase.
Looking at the overall market, the tech companies continue to grow And the Bay Area is on track to surpass the 10 year high of 35 IPOs that was set back in 2014. There continues to be daily announcements highlighting the expansion of companies in this market. Office vacancies continue to move lower, And all of this should support positive fundamentals in our space. The deliveries for 2019 in San Francisco are Expected to increase by about 2,500 units to 9,500 with over 40% concentrated in Oakland and East Bay submarket. At this point, it is still unclear exactly what the impact from the Oakland deliveries will be, Sort of like the Long Island City situation on Manhattan, although this will have considerably fewer units coming online.
Moving down to Los Angeles, we expect full year revenue growth to be 3.6%, which is up 20 basis points from our July guidance. Our full year assumptions are 96.2 percent occupancy, 6.1% achieved renewal increase and 1.4% new lease change. Construction in the market continues to face labor shortage issues, which has pushed 2,000 units from 2018 into 2019. We now have 2018 showing just over 9,600 units and 14,200 units being completed in 2019. It is likely that we will see some of the expected 2019 deliveries be pushed into 2020.
That being said, the combined 24,000 units over the 2 year period has not changed, and this total is spread out over a huge geographical region. Remember, we tend to feel the impact from new supply when it is delivered in a concentrated fashion in direct competition to our assets. For example, in 2019, our San Fernando Valley portfolio will have exposure to new supply for the first time in a while, But that new supply will have very little direct impact on our West LA portfolio, which is many miles away. Regardless, the overall market in LA continues to demonstrate strong demand, which should continue to aid The overall absorption. Moving to Orange County, our full year revenue expectations have modestly increased 10 basis points to 3.6%.
This is tied with LA for our 2nd highest revenue growth market for the year. Our full year assumptions have occupancy at 96%, achieved renewal increases of 5.5% and 0.3% new lease change. 2019 outlook for deliveries is about 500 fewer units at just over 3,500 units expected. And last but not least, San Diego. Our full year revenue expectations remain unchanged at 4%.
This will be our highest revenue growth market for the year. Our full year assumptions have occupancy at 96.2%, Achieved renewal increases of 5.9% and 1.6% new lease change. 2019 outlook for deliveries is about 700 fewer units at just over 3,000 units expected. So now let me close with some color on 2019. While we are not issuing guidance at this point nor will I be sharing any specific numbers at a market level, I do want to share some general thoughts on our guidance process and our preliminary view of the 2019 market performance.
To begin, we have 2 different approaches Creating our guidance. 1, that is bottom up completed by the on-site and property management leader and the other that is a top down approach completed By our revenue management and senior leadership team, we are in the very early stages of both methods and both methods consider supply, employment And our current posture in terms of renewals, new lease rates and occupancy. Today, we anticipate That both occupancy and Achieve renewal increases will be very similar or slightly better next year. We also expect to see some improvement in our new lease change as modest pricing power continues to grow in many of our markets. To bucket our very preliminary expectations today, we would say that California markets, excluding any impact from Proposition 10, May deliver similar results in 2019.
Seattle will likely be less and moving to the East Coast, New York should be better. Boston is on track to be slightly better and DTC will most likely be about the same. With that, I will turn the call over to our President, Mark Parrell.
Thank you, Michael. As we expected, we had a busy Q3 on the investment side. We mentioned last quarter that we plan to reenter the Denver market After exiting that market in early 2016, we did so this quarter by acquiring 2 assets at a total cost of $275,000,000 As you may recall, we left that market because we had a portfolio that was primarily garden, surface park older suburban products. It was a portfolio exit, not a market call. We have kept our eye on Denver and continue to believe that in the right locations and prices, This market can produce excellent long term returns.
We see in Denver many of the same attributes we see in our coastal markets And we think will lead to higher long term returns, such as single family home prices that are high as an absolute matter, As well as on a relative basis as compared to income, the creation of many high paying jobs over an extended timeframe, A history of strong rent growth and a market with a high quality of life where our target millennial demographic wants to live, work and play As evidenced by strong population growth in the 25 to 34 year old age cohort, and all that comes along with a fiscally sound local and state government. So some specifics for the assets in Denver. One asset was acquired for $140,000,000 which is about $395,000 a unit. The property was completed in 2017 and is a high rise in the Uptown neighborhood near downtown with a 96 walk floor. We expect a 4.7% cap rate in year 1 and believe we purchased it at a modest discount to replacement cost.
The other Denver property is a midrise located in the same uptown neighborhood. The property was acquired for $135,000,000 or about 364,000 a unit was built in 2017 and has an 83 walk score. We expect a 4.6 Percent cap rate in year 1 and believe we also purchased it at a modest discount to replacement cost. We also acquired a high rise asset in Boston For $216,000,000 or about $572,000 per unit, it's located in the South End neighborhood. It was built in 2015, Has a 97 walk score and complements well our current Boston portfolio.
We expect a 4% cap rate in year 1. And while we acknowledge that's a relatively low cap rate, we feel that it is a good trade as it was used it was funded using proceeds From the sale of an asset on the Upper West Side of New York and a disposition yield of 3.9%. This property sold for $416,000,000 or about $820,000 per unit. We This property is in the burn off period for the 421a tax abatement program. A quick note on our strategy in New York.
We have significant have a significant concentration on the Upper West Side of Manhattan And felt it prudent to reduce our concentration in that submarket and our exposure to outsized real estate tax increases in the future. We continue to believe that the New York market is an excellent long term IRR performer as evidenced by the return on the asset we just sold. You can expect us to buy and build in New York as opportunities present themselves. As always, we will continue to review our portfolio, both in New York and elsewhere, With an eye to maximizing our long term total return, including our cash flow growth. Before I conclude my remarks, As you all know, our friend and leader, David Nethercutt is retiring January 1 after a remarkable 25 year career at Equity Residential.
On behalf of our investors, our Board and the entire Equity Nation of employees, current and past, thank you, David, For your leadership and even more for being a person of great wisdom and integrity, whether it was taking advantage of capital allocation opportunities like Archstone, Navigating us safely through the shoals of the credit crisis, on your work every day to improve our operations and build our team, you always made the right decision in the right way. I also thank you for all the time and effort you've spent mentoring me over the years, and I look forward to having you continue to contribute to Equity Residential as a Board member. You've had a great ride at Equity, and we wish you well in the next chapter of your life. And now, I'll turn the call over to Bob Garachana, EQRC's Chief Financial Officer.
Thanks, Mark, and good morning. With Michael having covered our upward revision to same store revenue guidance, I want to take a couple of minutes to talk about same store expense guidance, Full year normalized FFO guidance and capital markets activity. As is our custom with our Q3 reporting, we've raised our same store guidance from We provide, sorry, our same store guidance from ranges to single points. For same store expenses, we expect to produce full year 2018 growth Of 3.7%, which is effectively at the midpoint of the guidance range we provided during the last call. Before I move to Specific categories, I'd like to highlight that for the 1st 9 months of 2018, same store expenses increased 3.4%.
As a result, our guidance implies a higher expense growth rate during the Q4 2018. This is due to a low comparable period for the same quarter last year. Now let me provide some color on the drivers of full year same store expense growth. On property taxes, we produced growth of 4.1% through the 1st 9 months 2018. We now expect our full year property tax expense growth to be approximately 4% or at the low end of our prior expectations.
We continue to have success with our appeal and refund efforts this year relative to our prior estimates. As a reminder, Our prior property tax expectations already contemplated the sale of the New York assets subject to 421A in the 3rd quarter as Mark discussed. As such, a 30 basis point reduction to property taxes was already included in our 2nd quarter range of 4% to 4.5%. Now moving to payroll, our 2nd largest expense category. For the full year, we continue to expect payroll growth around 3.5%.
The
job market remains highly competitive with near full employment. We, like many employers, continue to experience wage pressure in order to retain our best in class On-site employees and continue to provide superior resident service. In our earnings release, we gave full year same store revenue guidance 2.3%, driven by strong renewals, low turnover and high occupancy as Michael discussed. With same store expenses in line with prior expectations, We now expect to produce same store NOI growth of 1.7%, which is at the higher end of our previous range. This contributes approximately 1 additional penny per share to full year normalized FFO.
We've also updated our guidance for normalized Interest expense and corporate overhead, which we define as property management and G and A. We now anticipate a $0.01 improvement in normalized expense driven by lower than expected floating rates and later timing in our expected debt raise. For normalized corporate overhead, we expect to come in at the Top end of our previous range resulting in a $0.01 reduction to normalized FFO due to compensation expenses at the higher end of our earlier estimates. The net result of all of it is a $0.01 increase to our normalized FFO guidance midpoint, moving it from $3.25 per share To $3.26 per share. All in all, revenue expectations have improved, expenses remain in line And the midpoint of our normalized FFO guidance has modestly increased.
Quickly on the capital markets front, you saw in the release that we prepaid a $500,000,000 Secured debt pool due 2019 with our line of credit. Our guidance contemplated prepaying this relatively expensive debt and we were able to do so without penalty. We expect to term out all or portion of this debt in the upcoming months. With the majority of the anticipated offerings hedged at very favorable treasury rate, We would expect to issue at a rate well below the level of the debt that we prepay. With that, Jonathan, I'll turn it over to the Q and A session.
Thank
We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Juan Sanabria with Bank of America.
Hi, good morning. Thanks for the time. I was just hoping you guys could give us a little bit of color on New York City And how you're seeing new lease rates trending into next year? It seems like that's a big variable. If you could just talk to the range of what's expected for New York City in particular given the meaningful drop off in Supply, is that a market that's going to accelerate quickly or is that more of a 2020 story?
Yes. So this is Michael. So I think I I'm going to stay away from kind of the specifics or ranges at a market level. I will just tell you though in New York that while we do see this marked reduction In the supply, the 50 basis points, we like where the base rent growth is on a year over year basis today, holding strong into October. You are going to come up against the wave of renewals for all of the deliveries that occurred this year.
So it's not like you're completely out of the woods, but You have forward momentum and New York definitely will be better next year or should be better next year than where it sits today Just because of that forward momentum and what we have embedded into the rent roll.
Okay, great. And then you kind of gave some parameters about Supply expectations for 2019, but do you have could you provide the percent change in expected deliveries? If we look at the latest Axure numbers, it seems like some of the West Coast markets are seeing an increase as a whole. But yet you still generally feel confident outside of Seattle that things are going to improve. Is that correct?
Yes. But I think I said even like in the San Francisco market, we see about 2,500 more units coming concentrated in that Oakland kind of East Bay. So I think our process that we go through and obviously we start with this kind of active database. We look at what is competitive to us. So I think in those prepared remarks as I was going through each market, I mean, the biggest mark decline is New York City, right?
And then I would put everything else in these buckets are relatively similar and slight increase like we just said up in the Seattle and San Francisco area. I'm sorry, what was that?
Anything in the San Jose area, you mentioned Oakland that would be a concern or see a relative increase for your portfolio exposure?
No, I wouldn't say that there's really a concern. I mean, listen, there's strong demand In that market right now and even at those submarket levels, I think what's hanging out there right now is what impact Does these Oakland deliveries have on San Francisco? Will there be the draw? And I think it's too early to understand that. But there's all of the drivers are positive for the fundamentals of our business in that market.
So I think these units will be absorbed that are coming to market. And I do want to clarify one thing that because of the shift that we that I said in the prepared remarks In L. A, we do see a significant increase in the deliveries for L. A. In 2019 as compared to 2018.
Thank you for that.
Thank you. We'll take our next question from Nick Yulico with Scotiabank.
Thanks. Appreciate the commentary on 2019 on some of the revenue Drivers there. Any early look you can give on expense growth? Is revenues improving? Is Expense growth going to eat into that at all next year?
Yes. Hi, Nick, it's Bob. I mean, I'm going to Do the same thing that kind of Michael is doing and avoid any specific commentary on numbers. But thinking about the big expense categories, you really have real estate taxes, We've seen a healthy run rate and not sure that you would expect anything kind of different going forward in terms of an aggregate growth component. And then on the payroll side, we continue to be at full employment in the economy.
And so we would expect To kind of see similar levels of employment or wage pressure as we look to retain and engage our employees.
And then on New York City, you've had 6% expense growth this year, some of that is due to 21 tax abatements burning off. Can you just remind us where your portfolio in New York City is today in terms of the tax resets That have happened, what's still to come and I guess whether this issue is getting sort of better or worse in terms of expense Growth for the New York City portfolio.
It's Bob again. We currently have 14 properties in New York that are subject To the 421 program and what that means on our kind of real estate tax run rate basis related to the abatement specifically is on a full year basis, call it, $2,500,000 to $3,500,000 for the next call it 5 years. Those projects are all in different levels of abatement and some of them don't even start until Further out, but for the next call it 5 years, it's 2.5 to 3.5 on an annual basis.
Okay. And then just last question. You sold the Westend asset. It was a low cap rate. It sounds like I mean, we heard that went to evaluated buyers.
So I guess that supported a lower cap rate. I think you have 2 other assets you're Marketing for sale in New York right now, I mean, are those similar low cap rate deals? And is there also any tax abatement burn off Are there to consider? Thanks.
Hey, Nick, it's Mark. Congratulations on your new role. I'd say as Ryan commented on specific marketing activities, we're always out there putting assets on the market and doing recycling of assets through the system. But I wouldn't expect New York to be disproportionately affected necessarily by our sale activities. We've done well in the market.
You can see we got a pretty good IRR on the asset we just sold. So I think overall as we look at New York and the tax abatement assets, if you wanted to buy relatively new New York assets or build, you bought them with this abatement If we knew New York assets are built, you bought them with this abatement. Nothing really was built that didn't have this abatement on it. So the fact that we have a significant portfolio of 421a assets is a reflection of the fact that we have a significant portfolio in Manhattan. So, again, I think we've done pretty well in these assets.
Michael has mentioned some improvements in the supply picture. I think there's some optimism in our minds about New York's performance and whatever assets we'll sell, we'll sell because we get a good price and if we don't sell anything in that market, that's okay as well.
Okay. Appreciate it and thanks and congratulations on your new role, Mark. And David, best of luck in retirement.
Thank you very much, Nick. Thank
We'll take our next question from Nick Joseph from Citi.
Thanks. You continue to drive turnover lower and I know it's been a large focus, but what level of turnover do you consider frictional at which point it can't go lower and then new lease growth It becomes more important.
Yes. I mean, it's an interesting question. So I think I don't know if we're there yet, but I would say that we're getting close. I think with record turnover being recorded now for the last couple of quarters, I would expect that trend to continue. I think that the team has done a fantastic job, as I said, with our relentless focus On delivering outstanding service and focus on renewals, I don't know exactly where we're going to land, but I'm guessing that we're getting close to kind of Normalizing on the turnover percent.
Thanks. And then you did the deals in Denver this quarter. Are you considering expansion into any other markets right now? Yes. Hi, Nick, it's Mark.
The best thing I can do to guide you on that and we've Been very open to evolution in our strategic process is to refer you to our investor materials. There's a chart on Page 17 That is like a bit of a heat map that shows you what we think are our market attributes that contribute to success long term. And Denver was the highest rated market on there that we didn't know. So as we think about our markets, it's certainly possible that we'll enter other markets. But we're thinking about it in the framework of These classic characteristics that we think are good markets, which are relatively high single family costs, places where target demographic wants to live, work and play, Hi.
Wage growth markets, those sorts of things that are driving our decisions. It's Michael Billing and speaking. David, just one question for you and congratulations on your retirement and congratulations to the rest of the team in terms of this transition that was executed all With internal promotions demonstrating the bench and the leadership that you've shown, I'm just curious about staying on the Board. We've seen companies do different things where a CEO retires and then exits completely versus us staying on the Board. Can you talk me through how you and the Board came to the decision to have you stay on versus leaving?
Sure. We've had lots of discussions about that, Michael, and decided that really one size does not fit all, notwithstanding the fact There probably is best practices. It probably would have been impossible for me to have stayed on the Board if someone was coming in from the outside. I've actually hired Mark 20 years ago. He's reported going nearly directly to me most of that time period.
And so I think the general belief is that with that scenario that it would be okay for me to remain on the Board. I think I understand my boundaries. Mark and I have had a lot of discussions about what role I should play sort of going forward as well as Well, I can play for him sort of going forward. And I think we both go into this with our eyes wide open and with the belief that That will work very well. Now, will you add another independent to the Board to sort of balance things out a little bit, because arguably you are technically an insider?
Well, I'm more than technically an insider. I am an insider. Look, We have had some board quite a bit of board refreshment over the past several years,
and I expect that to continue. Thank you.
You're very welcome.
Thank you. We'll take our next question from Steve Sakwa with Evercore Investments.
Thanks. Good morning. I wanted to I know you guys aren't going to talk specifically about next year, but obviously Seattle has shown a very, very large A deceleration on your numbers, the same store rental rates gone from 6.6 a year ago down to 1.4 And I appreciate your comments about maybe supply moving to some of the suburban markets next year. But just I guess how Certainly about further slowdowns in the Seattle market in general as you look forward.
Yes. Well, I mean, I think Clearly, and you can tell from the prepared remarks that we expect Seattle will produce lower revenue growth next year. It's almost just taking what's embedded today with the rents in place and modeling it forward. I will tell you, I feel Better right now about Seattle than I did sitting here 3 months ago when we were talking about the market. We've kind of stabilized The occupancy, albeit at a lower price point, but sitting here today, our occupancy is up at 96.1%.
So we have Some growth in occupancy over the prior period, and I think we're going to kind of run this portfolio with a little bit of I think the job growth side, It remains a diverse market for job growth. We see that Amazon's got like they're back up to like the record number of open positions at 7,700 In Seattle, so I feel like there's some good fundamental things happening. We had to work through some of this supply. We're seeing some of that relief in the CBD. Now next year, there will be that shift, like I said, into the Bellevue Redmond.
I think we'll be able to kind of work our way through that With some of the expansion and strength from Microsoft, but this is just something we got to kind of let play out a little bit and I think we know how to kind of navigate our way through this.
Okay. So it sounds like things are stabilizing. Obviously, we just have sort of the natural maturation of the numbers. But From your perspective, it doesn't sound like it's getting worse from here.
No. Other than like the erosion of the pricing power that I just Alluded to it, it feels like we've kind of stabilized and we think we're in a place that we know how to navigate our way through this.
Okay. And then just maybe switching gears to development, I'm not sure who wants to field this, but just in general, as you guys are evaluating new projects and thinking about potential land Purchases this late in the cycle. I'm just curious, what are you seeing in terms of construction costs? And sort of what is your experience In terms of other developers, new projects, the pace of new starts, I mean, we clearly continue to see a push out of the current pipeline, but I'm just Sort of curious on your expectations maybe over the next 12 months in terms of new starts given sort of stabilizing market, but certainly rising construction costs.
Hey, Steve. It's Mark, and David may amplify my answer a little. Just to answer the question on costs, what we're seeing is generally 4% to 8% hard cost escalation with the 4% to 6% number more of the East Coast and the numbers in the 6% to 8% range being more Seattle, San Francisco and Southern California. We do look across our markets and we go to events that are industry events and hear Developers speak to the pressures they're under, both under in terms of hard cost escalation, the tariffs, high land costs, The slower growth we've seen in rents of late, not keeping up with those costs as well as of course financing costs up. We do see construction continue to go on.
We think it is abating, but not in Some material sense except in New York, as Michael alluded to. So we do think these developers are under significant pressure. We do think they're building to IRRs that are from our perspective too low. A lot of the product that was being built is good product Maybe his product we'd be interested in buying at some point in the cycle. But at this juncture, I can't tell you I see some material significant decline across the board, Again, except in terms of New York City.
Okay. That's it for me and congratulations to both of you and good luck.
Thank you very much. Thank you.
We'll take our next question from John Pawlowski with Green Street Advisors.
Thanks. Curious, some
of your office REIT peers have been pounding the table on An inflection point in DC demand and I know multifamily supply is still high. Curious if you're seeing any inflection points From fiscal stimulus, defense spending, where big employers are starting to enter the market.
Yes. So this is Michael. Although I'm trying to see if I can get you the foot
traffic count. I think the overall
market right now is showing increase in demand. I'm going to see if I can grab that percent. So for the month of September, our foot traffic was up 1.4% over September of 'seventeen. So call it stable to increasing what I would say is demand people willing to take the time to come in and take a tour with us. It's still not demonstrating the pricing power that we need.
So I do think there's this Stable, improving demand component that's aiding in the absorption of the new supply, but nothing that's really giving us a position for pricing power. Okay.
D. C. Is kind of like New York is a magnet for capital and cap rates Pretty low and at least for the near term growth prospects, the cap rates seem irrationally low perhaps. Curious how you're thinking about DC as a source of funds
potentially for other expansion markets
and how you'd kind of rank the for other expansion markets and how you'd kind of rank the return prospects at D. C. Versus some other East Coast markets you operate in?
Hey, John, it's Mark. We're constantly looking at all the markets, including DC and pruning low performing assets. You can expect us We continue to do that in DC and we're certainly aware acutely of the high supply and the impact that's had on our numbers the last few years. I do want to point out DC over time has been a terrific performing apartment market and coming out of the great recession, it was it did very well for us. So it does have some countercyclical benefits.
It does have the fact that it's performed well over long periods of time. So there are things about DC that we do find appealing. Certainly, it would be great if the supply abated a bit, but at this juncture, it isn't like we think the DC in fact, we just completed An asset of 100 ks that's just started its lease up that so far is going very well in the sort of NOMA Area, so to speak, of Washington. So we like the market in many regards, but we do acknowledge the difficulties of late in terms of supply.
Okay. Thank you. Thank
you. We'll take our next question from Rich Hill from Morgan Stanley.
Hey, good morning, guys. I'm sorry if you mentioned this earlier, but I haven't heard any discussion on it. Do you have any updates from Costa Hawkins? We're hearing various different things, but I was wondering if you had any updates from the ground given it's A little less than a month away, a couple of weeks away at this point. David, Debrakit here.
Really, I mean, the only update you would have would be the things you're sort of hearing too, just the results of we see more and more newspaper editorials coming out Opposing Prop 10, we do probably see the same polling that you're probably seeing. No real updates I can give you going into now just 14 or so days away from Election Day. But generally, I can tell you we've got a we've assembled a really good team, very ably led by our senior most leader on the West Coast as well as Essex The senior leader there, and those guys have really been doing a terrific job getting the message out about What a mistake this would be to address a very serious housing problem in the state. And polling is suggesting at least initially that The electorate is understanding that
this is not the way
the one goes about addressing a very serious housing problem. So, today we're going to run through the tape on this and We feel like we've got a good message and the electric is hearing it. Got it. That's helpful. Thank you.
I want to circle back to New York City for For a second. Look, I have complete appreciation why New York City is a really attractive asset class over the medium to long term. But I'm curious if you think about New York City and supply coming down, is it just the worst case scenario coming off the table or do you really expect Growth to inflect. And I guess the question I'm asking you is how do you as an owner of multi family properties in New York City And near term maybe growth that's not as attractive as some other markets, but recognizing that medium to long term and IRR potential is still really John, it's Mark. I want to repeat back the question because you broke up a little there.
You're asking for sort of our view short and medium term on New York? Is that right? Yes, Rich. Yes. I'm going to go with that because I can't quite hear it all.
Again, we're not in a position to give you exact numbers at this juncture, but Just in 2015, this market was a 4% revenue market.
That wasn't that long ago.
We think that with the same, it's 4% next year, but we can't go back to a good run rate on revenues at some point in the near future. So We like to market short term, medium term mantra all across the board. Okay. That's helpful. I'm sorry for breaking up on you there.
That's very helpful. Thanks, guys.
Thank you. We'll take our next question from John Kim with BMO Capital.
Thanks. Good morning. The 2 stabilized developments you had this quarter indicate it's 4.3% stabilized yield. I'm wondering if that came in below your expectations. And if so, what drove this?
So I'm sorry, again, the question was relating to Helios?
Yes, Helios and the Pie 5 Brandon.
Yes, we see those assets stabilizing at a mid-five percent yield. Again, they're Still occupying possessions are burning off, all that still goes on, on those assets. So we're happy to bring those in, in kind of a mid-five Percent yield is our expectation.
Okay. And then on your partnership with Y Hotel in D. C, can you Give some kind of indication as to how much that could add to your development returns or development yield on the project?
So, it's Mark. I mean, we think that could be $800,000 or something like that to normalize FFO. It's really just to be clear, none of the numbers that we're going to show you as to occupancy and stuff on the development page have anything to do with why hotels occupancy Temporarily of units in that property as it does its hotel execution. So in the long run, what you'll see from us is just the 100 ks numbers It's strictly from a residential permanent residential perspective. But I think you should think about it not as affecting the development yield, but really just as affecting NFFO Next year.
Okay, great. That was my next question. Turning to your New York strategy, do you still feel like there's a need To reduce your concentration in the Upper West Side and or are you encouraged to sell more given the pricing at 101 West End?
Well, we certainly thought the pricing on Westend was good from our perspective. We don't feel compelled to Let's say lower our exposure further there. I think, again, we'll have assets in the market in all our markets at varying points in time. And If a bid came in we like, we might take it and reinvest in Denver and elsewhere. But I don't say we're here as a team, we don't feel like we're over any more to the Upper West Side, but again, we'll look at each opportunity as it comes.
Okay, great. Thanks.
Thank you. We'll take our next question from Michael Lewis from SunTrust.
Great. Thank you. You talked earlier about rising construction costs and what that might mean for supply. I wanted to ask it a little more specific to you. You haven't had to raise the budgeted costs on your active developments.
Could you talk a little about when in the process you lock in costs, how much you lock in, and if you've changed You know your process around that at all given we're in a rising cost environment?
I'm going to start and David may amplify some of this. But on, For example, the West End Tower deal, the so called Garden Garage deal, we're 90% bought out on that deal. It was a matter of great interest to both the Board and to the Investment Committee internally that we not go forward unless we were very certain about our construction costs and had an appropriate Agency. So I think we're very focused on these things. I'm not sure I have the level of detail you're asking for in each one of these deals, But as we've approached both West End Tower and 249 Third Street, which are our 2 most recent starts, we've been very focused on making sure that As much as possible, things are bought out.
And if there are some risks that we've got an appropriate contingency in them. So right now, we feel You know, comfortable, very much so with our budget.
No, that's helpful since Westend is the biggest one and has the longest lead time. My second question is more of a bigger picture question. A lot's been talked about millennials finally get into marriage age. They're older, right, but they're Getting up into their late 30s, the oldest ones. I was wondering about the falling divorce rate and if that's In any way impactful.
And if you think these things together could become a drag on household formation As that demographic wave kind of moves through the snake?
We don't think about I mean, very good question. We don't think about our assets as only attracting millennials. I mean 20% of our residents are 50 and older. We think our kind of product In the areas we're in with the urban and dense suburban amenities we have attract people of all ages. So I guess I'd answer and say that Certainly true, the millennials are aging.
Our average age in our units is 34, and the biggest cohort is 26 Right now, millennials. So we've still got people coming feeding demand. 40% plus of our units are single occupant units. So again, we see continued demand across all age groups for our product. That Gen Z group that's coming up, I'm not sure why they would Like an urban lifestyle any less than their slightly older siblings.
So I mean, we feel pretty good about all the demographic numbers.
Do you think the falling divorce rate is worth paying attention to or do you think it's mostly immaterial and
I guess that's kind of hard to say. I mean, I don't know. I mean, I don't know if that's a trend or if that's this year's number. I mean, The birth rate went down and down and now it sort of went up a little bit. I don't I said I'm not sure what to make of something when it just happens for a year or so.
All right. Okay. Thank you.
Thank you.
Thank you. We'll take our next question from Dennis McGill from Zelman and Associates.
Hi. Thank you, guys. One question with relation to the employment outlook. As you guys think about and plan for 2019 in general And maybe rising uncertainty in general about the economy. How do you think about some of the key drivers, whether it's employment growth, wage growth, things like that as you build the plan?
And what What type of ranges would you put around that with uncertainty, maybe a little bit higher, deeper into the cycle, etcetera?
Yes. Great, great questions. Just to be fair about our process, we don't have an algorithm where we input 150,000 jobs per quarter Per month, pardon me, new jobs and come up with a revenue number. It's more that on-site teams and the end market Talking about the hiring they're seeing and hearing about, as supplemented by what our investment teams think across our markets and here in Chicago. So, I don't want to get this sense that again there's some computer that's spitting out a number for us.
And again, a lot of the job growth numbers are national and our portfolio is not national. It's In certain places, so our focus is a bit more micro than maybe your question implies.
Okay. But just as you think about that micro impact, I'm sure you've looked at it that way. Is the preliminary look in the numbers that you laid out as far as directionally markets, Is that largely assuming that the employment backdrop that was in place in 2018 holds in 2019?
Yes, it roughly is. I We feel like we have in Michael's remarks, he gave you a little color on that. We see hiring occurring in all our markets, whether it's A new tech company in Boston or some other hiring relating to media in Los Angeles. So we see it across The platform, but yes, we basically in our minds right now are assuming that things we have rising wages across our resident base Combined with employment that's roughly equivalent in 2019 to 2018.
Okay. And then separately, can you maybe just discuss Sure hearing and seeing whether it's your own team or just out there in the market conversations around capital availability from the lending side as well as Capital interest in the assets in general.
All right.
Well, I'm going to take part
of this and ask Bob to speak on the lending side, but It continues to be a strong bid across the board for our assets, and for assets we think in the apartment space in general. We do think that Chinese buyers have retrenched and are a little less participatory in the market. There still are other significant foreign buyers, Canadians, Europeans and the like as well as a lot of U. S. Money still chasing the asset class.
You kind of see that in the development side, right? I mean, you see the continued development Well, as people trying to get exposure to our space and again, we think flows continue to be very strong on the equity investment side. I'm going to turn it to Bob to talk just about the debt availability part of your question.
Yes. So breaking that up and following on Mark's comment, on the stabilized You continue to see very healthy supplier or multifamily kind of with the GSE kind of lending arrangements. So, overall, costs have gone up because interest rates have gone up, but that has been very healthy and no meaningful changes versus kind of prior history. On the development side, really kind of echoing Mark's comments as well. We continue to see banks lending.
Construction lending is pricing actually has come down a little bit in terms of spread, but rates have gone up with LIBOR going up. So all in costs are maybe a push To slightly higher, but banks are continuing to lend and they're lending at relatively conservative kind of advanced rate, so loan to cost rates. What you are seeing in the space that is probably different than maybe what we saw a decade ago is alternative sources of debt capital in the form of Private equity debt funds, etcetera, that are willing to be a little bit more aggressive. And we see all of those kind of, sources providing capital to the space. As you look at that
on the development side, does that imply that development is going to last longer or prolong some of the what would otherwise be a decline in Competition from new supply deeper into the cycle?
I guess that remains to be seen, but I will say that this Capital that Bob just alluded to that's in the middle that's above the bank and below the equity is very expensive. But this tends to be very pricey capital And it's going to make the pro formas even harder to pencil. So it's not like that money is coming in at the same cost as the banks. I mean, it's considerably higher. It's double the cost or more.
So With that in mind, I think it isn't necessarily going to extend things too much, just again because the money is particularly expensive on a relative basis.
Okay. Appreciate it. Thank you, guys.
Thank you.
Thank you. We'll take our next question from Drew Babin from Baird. Good morning. This is Alex Kubishek on for Drew. Hope you guys could give us some color on the recent Boston acquisitions long term NOI growth Expectations relative to the 101 West End asset you sold?
Sure. I can give you a little color on that. So The asset is fully occupied. There's a fair amount of competition there. So our 1st year number in terms of revenue growth is Relatively low, it's around 1%.
And then we saw rent growth more averaging as it often does for us in the 3s and then a few 4s here and there, With expense growth for us, you know, 275 to 3, we generally underwrite these deals over a 10 year hold. That gives you some color there. We can certainly comment on Westend, but I would say this, I don't know what the buyer's pro form a looks like. I don't know what renovations they're going to do, With things they have in mind, other potential uses they have. So, from our perspective, we saw relatively muted Near term rent growth relatively high, real estate tax increases in the near term.
But again, at some juncture when this burns off, you can reset those units to market. I mean, there is certainly value that I'm sure the buyer underwrote in the deal.
Thanks. That's really helpful. Additionally, could you give us some On your long term unlevered IRR expectations for your Q3 acquisitions, most notably the Denver assets, we were just curious how you anticipate Denver's long term NOI growth, the trend and whether the relative residual value argument holds up compared to the coastal markets?
Yes. Good questions. I mean, we were looking at the Denver deals as mid to high 7 IRRs unlevered over 10 years, which is the way we Generally measure that. They did have we did have in our pro form a some increase to the cap rate on exit. So with the thought that even though these are high rise and mid rise construction that there would be some cap rate expansion on the end of the pro form a.
That's really helpful. Thanks for the time.
Thank you.
Thank you. We'll take our next question from Alexander Goldfarb with Sandler O'Neill and Partners.
Thank you and good morning out there. And first, congratulations David and Mark as well. Two questions for you guys. The first is just on retention. It was a question earlier in the queue, but if you guys are raising renewals 5%, it doesn't seem like you're holding back on the renewals and yet you're still retaining more and more tenants The retention is improving.
So do you think there are other things at work? Like are people just less willing to move apartments the way they were a decade ago? Or have home move outs suddenly declined? Or what do you think is going on that's allowed you to push 5% overall in a sort of 1% to 2% Mark it and still have keep more of your tenants than lose.
So this is Michael. I would say it's probably a little bit of everything that you just kind of alluded to. I would say from a reason for move out to buy home, We've actually seen very little change in our portfolio. On a year to date basis, we're actually down a little bit to 11.3% Of those that move out, citing that reason, that was compared to 11.8% last year. Put that all in, it's 200 Fewer people this year to date moving out with that reason.
I think in the Q3, we renewed, I think I alluded to it, 500 more Residence than we did in the Q3 of last year was roughly the same amount of exploration. And I think it's a little bit of everything. I think it's Deferring life changes, I think honestly, we see the relationship between high customer service And retention, and we saw marked improvement in our customer service. This is something we've been focused on, And we're seeing the efforts pay off. So I think all of those things put in the blender is contributing to this retention.
And to allude to the 5%, part of this too is, remember, when you're pricing these renewals, so we have a lot of our transactions occurring, We're pricing these renewals 3 months before and where is the rent going to be and we're issuing those renewals at that point. So I think this is demonstrating the fact that in many of our markets, our rents are up 3% year over year And you're quoting these rules and you're negotiating through this process and a lot has to do with where these residents' prior rents were in relationship to that market as well.
Okay. And then the second question is just on DC. It's been sort of a developer's paradise the past number of years. Popular speculation is that Amazon will go to Northern Virginia. Is your view that if that happens, suddenly You and other apartment landlords will benefit because suddenly there'll be an increase in demand?
Or is the fear that the developers are already waiting for this And we'll just ramp up on the development side and therefore any pickup in jobs is going to be more than offset by development.
Yes. Hi, it's Mark, Alex. I'm not sure that anything happens instantaneously. I mean, I don't think Amazon is going to open an office Immediately have 5,000 new employees and then get to 50,000 or whatever the number is. I mean, any of that happens, obviously, it's going to be more gradual.
Depending where this is, there's certainly the capability the developers have to build into this. But if it's near some of our well located assets that are there already, I think it certainly benefits, No doubt.
Okay. Thanks, Mark.
Thanks, Alex.
Thank you. We'll take our next question from Rich Anderson with Mizuho Securities.
Thanks. Good morning and congrats, Dave. Congrats, Mark. Congrats, Bob, job well done on that front. Costa Hawkins, I know where you stand on it, but have you guys done Kind of a sensitivity, such that, let's say, it gets repealed and every single municipality chooses rent control And Vacancy Control, what the impact would be on your growth profile?
Would it be 100 basis points when you look at the entirety of your portfolio? Have you done that
It's David Devica here. Rich,
we've not
Done all that math because, of course, that's the absolute worst case scenario. We don't know what municipalities that currently have rent control, How they might amend, we don't know what municipalities that don't have rent control might enact rent control, which is in fact a right they've had Since Tata Hawkins was first put into place and even before that. And you don't know what limitations they'll put on they From properties built before 1995, we're going to do properties built between until 2000 or 2005 or 2010. So it's Just a little bit of some game theory that I'm not quite sure is a productive use of our time. We do know how much NOI or current revenue we've got in markets that currently have run control.
We know how much of that might be impacted if a certain market went from 1995 to 2,005 or whatever. And so we but It's just not productive use of time to do what you suggest, but we certainly do know where we have exposure, understand how much income might be At risk if certain changes are put in place. But as I said earlier, we feel like we're in a very good place with respect to defeating Prop Ken, again, it is not the best thing for the State of California. It's the worst thing they could possibly do. We got a good team in place.
We're running hard. Going to go right up until the bitter end and we feel good about our chances there.
Okay. And then last second and last question, We're talking a lot about social changes, brought up divorce. But one thing, forgive me, but about 75% or 80% of your Portfolio now has recreational use of marijuana legalized. And I'm curious how you feel about that, probably going 100% over time. Do you have the ability to write your own laws within your communities, because perhaps there could be some mismatches within your community about people who are for it and against it, Or maybe you just let it roll and let people do their thing and perhaps they're happier and everybody's happy because of it.
What are your thoughts about Good.
That is good. No pun intended there, Rich.
Well, so this is Michael. I would say it's not that we write our laws. I mean, we have lease agreements in place. I would say almost our entire portfolio is Smoke free today. I think we have some outlier properties that we have not deployed that with.
So to me, the use of smoking marijuana is no different than cigarettes. Cigarettes are legal Today, marijuana could be recreationally legalized in those markets. In our communities, we are still smoke free communities.
Right. But they could smoke inside their apartment and run around out in the community, right?
Well, no, that It would be kind of a lease violation. So just like cigarettes, if somebody is smoking inside their apartment, neighbors smell it, I mean, that's a lease violation.
Okay, okay. Good enough. Thank you very much. Welcome.
Thank you. We'll take our next question from Tayo Okusanya from Jefferies.
Yes. So congrats from my end as well, David and Mark. Again, you guys have been a dynamic duo for a very long time. But again, with Mark now ascending to the CEO role, I'm just curious, Mark, are there any changes that you could kind of portend making to the EQR strategy Now that you're kind of in the CEO seat.
Well, I'm not quite in the seat. I'm very close to Thank you for those nice comments. We've never gotten a dynamic duo conversations before. Look, I've been at the company almost 20 years, been in the CFO role for 11. The strategy, I think, I'd say it was one that I embraced in terms of urban dense suburban product and the advantages long term of owning it.
We evolve all the time here and we certainly evolved back into Denver. So I think the strategy will naturally change over time in response to Changes in conditions and in our thought process. So, I wouldn't expect it to be static, but I don't expect dramatic changes, especially on the Core investment strategy either.
Okay. We wish you luck in the seat.
Thank you. Thank you very much.
Thank you. At this time, we have no further questions. I would like to turn the floor back over to David Nidecotte for closing remarks.
Great. Thanks, everyone. As we now close what I think is my 100th and Final earnings call, I want to thank everybody in the REIT community for your support, your confidence and probably most importantly, your friendship over the last 25 years. I can tell you it's been a great pleasure and honor to work with all of you. For those of you all seeing San Francisco in a few weeks, I look forward to thanking you in person.
For those of you that I will not speak, please know that I stepped down at the end of the year with extraordinary gratitude and with great confidence in Mark, the leadership Good team here at Equity and the Future of Equity Residential. So thank you very much and best regards to everybody. Thank