Good day, and welcome to the Equity Residential one Q 2023 earnings conference call. Today's conference is being recorded at this time. I would like to turn the conference over to Marty McKenna. Please go ahead, sir.
Good morning, thanks for joining us to discuss Equity Residential's first quarter 2023 results. Our featured speakers today are Mark Parrell, our President and CEO, and Michael Manelis, our Chief Operating Officer. Bob Garechana, our Chief Financial Officer, and Alec Brackenridge, our Chief Investment Officer, are here with us as well for the Q&A. Our earnings release is posted in the investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may 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 will turn the call over to Mark Parrell.
Thank you, Marty. Good morning, and thank you all for joining us today to discuss our first quarter 2023 results. We had a very good quarter to start the year, with same-store revenue results exceeding our expectations. While same-store expense growth was higher than we projected, due in large part to the California storms, that still left us with first quarter net operating income and normalized FFO better than we expected. In a moment, Mike will take you through our first quarter operating highlights. The strength of our revenue results point to the durable nature of our business in the face of volatile economic conditions. We continue to see substantial demand from our affluent renter demographic and moderate levels of supply in most of our major markets, with the new news in the quarter being the rapidly improving regulatory conditions in California.
Based on these continuing positive business conditions and the good prospects we see for our business going forward, during the first quarter, our board raised our common share dividend by 6% on an annualized basis. Despite the headlines on layoffs, demand feels solid. The unemployment rate, particularly for the college-educated, remains very low, which gives us a good feeling about the employability and earnings power of our affluent renter customer. In our portfolio, we are not seeing increases in residents downsizing their units or giving us their keys because of job loss. In terms of competition from homeownership, monthly costs and down payment requirements remain high in our markets, especially relative to rents, making renting a high-quality Equity Residential apartment a better value.
Only 8% of our residents who moved out in the first quarter bought a home. That's down from 12% in the first quarter of 2022. On the apartment supply side, as we have discussed with you on previous calls, we expect 2023 national apartment new supply to run at record levels. We generally feel good about the level of direct competition this supply will pose to us, given our market mix and importantly, the location of supply within markets relative to our properties. In our coastal markets, where we still have 95% of our NOI, we see very manageable competitive new supply in most markets, with Washington, D.C. being the exception, though D.C. is holding up remarkably well so far.
In the Sun Belt markets, including the Dallas-Fort Worth, Austin, and Atlanta markets, in which we are increasingly investing, and in Denver, we are seeing higher relative supply and more impact. We anticipated this when we acquired our Sun Belt and Denver properties. These properties are generally tracking consistently with our underwriting. As we look to expand our portfolio in these markets, we expect that these new deliveries will present buying opportunities for us. Mike will also discuss first quarter same-store expense growth, which was higher than we expected, especially in the repairs and maintenance and other on-site operating expenses lines. We think this growth was inflated for discrete reasons that will pass, and we continue to be comfortable in attaining our full-year same-store expense range, in part due to lower than previously anticipated real estate tax growth, combined with modest on-site payroll expense growth.
We have created at our company a culture and system that uses technology and centralization to improve the customer and employee experience and to contain our payroll costs. While the transaction markets remain unsettled, we did do a couple of deals to start the year. We sold a small collection of 25-year-old properties that totaled 247 units in L.A. for about $135 million in advance of the transfer tax increase. After the end of the quarter, we purchased a newly developed property in Atlanta for about $79 million that is currently in lease. The property is located directly on a portion of the Atlanta BeltLine that is being improved and paved. The BeltLine is a desirable amenity to our demographic and has been a catalyst for economic growth and densification across the area.
The property's economics benefit from various tax credits, and when fully stabilized next year, we expect to attain a 6.6% acquisition cap rate. Removing the tax benefits, which will burn off over time, we see the stabilized, fully taxed acquisition cap rate at 5.7%. We also love our basis in this property, which is at $288,000 per unit, and we see that as a 15%-20% discount to current replacement costs. Alec Brackenridge, our Chief Investment Officer, is here with us to answer your questions on the transaction market. With that, I'll turn the call over to Mike.
Thanks, Mark, thanks to everyone for joining us today. This morning, I'm going to review key takeaways from our first quarter 2023 operating performance in our markets, along with same-store operating expenses. As Mark mentioned, we produced very good same-store revenue growth of 9.2% in the first quarter. These results were ahead of our expectations, primarily due to continuing improvement in delinquency, along with continued healthy fundamentals in the business.
Before I get into more details on these topics, I want to emphasize that as we sit here today, the early stages of the leasing season and its setup remain strong, with year-to-date pricing trend improvement just above 3.25%, which is where we would expect it to be at this point in the year and is also consistent with expectations underpinning guidance. During the quarter, we continued to see good demand and strong resident retention that produced low turnover, stable occupancy, and solid pricing power. Despite some recent negative job headlines, our average resident remains in great financial shape, with rent-to-income ratios during the quarter for new residents continuing to hover around 20%. Resident lease breaks due to job loss and transfer activities to reduce rent, often early indicators of resident economic stress, remain below pre-pandemic levels and in line with seasonal expectations.
A resilient labor market, along with a large number of young adults choosing the exciting, attractive lifestyles our markets provide, along with the convenience and cost benefits of renting, continues to result in application volumes that are on par with the same period last year and continue to grow as expected into the leasing season. Couple this with the favorable supply position and lack of single-family homeownership competition that Mark outlined, we should be positioned for another good year. Results to date support the view we shared on our February earnings call that we expect pricing trends for this year to follow a normal, albeit slightly muted, seasonal trajectory.
Given the difficult comparison periods for 2022 for the back half of the year, along with the return to normal rent growth patterns, we expect that the first quarter will be our highest reported same-store revenue growth, with more moderate but still above historical growth in subsequent quarters. While there may be some uncertainty about the economy, including increasing layoff announcements, as I said previously, we are not seeing this impact our day-to-day operations. While we acknowledge that we are generally a lagging indicator, so far so good as we head into our primary leasing season. Now let me spend a few minutes talking about our market performance. Let's start with the East Coast. New York and D.C. are both exceeding expectations, while Boston is in line. New York was by far the top performer for the first quarter, with same-store revenue growth of over 19%.
With very limited and isolated supply, the outperformance in this market is consistent across all submarkets. Occupancy is currently 97.5%. All demand indicators continue to flash green, making this market the expected top performer for the year. Turning to D.C., performance has thus far been a pleasant surprise, with the market continuing to absorb significant new supply while still delivering good revenue growth. Similar to New York, occupancy is strong. So far all submarkets remain resilient in the face of new supply. For the West Coast, Southern California continues to post good numbers. Most notably, we are starting to see improvement in delinquency, particularly in Los Angeles, which has the heaviest concentration. As the eviction moratorium expired, we are seeing more of our delinquent residents figuring out the best option that works for them, which is either paying rent or moving out.
This activity started to pick up pace late in the first quarter, which was sooner than we expected, and has continued into April. While these move-outs are pressuring physical occupancy, it will benefit our financial results later in the year as we have good demand in the market to replace these residents with new residents that will pay their rent. Our remaining two West Coast markets of San Francisco and Seattle have posted respectable quarter-over-quarter revenue growth with good demand, but pricing power remains less than desired, especially in the urban centers of both of these markets. The San Francisco market is performing in line with our expectations, which already assumed a slow recovery. Use of concessions, mostly in the downtown submarket, remains common, along with limited pricing power.
Meanwhile, the South Bay submarket is demonstrating signs of improving pricing power and stronger occupancy with less widespread concession use based on a combination of factors that includes a greater variety of stable employers who are committed to the area, coupled with just a better overall quality of life. Heading to Seattle, the overall market continues to demonstrate a lack of recovery, which wasn't completely unexpected but is behind our forecast. Similar to downtown San Francisco, downtown Seattle lacks pricing power, with concessions being used on over 70% of our applications. The East Side, which we felt may hold up a little bit better, is still outperforming downtown but is a little more challenging than we thought based on supply pressure, layoffs, and overall just less hiring in the submarket. Amazon's May 1st mandatory return to the office date has a potential to be a catalyst for this market.
Finally, in our expansion markets, which currently make up a little less than 5% of our same-store NOI, revenue performance has mostly been in line with our acquisition performance and guidance expectations. As we expected, we are being impacted by heavy new supply in Austin, Dallas, and Denver. Atlanta remains strong with double-digit revenue growth for the quarter. Moving to expenses. We reported same-store expense growth of 7.2% in the quarter, which was slightly above our expectations.
We had always expected Q1 growth to be higher than our full-year guidance range, mostly because the growth during the first quarter of 2022 was so low, but also from pressure on a few specific items that outpaced positives in a few other expense categories. On the favorable side, we continue to benefit from good performance in real estate taxes and payroll, along with utilities, which were still elevated but lower than expected. On the unfavorable side, incremental cost and repairs and maintenance, other on-site costs, and higher than anticipated insurance costs drove higher than expected first quarter same-store expense growth. For most of these costs, we had anticipated an increase, but not quite to this degree.
Elevated repairs and maintenance was in large part due to increased outsourcing in the quarter, much of which stemmed from our own internal teams in California, focusing on the after effects of the severe rainstorms, which resulted in incremental outside vendor assistance. Higher legal and administrative costs related to faster progress in response to the expiration of the eviction moratorium, the benefit of which can be seen in our bad debt net. Insurance expense was higher due to tougher conditions than the already challenging environment we assumed on the renewal of our property insurance policy, which was completed during the first quarter. Despite this pressure, we remain comfortable with our existing guidance range on the full- year same-store expense growth.
At this point, we expect slower full- year growth in real estate tax and utilities than we initially expected to offset the overages experienced in other categories in the first quarter. Lastly, I want to spend a minute on our focus on innovation and the technology evolution of our platform. In 2023, we have a positive NOI impact of just over $10 million included in our guidance, with about two-thirds of that coming on the expense side, primarily in payroll and repairs and maintenance. This benefit will mostly be realized in the second half of the year, which will contribute to lower expense growth for that period. On the revenue side, we will continue to focus on other income items like Wi-Fi, parking, and pricing optimization. We will also leverage data and analytics to create opportunities to expand our operating margin.
Our vision is to augment pricing and renewal strategies by combining our growing data science capabilities with streamlined execution while delivering self-service solutions to our customers. We will continue to leverage our mobile platform to create opportunities to share on-site employees across multiple properties. With a fully centralized and mobile operating platform, we are in a strong position to create a seamless customer experience with a platform that continues to allow us to innovate, experiment, and rapidly scale what works across the portfolio. This uniquely positions our company to continue to create additional revenue streams while managing expenses to maintain and grow margins, even in an inflationary climate. I wanna give a shout-out for our amazing teams across our platform for their continued dedication to their residents and focus on delivering these terrific operating results.
With that, we will turn the call over to the operator to begin the Q&A session. Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. Our first question is gonna come from Eric Wolfe from Citi.
Hey, thanks for taking my questions. Just looking at your same-store revenue guidance, it looks like you're expecting roughly 4% growth for the rest of the year, maybe a bit higher if you're accounting for the better trends in bad debt. Just curious whether it's sort of the majority of the drop off happens in 2Q, and then sort of stabilizes, or if the drop off is a little bit more ratable through the year.
Hey, Eric, it's Bob. I would say that the drop off is more ratable through the year, 'cause what's going on in the 2023 kind of guidance is really more about what's happened in 2022 than the kind of core trajectory of the business. We continue to expect kind of that sequential leasing component, but you start getting into, starting in Q2 and really into Q3, difficult comp periods from 2022. You'll see Q1 as the high point and then a pretty consistent but above trend, quarter-over-quarter rate of growth as you go through the back end of the year.
Got it. Thanks. I think you said you expect the peak leasing season to play out as it normally would, I also thought I heard you say that rent growth might be a bit more muted versus history. Just trying to tie those two statements together and just try to understand if market rents are sort of growing as they normally would during the peak leasing season.
Yeah. Hey, Eric, this is Michael. I think there's two factors. One, the way that the rents are moving, and I said that albeit a little bit muted, that's more indicative to when we think about normal rent patterns of pricing trends. We came into the year with our guidance expecting the sequential builds. We just didn't think we were gonna see kinda outsized momentum anywhere near the pace that we saw last year. In terms of the setup right now, I guess I would just say the portfolio's sitting at 96.1% today. We've got great momentum. The Blended Rate for April sitting right at four. You got the sequential build and pricing trend at 3.25%, which basically positions us right where we thought we would be heading into this peak leasing season.
Yeah.
Just to supplement that, Eric, it's Mark. It's the difference between guidance. When we gave our guidance, we talked about the year being, kinda like a normal year, 2023, but maybe a little bit less, I mean, for period growth. You know, what's going on so far this year and so far this year, absolutely consistent with that expectation. It's those two terms are being used to describe different things, guidance versus so far so good this year. Got it. Thank you.
Our next question is going to come from John Pawlowski from Green Street. Please go ahead, sir.
Thanks for the time. Bob, first question's on real estate taxes. I know this year is faring well. Just be curious, as you stare out the next few years, are you seeing any early examples or hearing any chatter that cities need to tax apartments a little bit harder to fill the hole left by office and other commercial real estate sectors that are seeing impaired valuations?
Yeah, I would say that not a lot of chatter yet because we're really just focused on 2023. To your point, John, 2023 is actually better than what we anticipated. Obviously, we have that anchor with Prop 13 in California, which is helpful. As you move beyond, you always deal with that issue of revenue gaps and budgetary gaps and where people are gonna get money out of what pocket. So far, we feel good about where we are, very good about where we are in 2023, and it's too early to tell with these municipalities what they'll do in 2024, what those revenue gaps will look like and where what pockets they'll come to get it. So far, I'd say too early to tell for 2024.
Okay. Last one for me. Michael, just curious, if you could expand on the softness and pricing power you're seeing in Denver in your expansion markets? I know it's a small sample size of properties, but just curious how you're seeing fundamentals on the ground there relative to some softer West Coast markets?
I mean, I think I would carve them out a little bit different. Denver, you clearly have supply pressure sitting on top of us in the downtown sub-market, yet the suburban portfolios are actually doing pretty well. When we go into the Texas markets, we clearly are seeing just more concessions being used. You have demand, right? When you look at across all of these expansion markets, any of the reported data, including our own portfolio, which again is a pretty small subset, it's less than 5% of the company's NOI, the occupancies tend to be running lower in these kind of expansion markets for us. The one exception I would say for us is Atlanta seems to be doing a little bit better than even what we thought coming into the year.
We just don't have quite as much supply pressure on us, so we see a little bit better pricing power than what we thought.
Okay. Would you expect Denver and Texas NOI growth to lag or outpace your legacy footprint over the next year or two?
I mean, I think clearly our coastal markets right now are set up not even for this year, but just the entire setup, the demand drivers that we see, the cost of housing in those markets has really positioned them to outperform. Again, as we went into these sun belts, we knew, like, what to expect for these first couple of years. For us, the positive is that the large majority of our acquisitions are trending slightly ahead of how we perform at them and clearly in line with our expectation for this year.
Okay. Thanks for the time.
Next question is from Steve Sakwa from Evercore ISI. Please go ahead.
Yeah, thanks. Just a couple follow-ups on the top line growth. Michael, I know you don't necessarily guide to leasing spreads, new renewals or Blended, but just any thoughts on kind of where spreads might be for the year? It certainly sounded like bad debt's trending better. I realize it might be a little too early, but, you know, how much of a tailwind could that be, you know, if things continue sort of on the path they're on today?
Yeah. Well, maybe I'll start, Bob, you can kind of build a little bit on the bad debt. In terms of just the leasing spreads and kind of the guide, you know, a lot of that had to do with where we were with our embedded growth, where we were with loss to lease, capturing the loss to lease. I think I said, right as we were working through the call back in February, we expected roughly 2.25% on new lease change for the full- year, renewals right around 5%, and blended right around 4% for the full- year. When you look at where we sit today, we're set up going into our peak leasing season, where again, we're gonna do 60% of the transaction.
We're set up right where we thought we would be relative to the guidance. We have a little bit of pressure that we're doing more concessions in those downtown sub-markets in Seattle and San Francisco. That's kind of being offset by some of the outperformance we're seeing in the East Coast markets.
Yeah. Steve, on the bad debt side, just to fill out the question, you know, we certainly did better in the first quarter. We expected the first quarter to sequentially be equivalent, excluding governmental rental assistance to the fourth quarter, and we're a couple million dollars better. That equates to, you know, a little bit under 10 basis points on a full year basis, for revenue. That trajectory is continuing into April, so it's still early. So we would expect to perform better overall, but keep in mind, the 90 basis points assume that we're having improvement, so it's just how much that improvement is better relative to what we embedded in guidance.
We do think there's potential upside there, to the extent we continue to see that same pace as we play out through April into May and the rest of the year.
Steve, it's Mark. Just to help you with your model a little, the governmental payments are really key to the volatility because in the first quarter of 2022, we got about $9.5 million of governmental rental relief. In the second quarter, we got almost $15 million in 2022. We need to make up that difference in terms of improved delinquency performance in the second quarter. You drop all the way down to a little below $6 million in the third quarter, and then only $2 million in the fourth quarter of 2022. You can see that those rental relief payments are key to understanding.
The delinquency, we think, will improve the whole year, but there could be quarters where bad debt net because it's being compared to a number with so much governmental rental relief in it, is just not as good as it appears to be. The next quarter you'll see it even back out.
Okay. Just I guess second question is on sort of capital deployment. I mean, you guys did raise acquisitions and dispositions to still be net zero. I'm just curious what and maybe distress you're sort of seeing in the marketplace and what opportunities that might afford you. Thinking back to the, you know, coming out of GFC, you guys were early to buy broken condos and, you know, did the Macklowe transaction. I'm just curious if you're starting to see things percolate. I guess secondly, you know, are you seeing a big slowdown in new starts or planned starts from maybe some of the competitors and merchant builders?
Hey, Steve, this is Alec. Well, first offive all, transactions volume is down pretty dramatically. Their closings will be down about 60+% across the country, and that's pretty evenly spread among the different markets. A lot less activity. The sellers that do act now understand that cap rates are somewhere between 5% and a 5.25% . They're eager to transact. That comes from really three different types of sellers. There's the, you know, the private REITs that have the redemption requests that they have to fulfill. We're seeing some activity from them. There are merchant builders who aren't really capitalized to own property in the long run. You know, they always expect it to be able to execute and get out of the deal. A little bit of that.
You know, some floating rate borrowers who have caps that are expiring, you know, that they are not able to cover. There are sources of opportunity, but it's really been slow so far. I would expect all three of those areas are more likely to pick up than not in the next six months. You know, we are excited to deploy more capital as those opportunities arise. As you mentioned in the past, we've taken advantage of dislocation in the market, so we're certainly set up to that. In the meantime, you know, we're trading in and out of properties. Selling dispos opportunistically and taking advantage of acquisitions that we see. In terms of starts, I mean, they're dramatically down.
Already this year, what we were thinking in our markets would be, say, 110,000 starts is now looking like it might be half of that today. I expect even more things that we thought might start will drop off the list, you know, through the rest of the year. It's really hard to make a development work in an environment where cap rates are, as I said, 5%-5.25%. You need a yield, you know, at least around 6%, and you just can't get there with costs that may not be rising as quickly as they used to, a year or so ago. They're still going up, and obviously financing costs are higher. It's just really hard to make a development underwrite.
You know, we expect to see more and more deals drop out, development deals.
Yeah. Steve, it's Mark, just to supplement that. I mean, all this supply in the Sun Belt markets, Denver, places we'd like more long-term exposure, but we recognize that it's gonna be a, you know, tough couple of years. That's an opportunity for us. I mean, we're gonna sell low-performing assets in the coastal markets or assets where we have an over-concentration in the sub-market and kind of trade in and accepting that there might be a little near-term decline in putting that in the pro forma. As you said, I mean, I'm very hopeful. I think we're in a really good spot where our numbers are gonna show well imperatively in the coastal markets. We'll exercise our usual good expense control, then we'll turn around and deploy capital. Alec's got a big team of very capable, experienced people out there ready to buy.
I think, we'll be active, as soon as those opportunities are more substantial.
Great. Thanks. That's it for me.
Our next question comes from Chandni Luthra from Goldman Sachs. Please go ahead.
Hi. Good morning. This is Chandni Luthra, Goldman. Thank you for taking my question. Could you guys help us understand what the collections process will look like from here and what the magnitude and timing of recovery from past accounts could shape up to be? Like, do you have to go to courts, you know, to get rents from tenants who are perhaps no longer active with you or you're just evicting now? What kind of experience are folks witnessing with the court processes these days?
Hi, Chandni, it's Michael. We clearly have evictions filed right now with the courts. You are seeing a little bit of momentum pick up. I would tell you across the country right now it feels like most of this stuff is set up at about six -month timeframe from the time you file to the time you actually get to your proceeding, you know, with a court date. Really what's happening on this collections front is twofold. One, you have individuals that you are filing on that have a lot of past balances with you, but if they start paying you current month's rent, those past balances are somewhat protected still to date and go out into 2024. I think maybe some of them even stretch into 2025.
You have a little bit of a longer tail to go after the previous balances to collect. We are starting to see this resonant behavior, where they're making decisions either to move out in front of any kind of eviction proceeding or actually just start paying us their current month's rent, knowing that we're ultimately gonna have to, you know, come to terms with what happens with this previous balance. In areas where those balances are not protected, we have sent much of that over to the collection agencies and let collection agencies start working. That's a slow process because typically what you need to see is a lifestyle change. You need to see somebody needing to go buy a car or a home or some other thing that then causes them to come to terms that they gotta clean up that balance.
I think what you should expect to see is the court system is gonna continue to move at this pace of call it, you know, the six-month window, and you'll see us gradually just start chipping away at this delinquency and gradually start to improve the recovery of this of the past balance.
Can there be reversal to some write-offs, you know, or some reserves that you've taken in the past as we sort of think about, you know, the magnitude going forward?
Yeah, certainly. To the extent that all of those historical balances that Michael just described have been written off. To the extent that you collect them, you would see that as a current period pickup, offsetting bad debt. Those collections would flow through. As Michael mentioned, we would expect that We haven't really incorporated much of that overall, that we'd expect that to really trail.
Got it. Very helpful. You know, follow-up question is on L.A. mansion tax. Obviously, you guys sold a property ahead of that sort of, you know, tax change on April 1. As we think about the composition of your current portfolio and you know, what you've laid out in the past that you want basically, you know, 33% of your portfolio is sitting in sort of, you know, each of the coasts and then 33 in the Sun Belt, how do you think about the impact from this policy change to, so, you know, affect how you think about sort of, you know, selling properties in L.A. going forward and, you know, reaching towards that optimal mix of geography that you've laid out in the past?
Well, it clearly has an impact. It, you know, it's a, it's a big move in the rate from 1.5%- 5.5% in L.A. It was designed to raise, you know, may raise money for cities to build affordable housing. I think it probably had the reverse effect in that there won't be that many transactions, so they're not gonna collect very much. It may be that this gets reduced over time. We don't know that it'll be around forever 'cause it doesn't seem to be well thought out public policy. You know, in the meantime, there are other ways, other properties that aren't subject to the tax within California that we can transact on.
We can also consider joint ventures as an opportunity to lower exposure in a market like L.A., where selling a property may not make a lot of sense.
Yeah, Chandni , it's Mark. Just to supplement Alec's answer, we, I mean, it certainly impacts the tactical way to get to the success to lower that exposure. I mean, we remain committed to the goal, and we're just gonna figure out different ways to do it. Again, maybe you're selling properties in Ventura County instead or in, you know, outside the city of San Francisco, in the county of Los Angeles, and we have plenty of those too. We've got other levers to pull, and we'll be thoughtful about that.
Great. Thank you so much.
Thank you.
Next question goes to Michael Goldsmith from UBS. Please go ahead, sir.
Good morning. Thanks a lot for taking my question. On the concessions, have they gotten better or worse as the year has progressed? Is the gap between markets, is it getting wider or narrower?
Yeah. Hey, Michael, this is Michael. The concessions for us right now are really concentrated in those urban centers of Seattle and San Francisco. I think what you saw when we turned the corner into January and we were getting on that first or the fourth quarter call, I was telling you that the demand was picking up and you saw the concessions starting to slow down across most of the markets. That absolutely held true. Almost all of the markets now have weaned themselves off of the concessions, except what we saw in somewhere around that middle February and into March. You really saw the concession use pick up in those downtown urban centers of Seattle and San Francisco, and they've been fairly constant.
I'll tell you the last couple of weeks, we see a little bit of hope right now that the demand is picking up, application volume is picking up in those areas, and you could start to see us get to a place where we could start pulling them back again. For the most part, just in the rearview mirror, they've been constant for the last couple of months for us.
That's very helpful. Then my second question is on the transaction market. Does this 5.7% stabilized cap rate on the Atlanta deal, does that represent a motivated seller or a function of the actual market? Is this where deals are going forward? Maybe, just maybe on a broader terms, like, are you starting to see a reopening of this transaction market now that you're guiding to a modest amount of activity in the year?
Michael, this is Alec. The 5.7 really isn't a reflection of market, it's more a reflection of the property being in lease up right now. We're taking it over in the middle of a lease up and we're gonna finish it off. We're getting compensated for doing that. I would say, as I said earlier on the call, you know, the rates are somewhere between 5% and 5 .25% for typical deal. Yeah, we're getting a little bit of a boost there because we're taking on a little bit of a lease up, but that's not an indication of market. In terms of other opportunities, I mean, we're obviously always looking for other opportunities and it has been pretty slow though so far.
Our next question will come from Nick Yulico from Scotiabank. Please go ahead, sir.
Thanks. Good morning. I want to go back to, you know, the topic of, you know, job losses, and I know you said is, you know, you're really not seeing that much of an impact. Are there any indications yet of, you know, job losses of residents, you know, impacting expected turnover? I mean, is there anything you're learning now as you're sending, you know, renewal notices out for the spring? I guess, you know, if there's any differentiation you're seeing on this topic, between tech heavier markets like San Francisco Bay Area, Seattle, you know, where there has been more high profile job losses announced versus other markets of yours.
Yeah. Nick, it's Mark. I'm gonna start, and Michael's gonna supplement, excuse me, with some market specifics. I mean, again, when we look at the general economics, professional and business services, for example, still has positive job growth. That's an area where, you know, we do have a lot of our residents employed. You know, finance and insurance kind of flat. Information services certainly down, but not down that dramatically. The unemployment rate remains very low, especially for the college-educated. I guess I just wanna point out again on the macro. The macro picture is very good for our company and for the markets we sit in, not just in the long term, but in the near term, in the here and now.
Certainly there can be another shoe that drops, but the current numbers we're all seeing are certainly a decline from the COVID recovery numbers, but they're still pretty good, and people losing jobs are finding them. That's been the experience, it looks to me, like in the general economy, and I'll let Michael comment on what he's seeing in the rest of our portfolio.
Yeah. I think, one, you gotta put into context that the reported turnover for the first quarter was really low. I mean, it's not quite record low, but it's really low number. The absolute number of move-outs that we're having is clearly below any kind of historical norms. When we start drilling in and we look at those reasons for move-out, we're really not seeing anything indicative of changes. You're not seeing kind of job loss or job change pick up anything different than what you would expect for the first quarter of any given year. Specific into like a Seattle or San Francisco, where you saw kind of more of the headlines, we said on the last call, we thought a lot of those layoffs were being dispersed across the country, not just heavily concentrated in those markets.
I think what you've seen, we have not seen anybody really give us keys telling us they're breaking the lease or they're not renewing because they were laid off. What we do notice in those two markets is the in-migration, meaning what percent of brand new residents are coming to us from outside of that MSA. The in-migration in those two areas is less than what you otherwise would have expected, which I think makes sense, given not only the layoffs, but more importantly, like the hiring freezes that have been taking place. You're just not seeing them draw into the market like they used to.
Thank you. That's very helpful. My second question is going back to Los Angeles, and you know, it's a market that doesn't look like it has much supply except for downtown. You know, you did talk about, you know, dealing with delinquent units going forward, right? In some cases, it's impacting occupancy right now or at some point it will. I guess what I'm wondering is how you think, how you feel comfortable with this. It's almost like a shadow supply type of scenario where you and other landlords are finally getting tenants out in L.A. and that, you know, you feel confident that there's enough demand to fill tenants leaving.
Yeah. Again, it's Mark, Nick, to start. Michael may have something to add here. I'll start by just talking about the employment base of our residents as we see it in the market. We looked at sort of the big tech majors, and we said, "What percent of our residents have stated that they're employed by those big companies in Los Angeles?" That's something on the order of 3%. I think we just have very low exposure to those sort of tech folks in the very diversified L.A. economy. I think L.A. just frankly is stronger than San Francisco Bay Area and stronger than Seattle right now, where we have higher numbers of our residents employed by those sorts of people and probably bigger local economic impacts. I think we're...
In your opinion, it's almost like we have two empty buildings in Los Angeles we're delivering into same store over the rest of this year and that we're gonna fill up, and we've got the demand for it. I think when you look at the local economy, that matches up very well with our portfolio. They're in content creation, they're in other businesses, some of which feel some pressure. This disproportionate tech layoff, that isn't a Los Angeles phenomenon. That's occurring all over the country. The extent there's any concentration, it's more San Francisco and Seattle than it is L.A.
Thanks. I wasn't specifically really wondering about tech in L.A. I just meant the issue of delinquent units coming back to market for you and other landlords, right? As you're getting people.
Yeah.
It creates almost a supply issue in the market.
Yeah, the supply is being met by people that have jobs. That was the point of my comment. It isn't. A lot of these people are in diversified industries, so it isn't like everyone's losing their job down in Los Angeles. It's very well employed down there. A lot of people looking for housing, a lot of demand. Michael sees good demand numbers in terms of applications and the like. That's the source of our confidence, a diversified economy in which, like I said, us and others are effectively delivering empty buildings into that. I'm confident that demand will meet it, given what we see on the ground and given the composition of employment in the market.
Okay, thank you.
Thanks, Nick.
Rich Anderson from SMBC is next. Please go ahead.
Hey, thanks. Good morning, everyone. Back to the bad debt questions. If you were to sort of magically flip a switch and you'd be back to 40 basis points bad debt like you'd see normally, would that recovery be less than the rent relief number that you, that you gathered last year, about $32 million? I'm wondering how much the rent relief overcompensated you or maybe undercompensated you for the bad debt that you took on. I'm just trying to understand that math.
You're right. The governmental rental relief in 2022 was $32 million. To get back to call it 40, 50 basis points normal, that's $1 million a month of bad debt. If you look at kind of the disclosure for Q1, we were averaging like probably around, certainly in January and February, more like four. It's like a $3 million spread. You'd have to get, you know, $3 million times the 12 months or so is about where you'd be at, which would be a little bit more than what the governmental rental relief would be. You're getting there if you got back to call it that $1 million a month right away. That's obviously not what's happening yet.
We're hopeful that that happens, and the sooner, the better, from a growth perspective. Does that help, Rich?
Yeah, yeah. Thanks. That's great. My second question is, Michael, I think you mentioned you're running a 3.25% market rent growth at this point. If memory serves, I think you said your guidance presumed 3% market rent growth for 2023. I know you guys are trying to be careful about overpromising, you know, having not, you know, updated guidance yet, and that's coming later. It seems to me you're ahead of the schedule from a market rent growth, particularly at this point, you know, in the year.
Shouldn't 3.25% , you know, barring a major disruption from some sort of recession, shouldn't that really be a maybe significantly bigger number as you get into the heavy leasing season and maybe that will be another driving force to you know, upticking your guidance, just a better market rent growth trajectory than you expected? If you could comment on that, please.
Yeah. I mean, I think, Rich, you could look at that and say the 3 .25% sequential build from January 1 is about where we peg we should be of what a normal cycle is. The 3% for the full year, remember, you gotta blend in what happens to you in that first quarter and the fourth quarter. When you put it all into the blender, could you be up at a 4 .5% in the peak leasing season? Sure. You still could average to the 3% for the full year.
I think I would just look at the trajectory that we see, the sequential build of application volume and the sequential build of this net effective pricing trend is basically resulting in us being right on top of where we thought we would be from the Blended Rate growth, which is what manifests itself to the P&L.
Okay, great. Thank you.
The next question comes from Brad Heffern from RBC Capital Markets. Please go ahead.
Yeah, thank you. Morning, everyone. Circling back on bad debt. It was 1.7% of revenue in the first quarter, excluding the assistance payments. You obviously mentioned that it improved in March and April. I'm curious if you can just compare the whatever leading edge figure you have to that 1.7%.
Yeah. The 1.7% would probably be something, call it 20 basis points better. Maybe a little bit more, maybe 30.
Okay, perfect. Thanks. Going back to Nick's question, you gave the 3% employed by big tech in L.A. figure. I'm curious if you have the figures handy for the Bay Area and for Seattle and if there are any other markets like, I don't know, New York that have a larger number too.
Yeah, I've got some numbers for you. I don't have the East Coast, but the Bay Area is about 14%, and Seattle's about 30%.
Okay, thank you.
Next question comes from Haendel St. Juste from Mizuho. Please go ahead.
Hey, good morning. A couple from me. I guess first question is, can you provide the new and renewal numbers for March specifically? Where are you sending out renewal rates today for May? What's the loss to lease in the portfolio today?
Let me just start with loss to lease. We snapshot that on the 15th of every month. On April 15th, we were 3.4%, which basically compares to, I think, we were 1.5% on January 15th. Again, trending in line with where you would have expected it to be. In terms of like the March, April, I will tell you both new lease and renewals are basically flat when you look at it sequentially. You look at the blended rate, and you can see that we're moving from a 3.8% in March to a 4.0% expected in April. Again, right in line with what we would think based on the sequential build heading into the peak leasing season.
If I look forward to think about transactions that are on the books for May, so we have renewals on the books, we got some, you know, expected move-ins for leases that just haven't started yet. Those are also trending in line with what you would expect, which you're starting to see that improvement, kick into gear on New Lease Change, and you got that consistency on renewals. In terms of the forward view on renewals, we've got quotes sitting out there for the next 90 days. I think I said in the prepared remarks, we really do expect a lot of consistency here. We're renewing about 55%-60%. We don't see any reason not to expect that in the next several months going forward. We're achieving somewhere in this 5.5%-6%, achieved renewal rate increase each month.
We don't see a significant change there. We have a lot of confidence in this renewal process. My expectation is when we turn the corner to the second half of the year, we do expect to see a little bit of moderation on renewals, probably more like in that 4%-5% range, which is just a function of the comp period and what we see as we return to more of a normal pricing trend.
Very helpful. Thank you. The other question on, I guess, some of the charges in the quarter. It sounds like the property legal and admin charges are tied to the evictions process, but can you comment on the other charges, the $5 million environment settlement and the $2 million data transformation project? If we should expect those in future quarters too. Thanks.
I'll start. Bob will help here a little. The data transformation project is something we're working on. We mentioned this before in prior calls. It's a big data analytics project with an outside vendor. You can expect a couple million dollars more there, that should be at an end. All of our internal employee hires and all that's in our normal overhead load. Continuing costs are in the run rate of the business. The sort of, you know, discrete one-time sort of events are separately categorized, as you said, on the page 24 of the release. I don't know, Bob, if you wanna comment on the rest.
Yeah. The other components are adjustments to, various kind of regular course, litigation reserves that we made during the quarter as we got more information and adjusted our outlook.
Okay
T hose are all case by case dependent and depend on, facts and circumstances at the moment.
Got it. One more question on cost. Is there any part of the property damage from the cost in California, the rainstorms? Any part of that recoverable perhaps from insurance?
This all falls, it's marked below our deductible Haendel, so this is all covered by us.
Got it. Okay. Thank you.
Our next question comes from Alexander Goldfarb from Piper Sandler. Please go ahead.
Good morning, and thank you. Two questions. First, on the insurance, you guys mentioned that, and we've heard from others that insurance has become more challenging, expensive, especially in like Florida and Texas. Two parts to this. In your experience, do you expect that the insurance providers will rapidly adjust, new capital will come in, and that this won't really be a problem, or do you think that this actually could give you some opportunities to buy deals where the existing owner can't get insurance on their property, and therefore provides you guys with some opportunity to buy some of those in some of the expansion markets?
It's Mark. That's a good question. The insurance market typically has, as you suggested, when you see costs go up as much as this, capacity has gone up. We don't yet see that. The difference now is that fixed income is a real alternative. I mean, folks that are reinsurers can invest in a lot of different things and, you know, the fixed income market and maybe even these beaten down equity values may be more interesting to them. There's a little more competition for those reinsure insurance dollars, that investment. In the off-season here, 'cause we just renewed our policy program, excuse me, our property program last month, Alex, we're gonna be out there looking for other capacity in other places.
because I'm not sure, given the severity of this named windstorm risk, that we're gonna be able to find additional capacity for that risk. Now, EQR doesn't have Florida exposure, and we don't have that risk, but it has impacted other spots in the market, and other folks have much larger increases than we had. Ours was about 20% on our property program. I would say I would expect normally for the market to get bigger. I wonder this time how quickly that's gonna occur given concerns that, you know, these sort of windstorms especially are gonna be more continuous than they've been in the past, and just alternatives that insurers have and reinsurers have to invest elsewhere. Hopefully that's helpful.
That is. The second question is, the tax deal that you did in Atlanta, you guys had previously spoken about, you know, the 421-a's here in New York and the drag it caused to earnings when those tax incentives dried up or, sorry, matured off, burned off. Do you see similar with the Atlanta and in general, are you looking to do more tax deals or your preference is to shy away from them except where, you know, on a case by case basis?
Yeah, a great question. We certainly like not to repeat things like that. You know, you gotta look at the IRR on the deal. You start with these elevated cash flows. You're getting a little bit better cap rate because of the fact that later on you're gonna be paying these higher taxes. For us, in year eight or nine, taxes are gonna go up, and you're gonna really have this flatten out. But it's not the order of magnitude of the 421-a program. We also keep track, Alex, of these. We're not allowing any one year to be overburdened. We don't feel like we're, you know, robbing Peter to pay Paul, as long as we're comfortable with our IRR.
As our overall IRR, we being paid upfront for the cash flow growth flatness that'll occur eight, nine, 10 years from now. I think we feel like we were, and we'll do deals like that. Most of the new product is gonna have stuff like this. We'll also buy some stuff that's a little bit older. You know, Alec and his team are looking at those kind of deals as well, where you won't have that. If you have an older deal, remember, you're gonna be putting in a lot more capital. It's not possible to avoid some sort of cost here. 'Cause if we bought something 10 years old that had fully stabilized taxes in Atlanta, it probably would require more capital, and that would affect the IRR. We're gonna look at the IRR and use that as our check on that.
In some cases, Alex, and this is Alec, as the abatement burns off or when it burns off, some of the units might go to market, so you get a pick up there too. It's not, it's not all downside. Okay. Thank you.
Jamie Feldman from Wells Fargo, please go ahead.
Great. Thanks for taking my question. I guess just big picture, you know, to your comments on maybe assets coming to market for investment. You know, your you leverage tick lower in the quarter. It looks like you've been met or This year you plan to match fund acquisitions with dispositions. To the extent you want to put incremental capital to work beyond asset sales just because you see so much opportunity, can you just talk about the sources of capital to do that? You know, are you having conversations with potential JV partners? If so, what kind of capital looks interested? Then what would you be willing to do in terms of leverage, and how do you think about, you know, your liquidity position today for investment?
First off, there isn't such a significant opportunity out there that it's worth using up precious leverage capacity or issuing a bunch of equity below what we think the intrinsic worth of the business is. I haven't been presented yet with that issue. Talking to the board, we're certainly willing to take leverage up. We have a stated leverage policy, Bob.
5x-6x net debt to EBITDA.
Yeah. We're approaching three. Into the three. I would say to you that there's several billion dollars of capacity in the system to buy great assets at great prices, using debt when and if we see those opportunities. You know, we're looking hard for those. We don't see them yet, but I'd start with debt. Certainly the JV market is another source of capital. We're very aware of that. The private market continues to love the apartment industry, even if the public markets are being buffeted a little bit by some of these crosswinds. You know, we're out there looking for other sources of capital, for sure.
Thank you. Can you talk about the returns the private market's looking for or those sources of capital are looking for? How are they underwriting apartments today, and what kind of returns are they looking for?
Generally, they're, this is Alec. Generally, they're looking for the same kind of return, a cap rate of, say, 5 .25%, depending on the asset so that we would see in the transactions market.
Okay. Finally, I mean, to your comments and everyone's comments, I mean, there's so much talk about supply. When you just think about the next, you know, six months, nine months or 12 months, 24 months, like, when do you think the supply chain really starts to kick in based on the delivery scale?
Just to make sure I understand the question. When do we think supply will start going down based on deliveries? I'm sorry, I didn't hear the end of that.
No, I mean, I know in your comments, you know, you feel somewhat protected from supply based on where your assets are located. Clearly a very large pipeline, set to deliver over the next two years. You know, when do you think, you know, that supply really starts to be felt nationally? It certainly doesn't feel like it's in the next several months.
I think you've got stuff that's gonna get completed. I would say you're looking more in late 2025 and 2026. I mean, stuff you start now, I mean, if you've got your capital stack and you're able to start, you're gonna deliver. I mean, you may deliver a quarter late because of the supply chain, but you're gonna deliver. I think the starts Alec referred to will impact 2025's count will be lower, and 2026's count will be lower. Stuff for this year and next that's expected to deliver will deliver. I think some of the numbers in some of the markets, you know, some of which we're interested in, like Denver and Austin, are really large, and that's a terrific opportunity for us to buy and to sell some of these assets where we're overallocated in some of the coastal markets.
I think that's gonna be an attractive play for us.
Okay. Thanks for your thoughts.
John Kim from BMO Capital Markets, please go ahead.
Thank you. Good morning. I realize unemployment remains pretty healthy. It seems like demand is going very well for you guys. There have been some reports of employers delaying start dates for new hires. I'm wondering if you've seen any softness in demand as it pertains to the upcoming graduate pool.
Hey, John, this is Michael. I haven't heard that. I mean, I did hear a few kind of comments from prospects around what time they're looking for. Typically they're showing up taking tours, and these folks were thinking more like the June, July timeframe. There's definitely a little bit of pause in the prospects decision-making process right now around, you know, are there gonna be more layoffs? Will they actually get, you know, the offer to start when they want it? It's nothing of a material nature because, again, our sequential build of application volumes, our foot traffic year-over-year, all of those things are trending in line with what we would say is a normal seasonal pattern. We haven't seen anything like that.
Okay. My second question is, I think for Bob. On the litigation reserve, that you incurred this quarter, is this something that may be ongoing, and is this related to RealPage?
Yeah, it's Mark. I'll take that. You know, being in a consumer-facing business, there's always some level of litigation costs. They're widely varying. There's no significant amount of RealPage related costs in there, but they are in there. It's relatively small. The reason for that is that the case is at its early stages, and you should think about that going on for a longer period of time. They aren't resolved in weeks or months. It's more like years. Again, we feel very strongly about our position. We think these claims are without merit, and we're gonna defend ourselves. You know, we continue to feel really confident in our prospects there. There is some small amount, but it's small. Most of that just relates to just continuing, you know, legal costs from being in a customer-facing business in an industry that has regulation.
The litigious society as well. Thanks a lot, Mark.
Thank you.
Next question comes from Adam Kramer from Morgan Stanley.
Hey guys. Yeah, thanks for taking the question. We just wanted to ask about this California storm damage, kind of cost. Look, I appreciate kind of the disclosure around 1 Q impacts. Wondering just on, you know, if there will be further impacts, and in particular, if you could kind of quantify, you know, maybe the 2 Q impacts or any other impacts going forwards.
Thanks, Adam. It's Bob. Our expectation is that there won't be anything material going forward into Q2 related to these specific storms. If there's a different event, then we don't know. As it relates to this, there's nothing material that's moving the numbers soon for Q2.
Great. Thanks. Just on, you know, thinking through occupancy and kind of the occupancy versus renewal, kind of pushing renewals kind of trade-off. Look, recognizing occupancy, you know, there's some drivers there in terms of physical occupancy, right? And kind of what's happening on the, on the bad debt and eviction side. Just thinking through, you know, how is that kind of, you know, that trade-off that you guys go through, right? You know, managing occupancy versus pushing renewals. How would that conversation maybe evolved, you know, from 4Q to 1Q to today? Is there a change in kind of how you're approaching that and how much you're kind of willing or able to push renewals?
Well, I think you could see just that sequential build that we have right now and the achieved renewal increase shows that we are pushing on that front. I mean, every market has a different balancing act that's going on between the trade-offs of occupancy and renewals. I mean, for us, you know, the preference clearly would be to continue to renew as many residents as possible because, one, we avoid the turn costs, and two, we avoid the vacancy loss with that. You're seeing us do a little bit more negotiation across many of the markets right now. Again, we're well-positioned, which gives us that confidence to keep kind of pushing on that rate in the marketplace that not only fuels the New Lease Change, but also helps the future months renewals as well. I think this trade-off is constantly balancing.
Honestly, we're looking at these markets every week to going through that conversation now that we have this centralized renewal team, which is which way are we leaning?
That's really helpful. Thanks so much for the time.
Linda Tsai from just Jefferies. Please go ahead.
Hi. Thanks for taking my question. I know you just emphasized IRR of individual deals, but the higher taxes and insurance occurring in the expansion markets, does this shift the attractiveness of these regions long term?
There's no riskless apartment market, and it's Mark, I'll start, and Alec may supplement it. I mean, if you're buying in some markets, you're gonna have higher insurance costs, but maybe lower political risk. In another market you may have slightly higher political risk and a lot better resilience and maybe a better supply picture. Our whole investment thought process of being diversified is premised on the idea of, you know, kind of accepting these risks in small doses across the whole country and staying tied to these affluent renters. It doesn't change our mind. We just underwrite it, and the deals will either work or they won't.
I do think that some of the markets that have outperformed lately in the Sun Belt that have resilience challenges are really gonna be pressed by these insurance costs, and frankly, maybe even the availability of financing if insurance is unavailable. That's something an issue lenders are very sensitive to. From our point of view, I mean, we're just gonna run the numbers. I think these markets continue to have other subjective factors that are valuable to us. You know, I think they're gonna remain investable, the ones that we're interested in for sure.
Thanks for that. Just on the strength you're seeing in New York and Atlanta, could you talk about that a little more?
Yeah, I mean, this is Michael. I said in the prepared remarks, I mean, New York, the strength is really kind of widespread across all of the sub-markets where you have good demand, you have pricing power, you have the sequential builds of the demand and rents moving up with really strong kind of results, both in the retention as well as the achieved renewal increase. In Atlanta, you know, I think right now, relative to our expectations, we feel really good. We're not having that, like, direct supply pressure on us. We're not seeing kind of heavy use of concessions in our portfolio. We have demand.
Even, you know, the deals that we're looking at, one that we have to go through the lease-up or finish the lease-up on, we got a lot of confidence in the velocity, the weekly velocity of application volume there that they're gonna perform really well.
Thank you.
Omotayo Okusanya, From Credit Suisse, please go ahead.
Yes. Good afternoon. Thank you for the call on just capital recycling and the updated guidance there. I get it, of buying assets at higher cap rates and selling assets at lower cap rate and kind of creating value that way. I'm curious, with your implied cap at, like, 6% at this point, according to our math, you know, you did make some comments earlier on about kind of development start slowing because development doesn't pencil out. How do you kind of think about that on the other side of the story, which is the acquisition side?
Is the idea still things are not gonna be able to kind of pencil out for a while, and unless you're kind of matching, you know, asset sales, versus acquisitions, you don't expect to kind of be doing much out there on the acquisition side as well?
It's really as you said, Tayo, this is Alec, about matching the sales and the acquisition. We keep track of that. We don't get ahead of ourselves on either side and just match them up, and it's a neutral bet. We feel like we're accomplishing our goal of diversifying the footprint.
The focus from an acquisition perspective remains in your newer markets rather than some of the more established markets.
primarily, but also in the suburbs of our established markets, and as we've talked about being opportunistic. There may be opportunities that come up if there's more dislocation that are appealing anywhere, and we would chase those.
Gotcha. Okay, that's helpful. Would there be any interest in doing something in regards to office to resi conversion, from your end, or just the development risk and everything is just way too great for you?
Well, I'm gonna split it up because there's the urban conversion of these office buildings that are really, you know, giant one block floor plates. It's very challenging in urban locations to take a property on LaSalle Street in Chicago or in Midtown Manhattan that spans a block and doesn't have a lot of windows relative to the total floor space, doesn't have a lot of plumbing fixtures. You know, there's been work done by engineering firms in Boston, for example, on this. You know, there's relatively few of these buildings, these large buildings that are gonna work as repositioning plays. They may work if the building isn't there anymore, but they're just taking that building and somehow re-engineering it is gonna be tough.
In the suburbs, you may, and this has been common in the Bay Area and in suburban Washington, you may scrape a, you know, an office park and build apartments there. You know, we've been involved in those sort of plays, but those are different altogether 'cause you're not re-reusing a building. I think reusing an office building is tough in an urban situation just because of the need for plumbing fixtures in the unit and the need for windows that these larger office buildings just don't allow very well. I would say we, as urban owners, we'd like to see these central business district office districts thrive. I mean, they pay taxes that support transit, that support public safety. We want those to be repositioned.
It'll just take more time and likely be more costly and extensive than, you know, some observers seem to think. I just don't think you can snap your finger and take a 40-year-old office building and turn it into a livable, awesome apartment building in the center of whether it's Manhattan or the center of Los Angeles. We'll kind of play wait and see on that. Urban repositionings for us are not likely placed.
In New York downtown, where it was done a lot, that was on the back of a tax abatement that's since expired, the 421-g that was specifically to promote the conversion. It doesn't happen easily, and it does need. It generally does need public policy support.
Fair enough. Thank you.
Our next question comes from Josh Dennerlein from Bank of America. Please go ahead.
Yeah. Hey, everyone. I just wanted to touch base on the New Lease Change in April relative to 1 Q. It looks like it kind of stepped up 30 basis points. How does that compare to, kind of the typical acceleration in April versus 1 Q?
You know, I don't know if I looked historically back. I will tell you it's sitting right on top of what we modeled at the beginning of the year, which is, you know, what we would say more like a 2019, 2018 kinda curve and expectation. You know, some of this just has to do with, you know, the timing of who moved out, what was their previous lease. When I look at the 30 basis points growth, I would just tell you, anytime you look at these statistics or these metrics on such a short time period of time, it does create some volatility with it, so we tend to look at this over the longer stretch.
Right now, I've said this a couple times, we're sitting right where we kinda modeled for the year and right what we would expect based on just the normal sequential builds.
Okay. It sounds like concession you just picked up in March and April in Seattle and San Francisco. If you stripped out those two markets, how is kinda new lease rate trending?
I think the impact on the overall portfolio was like 20 or 30 basis points on the net effective, like, new lease change. If you just pulled out kinda those two markets with the heavy concession use, I think that was what the impact was.
Okay. Just digging down into same-store expenses, I don't think we've touched on the other onsite operating expenses on the call. I think that's where the kind of legal kind of fees flow through for the evictions. What's kind of the expectation in that line item going into 2Q, just given the move-outs?
Hey, Josh, it's Bob. Our expectation is that that could be pretty bumpy because if you think about the expense, the expense is really in advance, oftentimes is in advance of the actual move-out. It depends on how quickly and how fast the cases get filed, which we've, you know, made a good amount of progress faster than what we thought in the first quarter. We'll have some go into the second quarter. That line item is normally a line item that barely grows for us, it will be bumpy 'cause of this elevated activity, it will be lumpy. Just expect it to be kinda grow above trend relative to history and be lumpy quarter to quarter, hopefully tailing off as we get to the back end of the year.
Got it. Appreciate the color.
There are no further questions in the queue. I'll turn the call back over to Mark for additional and closing remarks. Please go ahead.
All right. Well, thank you all for your time on the call today and for your interest in Equity Residential. Good day.
Everyone else has left the call.
This concludes today's call. Thank you for your participation. You may now disconnect.