Good day. Welcome to the Essex Property Trust first quarter 2018 earnings call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions, and beliefs, as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC. When we get to the question and answer portion, management asks that you be respectful of everyone's time and limit yourself to one question and one follow-up. It is now my pleasure to introduce your host, Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall. You may begin.
Thank you for joining us today. Welcome to our first quarter earnings conference call. John Burkart and Angela Kleiman will follow me with comments, and John Eudy is here for Q&A. I will comment on three topics. Our first quarter results and outlook for 2018, regulatory matters, and investment markets. Our first quarter results were stronger than expected, with significant improvement from a challenging second half of 2017. As noted at the Citigroup Conference in March, these results were better than our 2018 plan because of higher occupancy and other income, which John will discuss in a moment. Market rents for our portfolio grew 3.8% from year-end to the end of the first quarter versus 3.1% in the same period last year, and are mostly consistent with our market rent growth expectations for the year.
Job growth was relatively stronger in the first quarter, with Essex markets achieving 2.2% job growth on a trailing three-month basis versus the U.S. average of 1.5%, with most of the outperformance emanating from the tech markets. This growth is notable considering the tight labor market conditions, which are demonstrated by ultra-low unemployment rates averaging 3.4% in the Essex markets and 4.1% for the U.S. We are encouraged by the strong start to the year and will reevaluate our MSA forecast on page S16 of the supplemental next quarter. The positive job growth has been achieved in part from migration from other areas, indicating the ability of local employers to source and retain skilled workers. The Bay Area continues to be a net attractor of talent, especially from high-cost East Coast metros.
This trend is highlighted in the monthly workforce report published by LinkedIn, which details migration patterns of workers within LinkedIn's network of more than 130 million users in the U.S. On page S16.1 of the supplemental, we have reproduced a visual from the report that illustrates migration in and out of the Bay Area over the past 12 months. This supports our view that the number of educated workers moving into the Bay Area continues to outweigh the number departing. The Bay Area and Seattle remain among the most innovative and dynamic economies in the world, which compete successfully for high-skilled workers. Wage growth continues to improve as the skilled labor shortage intensifies. Estimated personal income growth for 2018 for our West Coast metros ranges from 4.6% to 6.5%, compared to 4.1% for the nation. Affordability pressures are relieved when wage growth exceeds rent growth, as it has recently.
This has led to a reduction in rent-to-income ratios year-over-year in all of the Essex metros. As cited in The Wall Street Journal, a recent study by Up for Growth National Coalition analyzed America's housing shortage and proposed potential solutions. That the study acknowledged the widespread nature of housing shortages for the U.S. in the 15-year period ending in 2015, affecting 23 states. In total, the study indicates the nation has produced roughly 7 million fewer housing units than needed to keep up with economic growth over that period. California, in particular, has the largest shortfall, consisting of nearly half of the total underproduced housing, or roughly 3.4 million housing units. The chronic shortage of housing in California and related problems of traffic congestion and long commutes remain key issues on the West Coast.
Turning to supply, our multifamily supply projections for the Essex markets remain unchanged on S16 of the supplemental, and the impact of deliveries across submarkets vary widely. As a result, we continue to expect periodic disruption to pricing power at stabilized communities when multiple lease-ups in a submarket offer concessions exceeding 6 weeks of rent. At this point, we expect supply to be mostly flat in 2019 versus 2018, with an increasing share concentrated in downtown submarkets. Factoring in shortages of labor, strict land use regulations, construction costs rising faster than rents, and more conservative construction lending, residential construction appears to be slowing even though permits have continued at a strong pace. We are seeing many examples of residential developments being put on hold as the economics don't pencil.
This supports our belief that the construction pipeline has peaked in our markets, and supply will slowly taper off over the next several years. On to my second topic, regulatory matters. I wanted to provide an update on California's proposed referendum that seeks to repeal the Costa-Hawkins Rental Housing Act that will likely appear on the November 2018 ballot. As you may recall, Costa-Hawkins, in part, restricts local jurisdictions from enacting rent control on any apartments completed after February 1995 and mandates that vacated apartments be priced at market rates. When the law was created in 1995, a primary consideration was that cities with extreme forms of rent control, including San Francisco, Berkeley, and Santa Monica, produced minimal rental housing after enacting rent control ordinances in the 1970.
In passing Costa-Hawkins, California's legislature sought to increase the production of rental housing to counter shortages and affordability issues, especially in cities that failed to contribute to the housing needs of the state. The California legislature recently considered Assembly Bill 1506, which like the proposed ballot measure, would have repealed Costa-Hawkins. AB 1506 did not get past the committee level in 2017, and again earlier this year. We believe that the legislature clearly understands that abolishing Costa-Hawkins could result in even greater shortages of housing in California, which could be a major headwind to business expansion and thus economic growth. The significant issues and unintended consequences of rent control have been researched and documented in great detail by the academic community and California's government. This includes a 2017 study of San Francisco rent control by the faculty at Stanford University and a 2016 report by the Legislative Analyst's Office.
These studies conclude that rent control is a contributing factor to housing affordability issues, mostly due to shortages of housing. Rather than elaborate here, we refer you to links to both studies on the internet at savecostahawkins.org. We will continue to provide periodic updates on regulatory issues in the future. My third topic, investment markets. The demand for apartment property remains healthy, and as a result, we have seen no change to cap rates in our markets despite higher interest rates. For example, we are currently in contract on a disposition that is likely to close in the second quarter at a low 4% cap rate. This transaction and other recent sales support our belief that cap rates have not changed. A-quality property and locations continue to transact around a 4%-4.25% cap rate using the Essex methodology.
B-quality assets and locations are generally 25-50 basis points higher, though often contemplate upside from redevelopment and/or value-add activities. As noted last quarter, we continue to see a slowdown in the preferred equity pipeline. This is consistent with my earlier comments that cost increases represent a headwind to new development. We continue to believe that we will be close to our target for preferred equity commitments this year. As of quarter end, our total commitments for preferred equity and subordinated debt investments aggregated $395 million. That concludes my comments. Thank you for joining the call today, and I will turn the call over to John.
Thank you, Mike. We're off to a good start in 2018 with year-over-year NOI growth of 3.6% and revenue growth of 3.3% for the first quarter. Our strong revenue growth was favorably impacted by an additional 60 basis points of occupancy over the prior year's period, and higher-than-expected utility reimbursements due to timing and increases in the underlying utility expenses. Strategic adjustments made by the operations team led to increased occupancy through the promotion of short-term lease extensions, which led to fewer move-outs and an increase in month-to-month leases. Turnover in our portfolio dropped to 40% on an annualized basis in the first quarter of 2018 compared to 46% in the prior year.
Part of the reduced turnover relates to the executive order signed by Governor Brown as a result of the devastating California wildfires, which effectively limited rent increases on all California housing to 10% above the price in place when the order was signed in October of 2017. It has been extended for selected counties directly impacted by the wildfires through the end of the year. We are working to ensure that we comply with the law where applicable, and we expect that it will impact operations in selected markets. Our operations strategy will continue to change with the market conditions. As we enter peak leasing season, we expect occupancy to decrease while turnover increases, as is typical for this time of year.
Preliminary April 2018 results already show that our strategy is playing out. Our year-over-year financial occupancy is only 30 basis points over the prior year's period versus 60 basis points increase we achieved in Q1. In April, scheduled rent grew at approximately 2.3%. Gross revenues grew at approximately 2.7%. April results indicate a sequential decline in revenues, a significant but expected slowdown from the first quarter. Overall, the Essex markets are performing as expected, with Seattle a little weaker and SoCal a little stronger versus our expectations. Moving forward, we expect to see more typical seasonal pattern in rent growth, which is assumed as part of our 2018 forecast. Now I'll provide an update on our markets. In Seattle, job growth continued to be the strongest in the Essex portfolio, posting year-over-year growth of 3.2% for the first quarter of 2018.
This is the highest growth the region has seen since the third quarter of 2016. However, the impact of supply is evident in the rental market. Rents in March 2018 are slightly below where they were in the prior year's period. There was a gain to lease of 1.1%. That's compared to a 3.1% loss to lease at the same time last year. In downtown Seattle, WeWork signed leases totaling 250,000 sq ft. On the East Side, Microsoft continued to expand their footprint in downtown Redmond. Seattle MD has roughly 4.8 million sq ft or 5% of the space currently under construction, nearly half of which is already pre-leased. Seattle median home prices continue to gain momentum, increasing almost 17% year-over-year for the month of March, making it the second fastest-growing region in the Essex portfolio, only surpassed by Bay Area markets.
Our year-over-year same-store revenues for the first quarter of 2018 were 4.8% in the CBD, 4.2% in the East Side sub-markets, while the North and South sub-markets grew by 5.1% and 5.4% respectively. Moving on to Northern California. In the first quarter of 2018, job growth in San Francisco Bay Area averaged 2.4% year-over-year, with roughly 75,000 jobs added. San Jose led the way with 2.9% job growth, while Oakland and San Francisco were up 2% and 1.7% respectively. Market rents in the Bay Area were up 2.5% in March over the prior year's period, leading to a loss to lease of 2.2%. In San Francisco, WeWork continued their growth trend, signing the largest year-to-date lease in the city for 250,000 sq ft in the downtown area. Moving down to the South Bay, Facebook pre-leased 1 million sq ft of planned office space in Sunnyvale.
Google continued to acquire land near the Diridon Station, purchasing a site approved to build 1 million sq ft of office space. In total, the company has invested roughly $300 million in that Central San Jose sub-market. Additionally, Google continues to expand in the Silicon Valley sub-markets, having purchased 3 industrial buildings in North San Jose and 2 additional properties in San Jose and Mountain View. Silicon Valley and San Francisco markets have approximately 9 million sq ft of office space or 6% of the total office stock under construction, roughly two-thirds of which is pre-leased. Median home prices in the Bay Area continue to soar, led by San Francisco and San Jose gaining approximately 20% and 33% respectively in March 2018 over the prior year's period. San Francisco and San Jose median home prices are now over 30% higher than their prior peaks in 2007.
During the quarter, we started a lease-up of Station Park Green Phase One, located in San Mateo, with six-week concessions on selected units. As of April 26th, we are 40% leased. Our year-over-year same-store revenue growth for the first quarter of 2018 was led by our Fremont and Oakland sub-markets with 4.8% and 4.0% respectively. Heading down to Southern California. Job growth in Los Angeles County in the first quarter of 2018 averaged 1.5% year-over-year, which was in line with the U.S. Market rents increased 2.3% in March over the prior year's period, and loss to lease was 1.6%. Leasing activity by tech and entertainment companies remained strong in West L.A., with several leases from high-profile tenants, including another lease by Amazon Studios, expanding their Culver City presence for content production.
As discussed last quarter, the downtown CBD sub-market continues to be challenged with elevated levels of supply, causing our same-store L.A. CBD revenues to decline 1.1% in the first quarter of 2018. However, other Essex sub-markets less impacted by the downtown supply performed much better in the first quarter of 2018 compared to the prior year's quarter, with revenue growth ranging from 2.7% in Long Beach to 5.1% in Woodland Hills. In Orange County, job growth improved in the first quarter to 1.9% year-over-year, a 20-basis-point increase from Q4. The impact on supply on market rents is evident, with market rents only increasing 70 basis points in March over the prior year's period, and loss to lease was 40 basis points.
Finally, the San Diego MSA continued to perform well, recording year-over-year job growth of 1.9% in the first quarter of 2018. Market rents increased 2.1% in March over the prior year's period, and loss to lease was 1.4%. Revenue growth in the first quarter of 2018 was between 3.6% in Chula Vista to 5% in the Oceanside sub-markets on a year-over-year basis. Currently, our portfolio is at 96.8% occupancy, and our availability 30 days out is at 4.5%. Our renewals are being sent out at about 4% for the second quarter overall. Thank you, and I will now turn the call over to our CFO, Angela Kleiman.
Thank you, John. I will start by discussing our first quarter results and increase to the full-year guidance, followed by recent investment in capital markets activities, and conclude with a balance sheet update. For the quarter, core FFO exceeded the midpoint of our guidance by $0.05 per share. This is outlined on page four of our press release. $0.02 of outperformance is related to timing of operating and G&A expenses and is not expected to reoccur. The remaining $0.03 resulted from revenue growth realized during the quarter, primarily due to our occupancy strategy, as John commented earlier. With this backdrop to our first quarter performance, we now expect the first half of 2018 same property revenue growth to be higher than the second half of the year.
Also in the first quarter, we declared a quarterly common dividend of $1.86 per share, which is a 6.3% year-over-year increase. This represents 24 consecutive years of dividend growth and keeps us on track to become a dividend aristocrat in 2019. Moving on to the 2018 guidance. We are increasing the midpoint of same property revenue growth guidance for the year by 15 basis points, thereby increasing the NOI growth by 20 basis points to 2.7% at the midpoint. This increase is primarily driven by first quarter performance, which also enable us to raise core FFO guidance by $0.02 per share to $12.46 at the midpoint. For the second quarter, we are forecasting core FFO per share of $3.05 at the midpoint, which is $0.04 lower than the first quarter. This is largely caused by two factors.
First, interest expense will be higher in the second quarter due to the $300 million bond issuance closed in March, which had little impact to the first quarter results. Second, we are anticipating lower NOI growth in the second quarter as we shift strategy to favoring rent growth over occupancy, coupled with higher operating expenses as we enter the peak leasing season. Note that both items are timing related and are consistent with our plan for the full year. Turning to investment and capital markets activities. During the quarter, we continued to enhance shareholder returns through our joint venture platform with the amendment of BEXAEW entity by realizing a $20.5 million promote income. Last year, we stated our plan to monetize the embedded value within our private equity platform. Since then, I'm pleased to report that we have monetized nearly $60 million of promote income.
This is consistent with our track record of structuring unique transactions to maximize value while maintaining a disciplined and thoughtful approach to capital allocation. Lastly, onto the balance sheet. During the quarter, we issued $300 million of 30-year unsecured bonds at a 4.5% coupon. The proceeds from the bond offering were used to repay secured debt maturities in 2018. With this offering, we have completed the most significant refinancing needs for the year. As Mike mentioned earlier, we are under contract to sell one property. The proceeds from that sale will substantially provide for our 2018 development projects. Therefore, our need for additional capital in 2018 is de minimis, subject to new investment opportunities. With $1.2 billion of availability on our line of credit and 26% leverage and limited near-term debt maturities, our balance sheet continues to be strong and well-positioned.
That concludes my comments, and I will now turn the call back to the operator for questions and answers.
At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Our first question comes from the line of Richard Hill from Morgan Stanley. Please proceed with your question.
Hey, good morning, guys, and congrats on a really nice quarter. I wanted to go back to one of the comments that you mentioned at the very beginning about population migrations. It's one of the first times that I've heard you or your peers talk about this, and I'm sorry if I've missed you talking about it previously, but I was hoping you could elaborate on that a little bit more. We've heard some comments that San Francisco just doesn't have enough people moving there. I'm curious, how sustainable do you think those population migration trends are? Obviously, it's probably a little bit of a zero-sum game. Are they moving from one market to another market? How are you thinking about this?
Hi, Rich. Thanks for the question. I think it was invigorating, and I'm playing off of some of the other comments that were made on some other calls. No, what we're trying to demonstrate is whether the West Coast metros are competitive with the East Coast metros, and that may be countering some of the facts that you see out there with respect to U-Haul rates in and out of California and similar type things. What we think is happening is that we are attracting more than our fair share of the more skilled, highly skilled, and highly compensated worker, and perhaps losing some of the lower skilled and lower compensated workers. We think that's a normal process, normal evolution. We're obviously very concerned about whether our metros are competitive with other metros around the U.S. because employers have choices about where they're going to locate.
The competitiveness of the California markets are really important. We look for evidence that supports that basic thesis, and the LinkedIn information seemed to make a lot of sense. If you go into the report we published on 16.1, S 16.1, the San Francisco metro movement in and out. They go beyond that, and they look at some other metros as well. You can go onto that report. It really comes back to, are these metros, the West Coast metros, competitive? Are people willing to come here? Obviously, housing costs matter, but also compensation and opportunity matter as well. Making sure that we're competitive with respect to that is something that we think is really important.
Got it. Just one quick follow-up question. I think it's an important distinction, are you guys seeing there's population migrations because of jobs, or is there job growth because of population migrations?
Well, I think it's a bunch of different things. I think it's the competitiveness of the industries where the best opportunities are being created, that's why we think that the West Coast metros, specifically the tech markets, when you look at the job growth that was created, the outperformance of jobs relative to what our expectations were this year, it's clear that the tech metros are attracting a lot of talent and bringing people here, confirmed by the commercial construction, in the San Francisco, San Jose, and Seattle metro areas. The office construction being a pretty good proxy for what's going to happen a year or two down the road.
Again, we're looking for things that confirm whether the West Coast metros are attractive and obviously migration patterns, job growth, all these things fit together to determine whether these metros are being successful in competing for talent.
Got it. Thank you very much for that explanation. Congrats again.
Thanks, Rich.
Our next question comes from the line of Nicholas Joseph from Citigroup. Please proceed with your question.
Thanks. Maybe just following up on that. Looking at outmigration from San Francisco, did the trends make you consider expansion into Portland, Denver, or Austin? What would you need to see to decide to expand?
Yeah, it's Mike again. Clearly, Denver is, I think, attractive. There have been a number of other multifamily companies that have made movements into that market. We have been invested in Portland, and we are looking at that once again. It's a relatively small market. The cost of for-sale housing is less expensive, and therefore, the transition from a renter to a homeowner can be a little bit of a headwind in, actually, I'd say both Denver and in the Portland market. Our basic mandate is go to areas that don't produce enough housing and where the housing choices, for-sale housing versus rental, that the for-sale side makes it a challenge to transition from a renter to a homeowner. That has served us well over a long period of time. Those are the markets we primarily look for.
There are a couple of markets that are interesting, but, I think that they would be a step down relative to what we have in the markets that we're currently invested in.
Thanks. If Costa-Hawkins were to be repealed, and I recognize that rent control is not immediately enacted, but how do you think about your current portfolio positioning in terms of cities more prone to enacting rent control? And then is there anything you can do to proactively mitigate any impact?
John Eudy here. I'll make a couple comments, and if John wants to add to it, that'd be great. It's obviously virtually impossible to determine the financial impact of Costa-Hawkins. Obviously, Costa-Hawkins would enable local jurisdictions to adopt rent control measures, and we don't know which cities might do that, nor do we know the severity of their rent control ordinance. Without those two, it would be very difficult to determine the impact. I think that as the old saying goes, "As California goes, so goes the nation." We may be the leader with respect to some of these rent control issues, but I don't think that we're the end of that. There was a proposal in Washington as well to repeal the statewide ban on rent control. We've seen that in a number of other states.
I think this is part of a broader trend. It's not something that is going to immediately cause us to change direction with respect to our portfolio allocations.
Thanks.
Our next question comes from the line of Jeffrey Spector from Bank of America. Please proceed with your question.
Great. Thank you. Good morning. My first question is on supply. I feel like your comments on 2019, I think you said basically equal to 2018. Is that new? I thought previously you were saying down, maybe even last quarter you said down 25%. Has that changed?
Yes. It's Michael. We were down 25% last quarter. It was a smaller number, but we did think it was declining next year relative to 2018. I think what happens is you get to the end of the year, we moved about almost 4,000 units from 2017 to 2018. We have not yet moved units from 2019 to 2020, assuming that these delays continue, which is probably likely. Again, we talked on the last call and have talked more recently about the difficulty in pinpointing exactly when the deliveries happen and how they play out. There could be a small decrease in 2019. We're just not sure.
The numbers are really hard to pin down. Therefore, our best guess is that over the next couple of years, we're looking at permits as well, over the next couple of years that there will be a reduction, a slowdown, but it'll be relatively small. We don't see any major drop-offs, although there are pretty significant increases and decreases if you look at each metro. For example, the Bay Area will be down in 2018, and it will grow a little bit in 2019. Those types of variations will happen. We think the trend is still down. We think that a lot of the permits are likely to get pushed back given the comments we made earlier about the relationship between rents growing somewhere around 3% and construction costs growing in the high single, low double-digit range.
That obviously is not a good thing for residential construction. We think the trend is down, but probably not by huge amounts.
Okay. Thank you. My follow-up is just trying to get a feel for 2Q and peak leasing season given the strength that you saw in 1Q. I know you've said in the past that 1Q typically sets up 2Q, 3Q. Would it be fair to say at this point, are you driving rents in your markets as we finish April and enter May? Can you say any general comments?
Yeah. This is John speaking. As I mentioned earlier, we gave out some information on April, and things are playing out as we expected. We are following the market. The market overall, big picture for the portfolio is up a little bit less than 2% year-over-year, so April '18 over April '17. We're making the best of our situation there as we follow the market. It's working out according to plan. We reduced our vacancy as we're looking to optimize our position. The markets are solid. We're expecting that this year we have a standard seasonal pattern, whereas last year the markets peaked a little bit early. This year we expect the seasonal pattern to be normal.
We're benefiting a little bit by going into the peak leasing with higher occupancy, which was ultimately part of our plan to do what we could do to position our portfolio well to maximize our returns this year.
Great. Thank you.
Our next question comes from the line of Austin Wurschmidt from KeyBanc Capital Markets. Please proceed with your question.
Hi. Good morning. With respect to kind of the expectation for the standard seasonal pattern in the back half of the year, you referenced significant improvement early in the year versus the second half of last year. How should we think about the deceleration throughout the year, and when would you anticipate stabilization in sort of the second derivative of revenue growth in the second half this year?
Sure. Let me try to address that. This is John again. The big move that you're going to see is really related to our occupancy. We largely did very well in Q1 because we had higher occupancy, as I mentioned, 60 basis points over the prior year's quarter. We expect that to go down. Our plan is that our occupancy will be materially consistent with last year at about 96.6. That will be the big change. Our expectations for rents really haven't changed in our S16, which is 2%-3%, and right now we're at about 2%. The difference between last year and this year is we do expect the curve or the peak leasing to continue through the midsummer or late summer period as it historically has. We'll start to benefit, we expect, by locking in higher rents.
That really will benefit 2019, not 2018. Does that answer your question?
Yeah. No, I think that covers the gist. Then as far as L.A., you mentioned it being a little bit stronger with weakness mostly in the CBD, which probably doesn't come as a huge surprise. When would you expect some of that supply to leak into West L.A., or would you?
You mean the impact of the supply to leak into West L.A.?
Yes, correct.
It's been interesting to watch. I watch the different sub-markets. Obviously, Downtown L.A. has tremendous demand. There's an awful lot of jobs there and more than there is supply. The supply, ultimately, everything will balance itself out. The quality of life in Downtown L.A. continues to improve, and people like that. There is a lot of supply going in that location right now. Small for the overall county. You're less than what, a 0.5% overall supply in L.A., but nonetheless, a lot in Downtown. They are pulling from different markets, and we've watched the impact in different sub-markets. Interesting that sometimes it'll be Pasadena, Glendale area, other times, Torrance area, other times out in Woodland Hills. It seems to move around. I can't explain that movement.
This quarter, it happens that our Tri-Valley area, and Woodland Hills are stronger, and the Long Beach area is a little weaker, but it does seem to move around. We're actually seeing the impact of that over the last year and a half or so, kind of rotating through different markets. In the end, again, the demand is significantly in excess of supply for the overall market. It's just a matter of people making adjustments in their lives and moving downtown, which is a very desirable place and getting better and better each day.
I think you referenced last quarter, 77% of the new supply is West L.A. and Downtown. How does your portfolio break out into kind of those two sub-markets, I guess, and then versus the supply broken out between those two sub-markets?
Don't have the numbers exactly in front of me. It's a big portion of our portfolio is impacted by the Downtown as well as the West L.A. No doubt about it. That's why I brought that up last time. Yeah, we are impacted. You see that in our numbers, no doubt about it.
Okay. Thanks for taking the questions.
Our next question comes from the line of Dennis McGill from Zelman & Associates. Please proceed with your question.
Hello, and thank you. First question, just wanted to go back to the comments on the same-store revenue growth. Last quarter you had said that the first half of the year would be weaker than the second half of the year, that flipped today. It sounds like the approach you took on occupancy is exactly what you expected going into the quarter. Can you maybe just bridge what drove the difference in the cadence through the year?
Sure. Our expectations for market rents were just trailing a little bit in where we expected market rents to be. Our expectations on scheduled rent on the rent roll are really spot on. The real big change was in occupancy, that all really came together at the end of the year. It was a combination of factors from a concession strategy that we launched, as well as working to ensure that we do whatever we can from a community perspective as it relates to the fires, related to the executive order that was signed, of course, comply with the laws. All that together meant that we ended up lowering our prices on a month-to-month and increasing our month-to-month about 1.3% across the portfolio, as well as, we restricted renewal.
I mentioned in my comments that our turnover went from 46% down to 40%. All of that kind of came together, from the end of the year and then into the first quarter and gave us a benefit of the occupancy. The market overall is really operating consistent with our expectations and our scheduled rents is. At this point in time, we're watching as we expect our occupancy decline, it's really not a change in our expectations for the year. It's just we ended up with some extra occupancy Q1 and adjust our guidance accordingly.
Okay. That's helpful. Thank you. Bigger picture question, just on the supply dynamic. Michael, you noted the new supply not penciling or new opportunities not penciling, but at the same time, I think you appropriately talked to some of the, whether it's academic studies or I think just what we all realize is a shortage of housing in general. Those two things don't necessarily seem to go well together. If we have a shortage of housing and I'm on the side of high cost in one form or another, it doesn't seem like I'm going to lower my cost anytime soon. What would be the breakage? What causes cost to go down in that environment? Or if I'm a developer, said another way, why wouldn't I look past those short-term issues if I feel there's a shortage in front of me?
We happen to have a developer in the room, in Mr. Eudy, he can answer that. I would say, John, how many times in the 30 years you and I have worked together have we seen cost overall go down for new development? It's been, I don't think ever, right?
Well, in the recession it went down dramatically.
Well, in the
The great recession.
Okay. That's perhaps the only significant That was driven mainly by the construction. The general contractors have very little to do, and they want to get something started, so they're willing to do it at very low profit margins. I guess I contrast that with what we see now, which is commercial construction booming, various types of residential booming, dramatic undersupply of housing, and that's driving construction costs again, at around this 10% increase, which, again, there's an imbalance here, and it doesn't appear that the mend of that issue is anytime, or is close to being at hand.
If you look back on
We would agree with you.
If you could look at those prior cycles, have elevated costs ever been the catalyst to slow supply?
Of course.
Yeah.
Of course. Many times it's caused supply issues. In fact, it usually does when, again, we all realize that development is more risky than just buying buildings and putting a loan on them. Therefore, we require a premium because things don't always go as we plan them to go in a development deal. The question is, and I think you're starting to see that now, when you start having some of these issues, rents don't grow as fast as you hoped or as fast as your pro forma expected, and costs are going up, then your margins are being squeezed. Some landowners decide to go ahead at what would be considered to be a sub-normal risk premium on those deals.
They just put more equity into the deal, they make those transactions move forward, as opposed to the other option, which is essentially putting them on hold and hoping that things get better down the road. That's typically what happens. We're seeing a number of deals that really, from the market clearing threshold, don't hit the margins or risk premiums that are typical in the industry, but they're moving ahead anyway. I'd say that in general, that happens on a limited basis, and pretty soon people run out of additional equity to throw into their deals to make them work. I think we're in that middle ground where the market is trying to deal with these forces. Again, construction costs going up faster than rents and NOIs. We see deals slowing.
That's the primary reason that as we're looking at preferred equity deals and we're looking at other development deals, it's pretty challenging to make a transaction work.
This is John Eudy. A couple of other comments. At this stage in the cycle too, exactions and city requirements and takes on additional fees tend to go up. You have that coupled with hard costs and items that Mike mentioned that make it more and more challenging to economically make a deal make sense.
Okay. Thank you, guys.
Thank you.
Our next question comes from the line of Drew Babin from Baird. Please proceed with your question.
Good morning. This is Alexander Kubicek on for Drew this morning. My question's a little bit of a follow-up to what we were just talking about with the general transaction market as a whole. Where do you guys see the incremental opportunities that you guys can take advantage of to hit your 2018 for the rest of the year?
Well, this is Mike, and that's a great question. It's a little bit unclear. In the first quarter, obviously, the stock traded off pretty considerably, and we thought that the better transaction or the better capital allocation was to buy some shares back. Now that the stock has recovered somewhat, somewhere around NAV, let's say, ordinarily we would look more to our co-investment platform in that scenario to make deals work. There were 20 deals in the first quarter that were in our marketplace that would generally have satisfied our overall transaction parameters. There are deals out there. Again, when we have stock trading at a discount to NAV, we're going to pursue that as opposed to buying deals at market. I guess where we are now is probably relying on the JV platform to make deals.
If there's significant changes in either direction in the stock price, our expectations can change pretty dramatically and pretty quickly.
Got it. That's really helpful. Kind of just as a follow-up, do you foresee this Costa-Hawkins uncertainty overhang causing any general shift in the next, call it nine, 12 months, in underwriting expectations on both the acquisition and the disposition side?
It's hard to anticipate exactly what's going to happen there because you have interest rates that are thrown into the equation as well. Interest rates right now, let's say we've gone from an environment we had very strong, significant positive leverage on acquisition transactions to maybe a smidgen of positive leverage. I don't think that's a negative factor, but it's not a positive factor. I don't think, again, there were 20 transactions, most of them in California that closed in the first quarter. It doesn't seem to indicate that Costa-Hawkins is impacting or concern about Costa-Hawkins is impacting the transaction market. As we get closer to November, perhaps a little bit. Again, it's still Costa-Hawkins does not mean rent control is going to automatically happen.
Even if it does happen, the severity of rent control and which cities continues to be notable questions and important questions in the overall dynamic. I think it's still a little bit early to tell. Again, I'd just step back from it and look at California has this huge housing shortage. You have the legislature in this AB 1506 that I talked about on the call that is pretty clearly or concerned about the overall housing shortages in California, it decided not to push forward with the repeal of Costa-Hawkins. It seems like there's some forces out there that it's too early to conclude that it's going to have pervasive effects. Again, I don't know at this point in time, we continue to monitor the situation closely.
Perfect. Thanks for answering my questions.
Thank you.
Our next question comes from the line of Alexander Goldfarb from Sandler O'Neill. Please proceed with your question.
Hello. Good morning out there. Mike, maybe just following up on the rent control. Just, one, is it your understanding that single-family rentals are part of the rent control proposal, or they would be separate? Also, from what you guys have in your speakings with folks out there in California, what's your sense if you had a handicap that? Is your sense that enough people understand how rent control will actually be a negative as far as curtailing development and increasing unaffordability? Or is your sense from how the polling is going that the sentiment is building to pass an overthrow of Costa-Hawkins?
Hey, John Eudy is here, he spends a tremendous amount of time and has really led the industry in this discussion. John, you want to take that one?
Morning, Alexander. Sure, Mike. First, on your first question on single family, the repeal measure that is going to the ballot, it appears, does include removing the exemption of single family. Yes, if it passed, single family would be exposed to having rent control applied to it, which is one of the big proponents for us because it means the majority of rental units, as you well know, in California, are mom-and-pop owned and smaller local-owned entities, they have a lot to lose. That brings the attention to the ballot measure in a wide way to be in our favor to oppose it. Generally speaking, we've been working on this pre-campaign for about nine months before it officially got put into play in January, they just recently collected enough signatures to technically qualify it.
It's at the attorney general's right now office to get to the final legs by the end of June. We believe from a policy perspective, clearly the legislature gets it. That's why it never made it out of committee at AB 1506. We also know that every academic study that's ever really been done on rent control understands the unintended consequences, that it actually hurts those that it supposedly is intended to help. We're pretty encouraged that our initial polling and how we're going to be managing the campaign, we're actually going to push this back and at the same time come up with, at the tail end, ways to bridge the gap on affordability issues at the lower and middle end of the range, because that's really where the problem is.
Rent control per se, the reason Costa-Hawkins was enacted in 1995 was because it stopped housing, the last thing you want to do is stop housing production. We're fairly confident that we're going to get there and message it through, if it does go to the ballot, which it appears it will, that we will prevail.
Okay. The second question is, you guys mentioned, John, I think you mentioned that some of the emergency rent things are still in effect through the end of the year in some sub-markets. You also mentioned that your policy in the second quarter is going to focus more on boosting rent versus occupancy. Can you just sort of give a color for how much of your portfolio is still impacted by the 10% limit versus how we think about you guys boosting rent and having occupancy drop off in the second quarter?
Sure. Let me give a little bit of a broader answer to that, Alex. First off, the number 1 county that is impacted that we operate in is Ventura, it's less than 5% of the company that would be directly impacted. However, anywhere where we think there would be an impact, we would want to work with the community. It's what we do. Essex has always been interested in working with the community. If there were assets, we just haven't found situations where there's people that have been impacted by the fire that are moving in or around or near our assets. As it relates to the change, I wouldn't call it policy, but it's more of how we operate seasonally. Seasonally, the rents in our market with the portfolio go from January, a low, or December, a low, up about 5% to 6% and then back down.
We modify our operational strategy based on the season. It's best to emphasize occupancy during the, you might say, slower season and emphasize meeting the market on rents at the higher season. We're in a situation where our rents are moving overall, as I mentioned, year-over-year, about 2%. We expect to move about 2% or 3% this year. It's a minor adjustment, but it will impact our occupancy in Q2. Does that answer your question?
Yeah. It's just Ventura County that is the only one that is affecting you guys.
It's the main county. There's a few other bits and pieces here and there, but it's the main thing. Big picture, it's about under 5%.
Okay, great. Thank you, John.
Sure.
Our next question comes from the line of Steve Sakwa from Evercore ISI. Please proceed with your question.
Thanks. A lot of my questions have been asked and answered, thank you. I guess, Mike, in Seattle, there's this head tax that is potentially coming through the legislature, and it seems like Amazon has put the brakes on some development, and maybe that's just posturing on their part. I'm just curious how you sort of think about that and how you maybe think about some of the risks in Seattle over the next six to 12 months.
Yeah, Steve, that's a good question. It seems that Amazon is pushing back pretty hard, has threatened to slow down construction of some office space in Seattle. We have the whole HQ2 thing. I think there was an announcement that they had moved 1,000 jobs to Boston and 3,000 to Vancouver, B.C. There's been a lot of things happening with respect to Amazon. However, at the same time, we try to track the top 10 tech companies and what they're doing and how many open positions they've had. They've actually added a lot of positions. Amazon, at the end of last quarter, had about 4,700 open positions, and that has grown to 6,700. These are in California and Washington only. We still see pretty good impact from Amazon.
I guess I'd go back to the Boeing example and say that Boeing and Seattle had a give-and-take relationship, let's say. I think that it's important for any major employer to have options and just so you can make sure that you keep the pressure on the local governmental agencies. I think they're doing exactly what any major employer would do. That help?
Yeah. It doesn't sound like you're overly worried about this head tax, I guess, getting passed and slowing job growth. It just sounds like it's a lot of posturing, but ultimately doesn't maybe create-
Yeah.
-a major headwind to the city.
Well, I think it's, again, just part of a negotiation, right? I think it's normal. When you look at what they actually did, they actually added a couple thousand more job openings now this quarter versus a quarter ago. I'd say that's generally a positive thing, looking at Amazon specifically.
Okay. Just to maybe circle back, I know there's a lot been on the development side, and just to make sure I understand your view. You still think supply will kind of be even in 2019, but that by 2020, you kind of get a bigger fall off just given this rise in construction cost and more limited rent growth? Is that kind of the way you think about it?
I'd put it maybe a little bit differently. We think that permits can disconnect pretty significantly from what is actually started and delivered because you can stretch out even if you pull a permit, and the question is, are you pulling a grading permit? Are you pulling a zoning permit, or a building permit? We've had examples. Our Hollywood deal, for example, that was picked up as a permitted transaction 2 years before we got a building permit. The timelines are much longer on the West Coast. What we have learned is we look at permits and try to monitor starts, but we really get involved when something is under construction because we send our econ team out on a job-by-job basis and try to get a good handle for what's being delivered.
It's difficult for me to talk about 2020 at this point in time. Again, I think what I said earlier, remains our best estimate that the trend is to go down slowly, for supply to come down slowly. Again, it's a little bit murky, and it's hard to specifically address what's gonna happen unless you're within that 2-year window where it's actually under construction, and we can monitor its progress. Again, at the end of last year, we moved almost what, 4,000 units across our footprint from 2017 to 2018. When you have that much movement, it's hard to say exactly what's gonna happen when you have less clarity going a year or two out. Does that make sense?
Yep. Got it. Thanks a lot.
Thank you.
Our next question comes from the line of Wes Golladay from RBC Capital Markets. Please proceed with your question.
Yeah. Good morning, everyone. I want to go back to that LinkedIn study, just kind of curious what drove it. Were you more concerned about how the barrier with all those job openings, with all the office under construction in a tight labor market? Were you actually seeing, within your properties, some outward migration?
Hi, Wes. It's Mike, and anyone else can pitch in, too. It isn't anything that we have seen at our properties that's prompted that. This is a research effort trying to understand the competitiveness of our metros versus other metros in the U.S., recognizing that over the long periods, companies have choices, people have choices, et cetera. It really comes back to trying to keep a handle on the competitiveness of our metros relative to other major metros around the U.S. We found the LinkedIn study. You have job growth. You have a variety of other indicators that seem to lead us to believe that our metros are pretty competitive and are doing a good job at attracting talented workers, which is our mandate and which is what has allowed us to outperform over a long period of time.
I guess maybe what stood out the most to you, and it sounds like you feel a little bit better post-study. I guess one thing that stood out to me was that it looks like Los Angeles is losing people to the Bay Area. I actually thought it might have done a little bit better considering all the tech jobs that were going to the Southern California area.
Well, on the LinkedIn study, we reproduced what was there, so we haven't added anything to that. We may have presented it a little bit differently. I guess, as we look at things, just look at the level of job growth, that we have, back to the trailing three-month numbers where we just did so well in Northern California and Seattle. We did a little bit better in Southern California. We're 0.2% better on job growth than what our FY 2016 estimate was, but we're 0.8% in Northern California and 1.1% better in Seattle. It just shows that the strength of those markets on the jobs front is pretty exceptional and a lot better than what we expected, and that's where these companies are adding people and they're producing a number of products and it's a very vibrant situation.
I think that trend is unlikely to change over the next couple of years. It seems like that is where wealth is being created and where companies are really doing well.
Okay. I just have one question on development, more so for the private developer. Can you give me an estimate of how much equity they have in a development? Are you starting to see them get squeezed at all with the delays, cost overruns, rising short-term interest rates, and probably a little bit below expectations on the underwriting for market rent growth? If they are getting squeezed, have you changed your criteria for your preferred equity investments?
This is John. I'll answer the first part of that. Yes, smaller developers are getting squeezed. The equity requirements are close to 50% with construction loans in the 50%-55% range. If they went into a deal assuming cost was going to be X without having it bought out, they're going to have an equity squeeze on the backside because costs have gone up over the last 18, 20 months, 24 months, as Mike mentioned, in the double-digit range. As far as the preferred equity deals, we're seeing less opportunities, as Mike mentioned, because of the economics more than anything else, not necessarily anything beyond that.
If expectations are a development deal needs to be in the five and a quarter plus range, they're really four and a quarter, a lot less people transact unless they're in a position where they need to go, and that's the preferred equity deals that we've been focusing on because they are bought in and already funded. They're just a little bit short on the equity capitalization. We'll let them put us ahead of them and subordinate their interest and make it so it's a safer deal from our perspective and still a good transaction, although skinnier return on their side.
Okay. Thank you.
I would just add that, to keep in mind, these are in our markets. We use our underwriting, so we're not relying upon the developer's underwriting. We have obviously a direct development effort, and so we do our own underwriting. This program is enabled because construction lending, again, in the 55% loan-to-cost area, used to be most of our career somewhere in the 75% ± loan to cost. That's what has enabled that program. We really haven't changed how we look at it. I just want to make clear that it's not like we're taking someone else's underwriting and then making the investment. We underwrite it based on how we look at the world and consistent with all the other activities around here. I think we have a big advantage when it comes to deal selection.
Okay. Thanks a lot.
Our next question comes from the line of Karin Ford from MUFG Securities. Please proceed with your question.
Hi. Good morning. You mentioned that housing prices continue to soar in many of your sub-markets. Has there been any more positive momentum on the condo conversion side for rentals?
Hi, Karen. It's Mike. Yes, we are incrementally more excited about it. As that differential between apartment values and for sale values diverges, it becomes more and more interesting, and we are working on transactions pretty diligently. The answer to the question is yes, definitely.
Do you think we could see something potentially transact before the end of the year?
I don't think so. I think early 2019 is probably the earliest it could happen.
Great. Thank you.
Thank you.
Our next question comes from the line of John Pawlowski from Green Street Advisors. Please proceed with your question.
Thanks. I wanted to head back to Nick's question around how you'd approach your portfolio under a repeal of Costa-Hawkins. Not exactly exploring new markets right now, but within your current footprint, would, on the margin, you perhaps shift allocations to Southern California, where the political pressures may not be as high as the Bay Area?
Yeah, it's Mike. There is actually a significant number of cities in Southern California that have discussions about rent control. I don't think that that necessarily offers us a great deal of relief. I would also say that our expectation for rent growth and the greatest shortages of housing are in the north. I think that there's a couple of considerations. You have the cost of transacting, which can be pretty substantial as well. Again, until we have greater clarity about where this is going to go, we are assuming that this will be part of maybe an effort over the next decade to reexamine the effect of rent control in the United States, not just California.
I think that we'll come back to the same conclusions that are in all these studies, including, again, the Legislative Analyst's Office report, which is a bipartisan committee in California, and other areas. I think that's where we're going. Again, I think that we are pretty good at transacting when we know a little bit more information. Now, we're guessing about what might happen. As we get closer to it, I think one of the nice things about the company is we are careful and selective and pretty opportunistic about using our capital in a thoughtful way. I'm pretty sure that there will be opportunities that present themselves.
Yep, makes sense. Then I wanted to go back to the permitting discussion and zone in on the Oakland East Bay Metro in particular. I understand the permitting data is far from perfect, but the trend there has been consistent acceleration in permitting growth as a % of stock. John Eudy, I'm just curious if there's been any on-the-ground inflection points in terms of zoning policies or pro-development, or if it's just drafting off of the Bay Area and nobody can put the shovel in the ground in the Bay Area or across the bay, so they go to Oakland to get deals done.
A couple of things. You all heard about SB 827, the Wiener bill, that was attempting to change at the state level how things get zoned around transit-oriented locations. Came out of the chute fairly optimistic and with a lot of political support, then died about a month ago in the committee level because of local control and NIMBY again, stopping what seemed to make sense on the surface. It's not any easier anywhere to get developments today than it ever has been, in spite of the 15 bills that were passed last year. On the margin, the momentum is shifting in the direction to make it easier, but we haven't seen any real play on that. On the East Bay you were referring to, I assume it's Oakland, Alameda County.
They have been more open to development, which makes sense because of the cost of housing in San Francisco. We do think that will continue to be the direction that Oakland goes in the near term, as long as the economics make it work. The problem, again, gets the details of how the transaction economically is penciled, if you will, which is the biggest challenge we have in production across the Northern California markets.
Thank you.
Our final question comes from the line of Buck Horne from Raymond James. Please proceed with your question.
Hey, thanks everyone. I appreciate the extra time. I'll try to be brief. I just wanted to go back to the occupancy strategy during the quarter, maybe relative to what you're seeing in terms of job growth and supply. I can't quite circle the why exactly you boosted occupancy so high, and did things like limiting the renewal pricing in front of peak leasing, if the job growth was coming in better and if you believe that supply is going to be down on a year-over-year basis. Could you just help me circle that narrative?
Sure. We look at it and say if you're sitting on a vacant unit, you're not collecting any income. If we can create a scenario where our residents are benefited, and we're benefited because we keep that unit occupied during a slow season, we think that's a good thing, and I think we were able to accomplish that objective very well. We had, again, our turnover go from 46 down to 40%, which really means the majority of the boost in the occupancy was fewer move-outs, which is a great thing. In doing that, it enables us to be positioned well to meet the market as the peak season leasing comes upon us. We're not looking with buildings that have occupancy issues and struggling with our market rents. We're able to try to meet the market wherever the market is.
Our expectations are that the market will move up in the 2%-3% year-over-year range, we'll be able to meet the market where it's at. The strategy makes sense from our perspective. Otherwise, we would've just ended up in the same spot, with lower occupancy for Q1 and in essence, less income.
Okay. Yeah, I hear you. It kind of reduced your available inventory going into an ability to price higher with the seasonality, I thought.
I see what you mean. Yeah, no, I see what you mean. Our turnover increases, our natural expiration of leases increases pretty significantly. That will open up potential, quote unquote, supply of units. Again, remember, some of these situations where we have people on renewals and we allowed them to stay at a lower premium on a month-to-month for a short period of time, they will move out. They have the option of doing a 12-month lease if they so choose, they chose to go for a month-to-month. It's just extended their stay a little bit, they'll move out most likely during the peak leasing season. That is our expectations.
Just quickly, did I hear you correctly? I apologize if I'm misquoting here, I thought you might have mentioned something about April revenue indicating a slight sequential decline from the 1Q levels. That was driven mainly by.
No, you didn't. No, not because of Seattle, but because of occupancy declines. That's exactly what we said. I mentioned that scheduled rent was coming in at 2.3% in April year-over-year, that our occupancy April year-over-year gain was 30 basis points. I did that because I wanted people to understand that we're going from Q1, where we had a 60 basis point year-over-year increase, rolling into Q2, now we're at 30, and our expectations is our occupancy will match last year. Again, the year is now playing out as planned, and we're positioned well. There's no doubt. It's not that the market is not good. The market is performing as planned.
The difference is really in occupancy and how our portfolio is positioned, kind of getting to your point, taking advantage of the peak leasing season.
Okay. That's very helpful. I appreciate the clarification. Thanks very much.
Absolutely.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back to Michael Schall for closing remarks.
Thank you, operator. Thank you everyone for your participation on the call. We look forward to seeing many of you at the upcoming Nareit conference in June. Have a good day. Thank you.
This concludes today's conference. You may disconnect your lines at this time.