Good day, and welcome to the Essex Property Trust third quarter 2026 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. It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you, Ms. Kleiman. You may begin.
Thank you for joining Essex third quarter earnings call. Today, I'll cover our operating performance for the quarter, considerations heading to next year, and conclude with a transaction market update. Barb Pak will follow with prepared remarks, and Rylan Burns is here for Q&A. We are pleased to achieve another increase in our full-year growth outlook for same property revenue growth and core FFO per share. This outperformance has been primarily driven by Northern California, which has exceeded expectations. As such, we are now anticipating full-year blended rent growth of around 2.9%, close to the high end of our guidance range. Moving on to regional highlights. Beginning with Seattle. This market has gradually recovered from a soft start to the year. Blended rent growth turned positive in the second quarter and remained positive in the third quarter, generating 2.1% growth.
This improvement has been led by the Easts ide, benefiting our portfolio allocation in the region. Turning to Northern California, which continues to lead the nation in multifamily performance. We achieved blended rent growth of 7.3%, which was elevated by a strong leasing season with an extended peak that continued through September. As for Southern California, operating conditions remain stable, with Orange County and San Diego leading the performance across this region. Our blended rent growth of 90 basis points in the third quarter was in line with plan. Looking ahead to 2027, the outlook for the broader U.S. economy and labor market remains uncertain. Even against this backdrop, West Coast multifamily fundamentals offer a compelling case for continued growth above the U.S. average, with encouraging green shoots supporting the potential for further momentum.
Total housing deliveries are expected to remain at a historical low of approximately 40 basis points of total housing stock, positioning our markets comfortably to generate rent growth within a modest job growth environment. At the same time, technology sector innovation continues to attract investments and drive economic activities, supporting our expectation for job and income growth above the national average. Together with favorable rental affordability, these fundamentals provide a solid foundation for the next several years. Concluding with an update on the investment market. West Coast transaction volume for institutional quality assets in the third quarter was generally consistent with same period last year. Recent increases in the Treasury rates is still being captured into the transaction market. It would not be a surprise if fourth quarter volume declines as buyers and sellers adjust to the new rate environment.
Although historically, our data shows that rate moves have less impact on pricing and cap rates in markets with strong rental fundamentals. Lastly, I am pleased to announce that yesterday we closed on an acquisition of a 474-unit community built in 2022, located in the East Bay in Northern California. Priced over $200 million and well below replacement cost, this asset is expected to generate a mid-5% yield. It is another example of our investment team's deal acumen in a competitive environment, leveraging our strong reputation and geographic scale in our market to generate operating efficiencies from day one. Essex remains disciplined in focusing our capital allocation strategy to maximize FFO and NAV per share growth. We continue to be well-positioned to capitalize on market volatility with our efficient operating platform and strong balance sheet. With that, I will turn the call over to Barb.
Thanks, Angela. Today, we will cover our third quarter results, discuss updates to our full-year guidance, and conclude with comments on the balance sheet. Beginning with our third quarter results. We reported core FFO per share of $4, representing a $0.01 beat to the midpoint of our guidance range. The primary driver relates to better same-property revenues, which grew 3% on a year-over-year basis, led by the continued solid performance of our Northern California portfolio. Turning to our full-year outlook. Revenues continue to exceed expectations, and as such, we are raising the midpoint of same-property revenue growth by 10 basis points to 2.9%, driven by better scheduled rent growth. As for operating expenses, we remain on plan and are reaffirming our full-year midpoint. Our expense guidance reflects higher controllable spend in the fourth quarter, which we have previously discussed.
Taken together, we are raising the midpoint of same-property NOI growth by 20 basis points to 3%, representing sector-leading growth as we conclude 2026. The strong operating results led to a $0.02 increase in our core FFO midpoint. Finally, a few comments on the balance sheet amid the current interest rate environment. Our total debt maturities for 2027 at per share are around $575 million, of which the lion's share is the $350 million in bonds that mature in May. This represents a very manageable amount of maturities next year, given the size of our balance sheet. Further, we are well-positioned as it relates to our floating rate exposure, which is around 12% on a pro rata basis, of which just over 40% is tied to the SIFMA index, which floats at a cheaper rate than SOFR.
Lastly, over the course of 2026, we have been proactively hedging our floating rate exposure by executing approximately $600 million of swaps at pro rata share at an all-in fixed rate of 4.9% to replace swaps that expire over the next six months. While we will feel the effects of higher interest rates next year, we are favorably positioned relative to the peer group in a higher rate environment. With Net Debt- to- EBITDA of 5.4x and well over $1 billion of available liquidity, we have ample flexibility to meet our commitments, navigate the current rate environment, and pursue opportunities that support long-term FFO and NAV per share growth. I will now turn the call back to the operator for questions.
Thank you. We will now 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 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 poll for questions. Thank you. Our first question is from Nick Yulico with Scotiabank.
Thanks. I guess just maybe starting out with the blended rate growth. I think historically, you do not typically see an acceleration in the new lease rate growth in the third quarter versus the second quarter. At the same time, you also have Northern California as a region being very strong right now, and sort of seems like it is strengthening in the third-party data year to date. I guess I am just wondering, maybe just talk about what new lease rate growth looked like in Northern California versus the other regions in the third quarter. Thanks.
Hey, Nick. Angela here, and thanks for your question. You are absolutely right. Typically, sequential growth in blends from second to the third quarter, you typically see a deceleration because it is just normal seasonality for this business. In fact, Northern California has bucked that trend, and we have seen a slight increase on new lease rates increasing. New lease rates from second quarter to third quarter actually improved by 20 basis points. That is unusual, but then again, this market has had tremendous momentum as it starts its recovery. This is a good sign. If we look at our blends this year compared to last year sequentially, this year is doing better overall, not just in Northern California. I will give you an example. Seattle last year sequentially, new lease rates actually declined by over 700 basis points. This year it is only about 120 basis points.
All our other markets are doing just fine with, of course, Northern California leading the charge.
Okay. Thanks for that, Angela. Secondly, in terms of L.A., I know you're getting closer to that 95% financial occupancy you've talked about. How should we think about the other components needed to help drive some better rental rate improvement in that market? Thanks.
Yeah, Nick, good question on L.A. Certainly it's a market that we've been monitoring very closely. A couple of things I think we're seeing green shoots in L.A., although these things will take time. But supply continues to decrease. So over the past two years, supply has decreased by over 40% in the L.A. markets. Even though there's been layoff announcements related to entertainment industry, it's no longer meaningful. It's a small portion of the economy with less than 100,000 jobs in the past couple of years. So there's some noise there, but certainly isn't anything that we are concerned about. But what we've been really focusing on is the defense and aerospace green shoots. That industry is expected to grow faster in GDP over the next 10 years than the rest of the economy.
It's estimated to surpass over $1.5 trillion in the next 10 years. A third of that funding is allocated to Southern California. So it's great that there's a catalyst for demand growth to come in this market, and certainly it's the first we've seen in a long while in terms of a major industry taking a foothold in this market.
Our next question is from Steve Sakwa with Evercore ISI.
Thanks. I guess good morning out there. Maybe just kind of following up on the last line of questioning. I know we still have the fourth quarter to go here, and I'm sure you're focused maybe more on just overall blended rent growth and not any one component. But I guess it does feel like new rent growth this year will probably be slightly weaker than the new lease growth, I guess, posted last year, with renewals obviously better this year. As you look forward, is there a path to new lease growth accelerating next year in a, let's call it, a mixed or challenged job market, given that you've got low supply, or I guess, what gets a new lease growth to really accelerate moving into 2027?
Hey, Steve. Thanks for your question. It's a good point that you made to not get overly focused on a particular metric like a new lease growth, because we are focused on the blends, and we have to be, because that's ultimately what flows to the bottom line. As I've said in the past, we can actually fabricate or even generate a fantastic new lease rate growth. All we have to do is pull back on occupancy or pull back on renewals. But that is not going to maximize total revenues either. Just keep in mind, new lease rates, when you leave a unit vacant, one week costs you 2%. So we're not going to run our business focusing on pushing new lease rate growth. That does not mean that the market fundamentals are not sound or not improving.
If we look at new lease rate growth this year compared to last year at the same time, it certainly has done much better. So once again, I point to the sequential number. Last year, new lease rate growth sequentially went down about 40 basis points for the entire company as a whole. This year, sequentially, new lease rate is only down 120 basis points. So that would tell me that we actually have improvements in new lease rate growth, and that's continuing. In terms of the overall outlook, Steve, on the jobs, for example, that's really what's going to drive new lease rate growth, is that when we look at by region, of course, Northern California remains very strong with great momentum there. But Seattle, interestingly, is starting to show some positive trends.
When we track the top 20 tech openings, Seattle, for the first time, has reached its pre-COVID average in job openings, and it's the first time in the last two years. With the office expansion announcements that occurred last year, and supply deliveries continue to decline, we do anticipate that Seattle will have a nice rebound toward the end of next year. L.A. remains stable. It's gradually improving with green shoots with the defense sector and supply decrease as well. So I think all our markets should actually do better than last year. If nothing else, look at our earn-in. It's quite a bit better this year compared to last year.
Well, thanks for that, because you just teed me up for my next follow-up question, which is, could you talk about the earn-in as we sit here today for next year and maybe where are renewals going out for the fourth quarter and into, I guess, early part of 2027? Thanks.
Yeah. The renewals are going out in the mid-4s range in the fourth quarter. So it is on plan, and it is actually a little bit stronger than what we had originally hoped. Now, that means that asking is actually higher. I know that you guys wrote a piece and you were looking at the asking rents. And so asking rents are higher. They are in the low to mid-5s, and we anticipate that we are landing around mid-4 on the renewal side, on the actual renewal.
Our next question is from Brad Heffern with RBC Capital Markets.
Yeah. Hey, everybody. Is there any update you can give on where October spreads are trending? Obviously, I am sure you are seeing the normal seasonal fallout, but I know you also have the longer than normal leasing season, so I am wondering if that is playing into it at all.
Yeah. On the October spreads, let me take a quick look. It is generally in line with plan. It is obviously starting to taper off. Keep in mind, we are now hitting our seasonal low here. Northern California is leading the pack. On the new and renewal, Northern California on the new is well north of 10%, and with everybody else on the new side, starting in the negative territory as it should be in October.
Okay. Got it. Thanks for that. Can you just go through concessions by market and how those have changed, if they have changed?
Sure. Happy to. Concessions by market. Overall, let me just start with portfolio average. You have some data here. Concessions 3Q compared to last year compared to this year, not a whole lot different. 3Q last year, portfolio average around six days. This year, a little bit more, a few days more, around 10 days. Nothing to get excited about. Heading into the 4Q, we are around a week, so similar to last year's levels. If we are talking about by market, let me see. Northern California, effectively no concessions. PNW is less than a week, and Southern California, a little over a week. Once again, these are all normal and very stable levels.
Our next question is from Eric Wolfe with Citi.
I might have missed this in your answer to Steve's question, but did you say that the earn-in is still around 150 basis points? I just wanted to confirm that.
Oh, yes. Thank you for that follow-up. I didn't finish my answer. Our earn-in, which we originally published at around 150 basis points about a month ago, we are assuming a slightly higher earn-in, probably an additional 5-10 basis points.
Got it. Thank you.
Just for context, last year was about 85, so it's certainly much better this year.
Yep, makes sense. Just second question. You mentioned some positive indicators in Seattle that could cause us to inflect late next year. I think you said late next year, so I wanted to confirm that. There has also been some news around Microsoft trying to buy out 60,000 employees. Does that impact your thoughts on near-term fundamentals, or you think all the other sort of positive indicators that you are seeing will sort of more than offset that?
Yeah, that is a good question. Yes, we saw the Microsoft announcement, but what we have been looking at and tracking very closely is also the unemployment and continuing claims for the market. It has remained well below the long-term average. This tells us that layoffs have been absorbed very quickly or they have been rehired. More importantly, with this market, employers are doing what they are supposed to do, which is moving business units to reallocating their resources to higher profit businesses. Once again, this does not really concern us too much when we look at everything else. All the other fundamental data points point to a healthy environment. The one comment I will add is that, remember when Amazon had all these layoff announcements? Well, they ended up rehiring a lot of the layoff employees.
There is going to be that continued movement, but it has not been in such a way that it has disrupted normal market functions.
Our next question is from Alexander Goldfarb with Piper Sandler.
Hey. Morning out there. Two questions for you. The first question, Angela. Aerospace and defense certainly has been getting a lot of attention, and in 25+ years in real estate, it's never really received this amount of attention. As we think about Southern Cal, especially SpaceX and the other companies that are down there, is this more just like sort of cocktail conversation, or are your communities seeing actual evidence where increased hiring is actually showing up to rent apartments in your Southern Cal? That's my first question, then I have a second.
Okay. Hey, Alex. Thanks for your question. I think the difference with respect to the aerospace defense now versus what's been discussed in the past is that now there's actually been commitments or investments earmarked that's been published. And so $1.5 trillion is an eye-popping number. And have us stated that a third of it allocated Southern California is, as far as we're concerned, really terrific indication of where that industry is headed. As far as having SpaceX headquartered in the L.A. region and of course, Anduril in the Long Beach area, having two major industry giants having a footprint in those markets are also a very good indication for that market. Now, having said that, once again, these are relatively new and money is just getting allocated.
Companies are just starting to hire, and so it will be way too early to see that translate to job growth. It's just never happened that quickly, that announcement and then immediate job hire. It always takes time for people to find the right talent, find the right office space for them, and grow that business.
Okay. The second question is on Seattle. I don't know if you saw the article, but there was a recent business survey. Local businesses not too happy with the way Seattle is going, thinking about leaving, what have you. Obviously, the Microsoft news. But can you just break down the market because you talk about strength from the Eastside, weakness in the CBD where you have less exposure. There's obviously the political overhangs and just trying to understand the market if Seattle retains its economic engine or if there are disruptions where it may be a bifurcated market even next year, and therefore the hopeful growth that many of us think about is coming may not actually occur because of other dynamics in the market, whether it's a split between Eastside and CBD or where companies are allocating their hiring there versus Bay Area or elsewhere.
Yeah, that is a good question on Seattle, Alex. What we see is certainly Eastside has been a beneficiary of some of those migrations not just from downtown Seattle, but from other markets as well. And we do see that continuing because certainly no employers are making noises about leaving the Easts ide. I think that article really relates to the concern about the legislation. And I think when legislation becomes business unfriendly and discourages housing, I think that is a concern for all of us. And I do think that it is a good starting point to have a conversation with the legislation, with Seattle and the City of Seattle. I am hopeful that they will take note. I know in the past when these conversations occurred, there were adjustments and both sides were at the table trying to work things out.
And so I am hopeful that that will occur once again. Ultimately, with the Easts ide being the beneficiary, I think Essex is in a solid position. But keep in mind, the other overhang in downtown Seattle has been supply, and supply is starting to abate, so at least there will be some relief on that end.
Our next question is from Jana Galan with Bank of America.
Thank you. Good morning. Just wondering if you can go over latest thoughts around capital allocation. You mentioned the recent Oakland acquisition was in the mid-4s. How do you kind of weigh that relative to share buybacks? And also curious if you are seeing increased opportunities in lending or preferred equity.
Hey, Jana, this is Rylan here. Starting with the capital allocation strategy, what we are really trying to do, consistent with the past, is source the highest risk-adjusted returns, pair it with our lowest cost of capital to drive NAV and FFO per share. You mentioned several potential investment opportunities that we have done this year. When we think about our menu of options from acquisitions, development, preferred equity, reinvestments, stock buybacks, debt paydown, we have allocated to five of those six in 2026. We are going to remain nimble. Our strategy is not going to change, and we are just going to, when we see an opportunity to create NAV and FFO per share, that is where we are going to lean in.
As it relates to the most recent question about the deal that we just announced yesterday, again, this is really consistent with what we are doing for the past several years, where we have been allocating acquisition capital into newer assets where we can drive efficiencies from our operating model in markets where we have conviction of growth. As you mentioned, and Angela Kleiman mentioned, this is a mid-5% initial yield, and we believe the East Bay is in the path of growth. We have seen this before in previous cycles where you see really strong rent growth in a tight housing market in San Francisco and the Peninsula that is moving into Oakland and down south through Milpitas.
We believe this is coming with high level of conviction out in the East Bay. We are really comfortable with a basis in this property, and most importantly, we think we can create value. We have got two communities nearby so we can take costs out, improve the retail leasing. This is, I think, a nice win for our investors. Bigger picture, as we think about capital allocation, all that whole menu is on the table for us, and we are going to continue to lean in where we can drive the most value for our shareholders.
Thanks, Rylan. Just with the increased volatility in rates, curious if you are seeing more opportunities on that lending side.
Yes. I'd say it's still a little bit too early. I think the market's still adjusting to the move in rates that we've seen in September. But as the financing market gets a little bit tighter, that should create more opportunities for us on the preferred equity book as well as on the acquisition side. It's still early. I think buyers and sellers are still adjusting. I think you've heard the public commentary in terms of bid-ask spreads widening. I think that's fair on the West Coast as well. We're again, underwriting everything, trying to create opportunities, and I do think it will create additional options for us in the near future.
Our next question is from Austin Wurschmidt with KeyBanc Capital Markets.
Great. Thanks. Hello, everybody. Just with respect to the mid-4% renewal rate growth that you highlighted on achieved rates in the fourth quarter, are you guys more focused on building occupancy today ahead of next year? And I'd be curious where occupancy has trended subsequent to quarter end. Or is the move from the 5.3% renewal rate growth you achieved in the third quarter to the mid-4s, is there some other factor that's causing you to pull back a little bit?
Hey, Austin. It's Angela here. Thanks for your question. We typically favor occupancy heading into our seasonal slow in the fourth quarter. You'll see us continue to deploy that strategy with the caveat in certain pockets of Northern California where we're continuing to see strong momentum. That, of course, will allow us to continue to favor rents. We'll see how long that lasts, but we certainly will try to maximize that momentum as much as possible.
And then as far as where occupancy sits today?
Occupancy today is 96%. Hold on. 96.3%, I think. Yep, 96.3%.
Helpful. Then just last one for me. On the expense side, it looks like the guidance implies a fairly big pickup late in the year. Anything specific that's driving the increase? Then any considerations for expenses ahead of next year? Thanks.
Hi, Austin. It's Barb. As we've said the last several quarters, we did expect a second half increase in our controllable expense spend. It is just timing on when we were going to finish up some of the projects that we had going on this year. So that is what's really driving the Q4 expense increase of about 5% on a year-over-year basis. It's really driven by that controllable side, which has been light year-to-date. So no change from our original plan this year. As we look to 2027, we're still working through the budget process. But as I look at things today, when I look at the key categories that we publish on S-10, I don't see too many deviations in year-over-year growth from what we expect in 2026, with the exception of property taxes.
We did have some favorable Prop 8 appeals this year, which allowed our property taxes to be only 60 basis points increase on a year-over-year basis. I would assume that that's going to be more in line with our historical average of 3%-4% next year. That's the one line that I think has a little more pressure than the other lines.
Our next question is from Jamie Feldman with Wells Fargo.
Great. Thank you for taking the question. I guess, as we're thinking about next year, can you quantify how to think about the earnings impact from the JV swap resets, including the $496 million moving from 2.7% to 5.3%, and then the remaining $128 million? How do we think about the rate and timing when we're building out our models for next year?
Yes, Jamie, this is Barb. That's a good question. We do have three swaps maturing within the joint venture portfolio. One December 1st of this year, and then two at the end of March next year. We have executed new swaps for 80% of that at an all-in fixed rate of 5.3%. While our rate is going up, it's obviously a byproduct of the market. It's not an Essex specific issue, just rates are higher. What I can tell you is if we waited to hedge and we didn't hedge, our rate would even be higher today in the high 5s. We feel good that we do have a better than market rate going into next year.
The impact to our interest expense from the swaps that we have executed at pro rata share will lead to a $0.09 increase to interest expense in the joint venture portfolio. As you mentioned, 20% is not hedged and that is going to be floating at this time and that will add a couple more pennies to interest expense depending on what SOFR rate you assume. We'll monitor the markets. If we see an opportunistic window to hedge that, we might, but right now it doesn't make sense to hedge that. All in $0.10-$0.12 increase next year on interest expense from the swaps at pro rata share.
Okay. Thank you for that. The term loan, I don't think that's hedged either. Are you kind of making an interest rate bet overall, or it just was cost prohibitive, or you just felt like you could be patient on it?
That term loan we did in September, once again, we don't have a lot of variable rate exposure. Really, our exposure to SOFR is 7% at pro rata share, so it's very low on a total basis, and that does include the $275 million term loan that we just did. When we closed that term loan and we looked to go swap it didn't make sense. It was very prohibitive. We were paying up for a lot of interest rate increases that may or may not happen. We'll monitor the market and look to see if there's a window that makes more sense, but at the time it didn't, and it still doesn't today.
Our next question is from John Kim with BMO Capital Markets.
Good morning. I wanted to ask about San Francisco. It's been a gift that keeps on giving. But I wanted to ask how much further you think it has to go. We know there's occupancy kind of slow sequentially. When you look at rent-to-income ratios or other metrics, where do you see San Francisco pricing versus income? Do you think other markets like Oakland, East Bay, South San Francisco, they'll play catch up to San Francisco, just given affordability?
Yeah. Hey, John. I'll try to hit, I think all of your questions. If I miss something, just holler. As far as when you were talking about sequential occupancy, we took it down from 96.1% to 95.6%. That's intentional because we were able to push rents, and in that environment, that was a more of an offensive play. So it's actually a good sign. Landing where we land for San Francisco is actually quite a good number. As far as what's to come in this market or I guess what's left in the gas tank, Rylan will talk about affordability in a second. What we're seeing is that market rents is still catching up and coming. At this point, just to get back to the historical long-term CAGR, we're maybe halfway there at the most. I'll give you one example.
If you just take affordability, which Rylan will talk about all the other markets, but in Northern California, just to return to pre-COVID affordability levels, rents could actually increase by over 20% with no wage growth.
That gives you the magnitude just from this one metric. We have seen that coming out of the great financial crisis, the strength in this market, where the momentum actually lasted many years. You have a high cost of homeownership, which continues to favor rental affordability and historical low supply. That's continuing and of course, with demand catalysts. Rylan, you want to cover?
Yeah, John, just to give you some more specifics. When we look at the rent-to-median income ratios in Northern California, so San Francisco, that ratio has increased with the rent growth that we've seen by about 150 basis points compared to a year ago. It's currently sitting at 25.7%. This compares to the long-term average or 20-year average of just under 30%, and a historical peak of 36% over the previous two decades. So a long way to run there. Oakland and San Jose, we're starting to see some improvements, but these ratios in Oakland is 21% and San Jose, just under 21%, again with historical peaks in the 30% range. So affordability remains a tailwind in this market for us, and we continue to have conviction that there's more room to run there.
Okay, thank you. I think you hit all parts of my multi-part question. Wanted to ask about L.A. You talked about green shoots in the market and it being stable. You kind of threw cold water in response to Alex's questions on aerospace demand at least being a near-term pickup. So what are some of the green shoots you're seeing in terms of 2027 in terms of rent growth and employment growth?
Yeah. Well, first of all, we don't have enough visibility when it comes to employment growth because L.A. is a reflection of the broad U.S. economy. It does have more professional services. So that is a good stable that essentially supports the overall L.A. market. We do have, of course, supply continuing to decline. So that in itself will signal that you just don't need as much job growth to generate rent growth. So that's another thing that's good. As far as my comment on the defense industry, I didn't obviously mean to throw cold water on Alex. He makes a good point. I do think that it's a catalyst. It's a future catalyst. My comment is only relates to timing, which is we really don't know. We know it's coming, we just don't know when.
It's the same question I got about Northern California two years ago when everybody was asking, when is it going to happen? Our view was, well, we see something happening. We couldn't pinpoint exactly when. So it's a similar thought process.
Our next question is from Adam Kramer with Morgan Stanley.
Hey. Great, thanks for the time. I wanted to ask about same-store expense growth in the quarter. In Seattle was a bit elevated, maybe relative to the other markets or relative to expectations. Just wondering if there is anything in there to call out and then maybe just how to think about that specific market going forward within the context of your guidance.
Hi, Adam, it is Barb. No, nothing specific to call out. There was a little bit more controllable expense spend in the quarter versus a year ago, so that led to a little bit more elevated year-over-year growth. Property taxes obviously go up there more than in Southern California and Northern California. So that also led to a little bit elevated. But I think it is timing related on the controllable expense spend. I do not see anything unusual in that market that would lead to higher expense growth, all else being equal, than the other markets going forward.
Okay, great. Then maybe a little bit of a bigger picture one. I know we have talked a little bit about A&D sort of industry and what that can mean for broader SoCal. Maybe just for the Northeasterners on the call here, myself included, just maybe by submarket or sort of however you want to slice it, just sort of what are the regions, areas that you think are sort of seeing the benefit or are seeing the benefit right now? Then maybe just talk about sort of your exposure to those specific submarkets that are benefiting from the A&D spend here.
Yeah. Hey, Adam. It's mostly concentrated in the South Bay. I talked about Anduril having a headquarter in Long Beach and of course, SpaceX in Hawthorne. But those are kind of the two bookends, if you will, and then everything else in between. There's quite a few. I think we have a map in one of our presentations recently, which we can send to you after the call so you can get a good visual. It's really broader South Bay, which is great. That's a widespread footprint.
Our next question is from Rich Hightower with Barclays.
Hey, guys. Good morning out there. Obviously we've talked a lot about the strength in NorCal specifically, but I'm wondering, could you walk us through maybe different submarkets where you're bumping up against some of the AB 1482 limits in California? And then also add to that maybe where your loss to lease sits currently.
Yes, happy to go through that. In the Bay Area, let's see. Definitely San Francisco is bumping up against that AB 1482. And let's see, San Mateo, of course. And let's see. Parts of Alameda is starting to get close, but not quite there yet. And let's see, San Jose is also up there. I would say most of the markets, other than, of course, the East Bay, which is why we're excited about our investments there. As far as loss to lease, I have that. Okay, so loss to lease in September this year is sitting at about 1.4%. Leading the charge is, of course, Northern California, close to 8%. And just for context, much better than same time last year. Last year, we were actually 30 basis points gain to lease. Hopefully that gives you a good reference point.
That's great. Very helpful. I guess secondly, that's all good news. I guess, in terms of maybe cautious news, is there anything in the upcoming L.A. mayoral race or other statewide ballot initiatives, I'm thinking of the California wealth tax, is there anything on your radar that you're strategically planning ahead for if something goes the wrong way there?
Yeah, that's a good question. It's really hard to anticipate where the legislation is moving toward. We continue to run our business, as we've always done in the past 32 years, in terms of just focusing on optimizing our revenues and our capital allocation strategy. As far as the L.A. mayoral race, from our observations, it's a really tight race. Karen Bass has received support from major players like Rick Caruso and the L.A. Police Union, while Rahman has gained traction due to frustrations with legacy administration. It's hard to see where things are going to land. I do think that there's been a recognition that we have a housing shortage, and there's been certainly a focus on how to work with housing providers, and I'm hoping that'll continue.
Where I've seen recent legislation that's been proposed that has the onerous anti-business component to it, they have not passed committee, so that's a good sign that the legislatures at least have some understanding of what's important to voters and having a healthy economy is important. We're hoping that that trend toward moderation will continue. As far as the governor's race, so far Becerra from his campaign seems to understand, once again, the importance of partnering with private businesses and focusing on addressing housing shortage. There's not a whole lot of noise coming from his camp about rent control, because I think they're aware that that is just so ineffective and it actually discourages housing production. They've been focusing on measures to hopefully produce more affordable housing, which is great for the overall economy.
Our next question is from Ami Probandt with UBS.
Hi. Thanks. Just maybe another follow-up to some of the previous questions on Northern California. How should we be thinking about tailwinds to blends in Northern California as we move into 2027? Could there be some opportunities on the renewal side as you bring your existing residents up to market rate? Just thinking about where we are currently in terms of new lease growth compared with renewal growth, and if all else equal, that creates a built-in tailwind on the renewal side for next year.
Well, I think probably a good indication is if you look at our earn-in this year of 150 basis points, and the majority of that is Northern California. So we have a good head start to the year on Northern California. The renewals were capped at AB 1482, which is inflation + 5%, max of 10%. So there is still some room there, or I should say some tailwind there. On the new lease side, you just take the rent to market, so the new leases are not capped. The question really is how long does it take to capture the new lease rates. Perfect example is if market rent growth is growing at 15% and a tenant can stay in place where the rent is capped at 10%, the tenant is more likely to just remain.
That ability to capture the 15% will just be a little more prolonged. But as far as I'm concerned, that's all good for us. Keep in mind, Essex historically has operated with our self-imposed 10% cap because we do not believe in anti-gouging either, and we've done just fine in those environments.
Great, thanks. In terms of the same-store revenue guidance build-up, what are you including in terms of occupancy and non-rental revenues? Were there any changes within the outside of blends within your updated guidance?
Hi, Ami. It's Barb. No, the update for same-store revenues, the increase is 100% driven by scheduled rent growth. Just top line.
Great. Thank you.
Our next question is from Wes Golladay with Baird.
Hey, good morning, everyone. Over the last few years, you made a point to allocate capital in Northern California. Can you talk about what drove the decision to sell a relatively new asset in San Jose, and did you consider buying your partner's interest?
Hey, Wes. This is Rylan here. Yes, this was a joint venture asset, as you mentioned. Again, we thought we got a fairly good value for that asset. There's been a lot of people that have been looking to allocate capital into Northern California over the past year. We did have a discussion about potentially buying this out, but as I alluded to more recently, the recent acquisition in Hayward we felt provided a better risk-adjusted return. This remains an ongoing discussion on all of our joint venture assets. We do think we have an inside track there if we want to buy out some of these assets. Again, with finite amount of capital, we're looking to allocate to the best risk-adjusted returns, and in this instance, selling this asset and redeploying into the East Bay made more sense for us.
That's all for me. Thank you.
Our next question is from Julien Blouin with Goldman Sachs.
Yeah. Thank you for taking the question. I just want to ask about your supply outlook into next year. I think some of the third-party data suggests we could see an increase in supply in 2027. I think permitting is up from the bottom a couple of years ago. I was just wondering, I think on page S-16, you show supply coming down. Are you factoring in delays? Is there something else playing into that view?
Hey, Julien. This is Rylan here. This is something we have discussed for many, many years, the differences between our supply forecasts, which account for delays as well as the actual lease-up pace of buildings in a more likely manner. We have high conviction, high level numbers. We think supply is coming down around 20% in our markets versus next year, and we have pretty good conviction about what that supply number is going to look like. I would continue to look at our supply numbers, and one of the reasons why we are increasingly more optimistic about our markets next year. Was there a second part to the question?
No, that was it. My second question is around. I appreciate the comments around the mid-4s renewals stepping down in the third quarter being a bit a function of prioritizing occupancy. But I was just looking. I do not think we have seen a deceleration in renewals from 3Q to 4Q over the last few years. Is there something different this time around, or is it more just a function of how strong that third quarter renewal was? Any specific market showing a bigger sequential step down in renewals?
Yeah. We certainly had a very strong third quarter renewal, which obviously, as you astutely noted, makes it look like there was a big deceleration. But obviously that is not the case. In terms of the composition of the renewals, Northern California, of course, is sitting in much higher, in the 8% range, as you would expect, close to that AB 1482 cap. Southern California is hovering around the 2%-3%, and Seattle somewhere in the 3%-4%. So that averages to our renewals achieved to close to 4.5%. But once again, these are all normal numbers, and we are not seeing any cracks.
Our next question is from John Pawlowski with Green Street.
Hey, thanks. Good morning. I have two questions on L.A. The first is on operating fundamentals. Angela, I think you used the characterization as stable. I guess I do not see the stability in the revenue growth trend. You started the year 1Q, year-over-year revenue growth of 1.7. It has decelerated to 50 basis points year-over-year in 3Q despite easy comps. Sequential revenue is pretty weak. What are you seeing in the portfolio that gives you confidence the L.A. market is stable?
Yeah. We are seeing a couple of things. First, the delinquency in L.A. has remained stable, and it is going to ebb and flow in terms of getting back to that normalized run rate. But when we look at occupancy, it has been hovering around that gross occupancy around that mid-95%. Once again, that is a good sign, right? Because if there are cracks, you would see that occupancy fall right away. But ultimately, if you look at sequential revenues, L.A. County, which is on our S-9, it is not great, but it is still an improvement. 10 basis points sequential revenue improvement in L.A. County. I will take it. I am not seeing a meaningful backslide. I am just seeing either stable or slight improvement. And if I look at year-to-date numbers on a revenue perspective for L.A. County, once again, it is up 1%.
I do not know if I would get too caught up on kind of quarter-to-quarter noise, but once you look at all the metrics, it points to a stable environment.
Okay. Second question is on the transaction market in L.A. It is obviously not a loved market from capital providers right now. Rylan, I am curious for more urban submarkets, higher rise product, where you think kind of market clearing cap rates are for urban high- rise Los Angeles apartments these days?
Hey, John. We have not seen a ton of transactions. I think you are asking particularly about downtown L.A. and high- rise. I do not disagree with you. Given the vacancy in that specific sub-market and some of the operating challenges we have seen in recent years, that is a tougher ask and relatively not well bid. I hesitate to put a specific cap rate out there. We do think there is a market clearing transaction. It is probably closer to a positive leverage number. But we have not seen enough transactions to give you a real pinpoint on where that cap rate would transact today.
Okay. Thanks for the time.
Our next question is from Haendel St. Juste with Mizuho Securities.
Yes, thank you. I wanted to go back, I think it was earlier question that Jana asked on the mezz book. I guess I am curious if there has been any rethink in the mezz book strategy. I think you mentioned on a prior call or two that you had a target sizing for the book of $100 million by year-end. Looks like you added a small loan at some point during the quarter. I guess is the newer higher rate environment causing a rethink? I am curious if that book could be larger or smaller over the next year. Thanks.
Haendel, this is Rylan here. As we said for the past couple of years, we wanted to normalize the size of this portfolio relative to our business. It has shrunk considerably, and it is going to be, as you said, $100 million at the end of this year. We are just being really diligent as it relates to incremental investments within this pref book. They have to offer significant better risk-adjusted returns than several of the other options we have to allocate capital, which I mentioned earlier. I do think with the move in rates and the tightening a little bit on the financing market, this should create some more opportunities. The other factor that has happened in the past few years is development starts coming down considerably on the West Coast. That has historically been a good engine for the preferred equity book.
I don't envision that changing going forward, but I do think you might see some more opportunities on stabilized assets if the financing market remains somewhat tight over the next few years. It is something we continue to engage with sponsors on, and we will continue to look for good opportunities where we are getting compensated for that risk.
Thank you, Rylan. That certainly helps. Angela, maybe if I could ask you, just maybe a bigger picture question on the growth profile for Essex here within the intermediate term. San Francisco has been such a strong market the last year, should be strong next year as well. But the comps are getting a little more difficult. Sounds like Seattle and L.A. are moderating. It sounds like there are some green shoots of optimism, but it certainly feels like the core is slowing. Then there is higher interest expense that you are dealing with, the West Coast JV and the mezz book being a bit smaller, with less additive. Maybe are there other offsets that perhaps we are not considering? But how do we put this all together and think about the growth profile for Essex over the next year or so?
It certainly doesn't sound like there is an acceleration kind of story ahead of us in the near term.
Hey, Haendel. I think this is a complicated question in terms of what's going to happen next year and when acceleration can occur. Obviously, Northern California and what's happening there, that is clear to everybody on what the potential is, and that momentum, that is continuing. As far as Seattle and L.A., from a growth profile, we do see that there is more upside than downside as far as traditionally relative to past performances. Seattle has had a tough start to the year, but we have seen it turn positive. L.A. has remained stable with a potential demand catalyst in the defense industry. In both markets, supply are continuing to decline. If nothing happens between or if, I should say, if conditions remain the same between this year and next year, our fundamentals are slightly better just from the supply picture and some potential demand catalyst there.
Now, that is a top-line conversation, right? The question is, well, when are you going to see acceleration? I think that relates to the view on the broader economy. When we look at third-party forecasts, we are not seeing anything that is all that different than kind of more the same. It is also too early to predict because we do not know what the result of the midterm election is going to be. Hard to say, but I would go back to the West Coast does have a bull case. There is a path to that growth. Timing is difficult to predict, but I will point back to, once again, to what happened not too long ago coming out of the Great Recession. We had five-plus years of acceleration, and so certainly it is possible, and there is a path to that.
As far as bottom line, that interest rate expense pressure, I think that is not an Essex situation. That is not just all REITs. It is really all companies are going to be faced with that headwind. I do not think that in this itself is a call-out for the West Coast story.
Thank you. Our last question is from Alex Kim with Zelman & Associates.
Hey, morning out there. Thanks for taking my question. Rylan, I know earlier this year you mentioned that the South Linden project was trending favorably relative to your initial underwriting with an expected stabilized yield around 6%. Given the continued strength in Northern California rents, is that yield expectation improving? Are you guys getting any closer to moving forward with the other development in Mountain View that you discussed in September?
Hey, Alex. Thanks for the question. Yes. As you've seen the rent growth up and down the peninsula through San Francisco into San Mateo, South San Francisco is also benefiting. Again, the yields continue to improve on our underwriting costs. Thankfully, we're doing a great job managing that project, and we're hoping to deliver it ahead of schedule. More to come in the next couple of quarters as we continue to make progress. Everything's going to plan on the 7 South Linden project. We are making headway on the entitlement process as it relates to the Middlefield project. We'll probably have more to report on that in the next coming quarters. Again, looking for those select opportunities where we think we're getting compensated for the risk-taking inherent in development.
Excited about both those projects, and we continue to look for new opportunities to add value to our development pipeline.
Got it. Thanks. Angela, staying on Northern California, could you talk a little bit about the differences you're seeing in rent growth between urban San Francisco and more suburban markets across the Bay Area? Are you seeing a more meaningful divergence in new lease pricing or demand between those areas? Is one outperforming the other as we head into 2027?
Hey, Alex. Good question. On the Northern California rent growth, if we look at the blends, there is, of course, some divergence, as you would expect. We see Santa Clara, San Mateo, and San Francisco counties outperforming. They are closer to, on the blends. Where is my blends? Oh, here. On the blends in Northern California, they are running much higher. They are closer to, say, above 7%. With Alameda and Contra Costa, the East Bay market are lagging in at about 5.5%. That gives you an indication of that probably about, say, call it 300 basis point spread between those two key areas. This is why we are leaning in on our East Bay thesis, because we have seen this all before.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you again for your participation.