Bank of America's 2026 Global Real Estate Conference. I'm Jana Galan, BofA's Residential REIT Analyst, and we're thrilled to have with us Essex Property Trust's President and CEO, Angela Kleiman, and CFO, Barb Pak. I'll turn it over to Angela for opening remarks, then we can jump into Q&A.
Great. Thanks, Jana. It's great to be here. Thank you all for attending. I want to thank Bank of America for putting together such a fantastic venue. It's always very productive, I think, for all of us, so we're happy to support this event. Essex, just a high-level overview. I think most of you, I see a lot of familiar faces, and know us well. We're an S&P 500 company focused in multifamily space in the West Coast of the United States, just California and Washington. Depending on the day, about $24 billion in total market cap and 63,000 units across this footprint.
We focus our markets on areas where there's low supply and catalysts for demand drivers. As a result of that, we have a disciplined capital allocation program that essentially converts the top-line growth into the bottom-line growth that outperforms the peer, which results in long-term outperformance on a total return basis in the top tier of all the REIT space. More importantly, we're a dividend aristocrat with 32 years of consecutive dividend growth now, so pleased with that. With the fundamental backdrop of low supply and demand catalyst with AI in the technology space, we are operating in a stable environment with a potential upside in terms of rent growth, which is driven by strong fundamentals.
Great. Thank you. Maybe we'll start off with the operations. You guys did provide an update. If you can just go over some of those highlights, how did the peak leasing season this year compare to expectations?
Thanks. Yes, that is a good question. We actually have a presentation published that is available online. On page 12 of our presentation, we present the rent curve of what we are experienced to date relative to long-term averages in 2016- 2019, and also compare it to last year. In both of those cases, our rent curve is doing better than long-term average and last year. The rent curve also shows that we have an extended peak leasing season, which is fantastic. That peak is 100% driven by Northern California. Seattle has experienced a normal seasonality, and Southern California really did not have a peak.
It is pretty much performing on top of last year's performance, and that is understandable with the broad economy. Where we are seeing that rent curve right now is that it is starting to flatten, which also makes sense as we now enter into the typical slower seasonal part of our business, especially in the fourth quarter when employers do not typically hire and tenants do not typically want to move between, say, Thanksgiving and Christmas.
We will wait to see how that deceleration trend occurs. But right now, what we are anticipating based on leases that we have signed today through August, is about 150 basis points of earn in for 2027. Which is good news compared to last year. It is 65 basis points above last year, and so things are doing well on the ground here.
Great. Maybe focusing first on Northern California. You have been through other kind of apartment rent cycles. Do you think that the rent growth for that region could be even stronger in 2027?
Yeah. That is a good question. I think it is too early for us to predict 2027. I do think, though, that the fundamental backdrop for Northern California, the demand catalyst with AI, what we are seeing with job postings and company formation, office leases that are being taken down, and then the affordability component of Northern California, it does give it legs for several years. What 2027 is going to do, we are still working through our budgets, and we will provide more color later this year. But in terms of it having an extended cycle, I think we are in the early innings of the recovery.
In Northern California, if you look back, it really has done nothing since 2019. It was negative and flat for several years, and we are just starting to see rent growth. I think given the demand catalysts that are out there and the low supply that is in this market and will be in 2027 and into 2028 and even into 2029, because we know it takes so long to get things entitled and developed, I think we have a long runway here.
Can you maybe touch on the opportunity with rent as a percent of income in the region?
Yeah. If you look at the rent to income ratio, today we're at 21%, and this is for the market in Northern California. Historically, pre-COVID, we were at 25%. What that means is we could grow rent. If rents go up 20% from here with no increase in wages, we would get back to our pre-COVID rent to income ratio. But what we are seeing is significant wage growth in the Bay Area, rent growth, while it is going up significantly, it is not impacting our rent to income ratio because wage growth is also going up at a pretty significant clip.
There is some of the best affordability on the multifamily apartment side. That we've seen in years, and as you guys all know, it's very expensive to own a home. It's much cheaper to rent than to own a home in the Bay Area. That dynamic hasn't changed. It's actually gotten even cheaper to rent versus own. It's about two and half times more expensive to own a home than to rent in the Bay Area.
I have gotten some incoming questions, just on the regulatory front or the different types of rent caps for your markets. Maybe if you could share a little bit about that.
Oh, happy to. For the state of California, and actually Washington as well, there is statewide rent control, and they are pretty much on top of each other. California has AB 1482, and that is CPI + 5%, capped at 10%. Seattle is CPI + 7%, capped at 10%. In both of those scenarios, we view that as an anti-gouging measure. In that environment, Essex had had a 10% self-imposed cap well before these legislations were passed. We will do just fine in those situations. In terms of where the markets land, Northern California, no surprise, is pushing up right close to that cap on the renewal side. As far as the other markets, we still have quite a bit of room.
I guess for those that are newer to Essex Can you talk about the philosophy, the history behind the 10% self-governed, 10% cap-
Yeah.
...why is that a good thing?
Yeah, happy to. Our theory is that our leases do turn pretty quickly. They're 9- 12 months on average. 10% seem like, for us, a reasonable number in terms of just being responsible corporate citizens, because it doesn't take us long to recapture or get close to where the market is. At the same time, it doesn't create so much stress for the tenant base, especially in an environment where California produces so little housing. It's tough for tenants to find alternative places to live. We didn't want to create such distress. 10% is an environment where you can still operate efficiently and be able to manage your business and invest in capital recycling quite efficiently.
I guess.
Please. 10% is great. 5% would be awesome. Is there any noise at all in upcoming election period of anybody trying to spark residents and change the legislation to be more restrictive?
We haven't heard proposals less than 10%, let's start there. There's always going to be noise because there's a lot of rhetoric. I do think that in the recent years, what we have seen is the California legislature learn from COVID, where owners shutdowns, and owners regulation, and owners eviction moratoriums really hurt the state of California and certainly didn't help creation of new housing, which is, I think they do recognize that it's needed.
Before the state had a limit, you guys had your own limit. I guess the scale that you had in your markets is not enough to, let's say, impact the market. So your competitors might have been doing the 15%, 20%. There were a few years where there were some boom years. I guess you're saying the shorter leases, you were still able to capture the upside over those couple of years regardless.
Right.
Now the new governor, everyone at this 10%.
Yeah.
This would be a new. It was enacted a couple of years ago. This would be the first time that we may see the markets actually push to that, potentially, it sounds like for a few years.
Yeah. I think that's a reasonable assumption. AB 1482 was enacted in 2018. The Seattle legislation was enacted last year. When you look at our growth cycle coming out of the Great Recession, we had a long tail of high single digit, low double digit growth from 2012 to, say, 2016. Because of this legislation that is now market wide, is it possible that it's going to be longer tail?
I think that is a reasonable assumption, especially in light of the current market dynamics. Our supply as a percentage of total stock is only 30 basis points. That is record level low. The rent-to-income ratios that Barb mentioned, I've never seen a gap like this in my 30-year career in this business. Then you layer on the technology catalyst as a demand driver. It's like the perfect storm of a solid fundamentals creating a long tail for this market.
The biggest risk, of course, then would be if the state was able to incentivize supply, right? We've seen in the Sun Belt that the real-
Yeah.
...way to limit rent growth is supply.
Yes.
So-
Yes
To confirm, I guess, what's the latest on the supply front in California?
It's still very anemic. Part of it is legislation. There's been legislation proposed to facilitate supply. We've seen some tick up. It's mostly in the affordable space, which is actually good because we don't operate in that space in a meaningful way, and we really need more affordable housing than anything else. If you look at San Jose, the next two to three years, 50% of supply is actually in affordable space. In L.A., the reason the uptick is mostly in affordable. That's a good thing. As far as generally speaking, we underwrite. We underwrote about 100 land sites last year and picked one.
Partly because even though there's accelerated entitlement available and people think about fast track, if you take that word at its face value, we think, oh, it's immediate. Well, no, what the practical reality is that, and when we went through this, we are going through this with our Mountain View site, is that okay, instead of three years, it is two and a half, six months pickup. Yay. This is by right. We are not rezoning. This is entitlement by right, and we are just going through the permitting process.
So you go through that process, that is two and a half years. To put up a building, like a podium mid-rise, 250 unit plus type building, so right down the fairway for us, it is 36 months minimum. So you could see in California with high conviction when supply is coming your way, and we have high conviction that the next four years, not a lot is going to change, even if they fast track everything, and more likely five years.
How many would cost, construction cost?
Continue to increase. So that is construction costs and labor costs are two governors that continues to essentially temper supply in addition to the entitlement process.
Could you give us an idea of the rate of increase and compare that to a few years ago in terms of construction?
It's better than a few years ago. Pre-COVID, and even during COVID, not a whole lot happened during COVID, but pre-COVID, construction costs in our markets was going up in the low double digits to mid, so say around 10%- 15%. Today, it's closer to, say, inflation plus, so it's probably around 4%, 5%. It's probably moving depending on your market, right? If you're in Northern California, then it's better economics. But in Southern California, it's still not going to pencil. Of course, Seattle, it depends on the pockets.
Slower than rent then.
Slower than rent. But you have to go back to what's the land cost on the basis as well. All those components influences our expected yield.
Can you give us a little bit of color on land costs in the land transaction market?
It's actually a wide range because most land holders, they're individuals, and they all have different holding cycles and different cost of capital. What we have seen is very little land site coming to market, even in Northern California. Land sellers have, for the most part, a higher expectation of what the value of their land is than what the builders are willing to pay. Which is why we underwrote over 100 and only picked one to move forward with last year.
Maybe. Oh, go ahead.
I was just going to ask, just to follow up, if we do see some supply numbers hitting, you're saying at least half of it will be affordable housing, and that doesn't impact your more B pricing? It does not impact.
It does not really impact our market or our market rate business. The affordable, what I'm referring to is San Jose and L.A.
Okay.
Maybe we could shift a little bit to Greater Seattle. Leasing improved last quarter, but post-COVID, it's really kind of been plagued by stops and starts. Maybe if you could share with us how have trends progressed in your portfolio and the difference between Downtown and Bellevue.
Of course. Yeah. Seattle, as you mentioned, has had some pockets of starts and stops. Last year in the fourth quarter, it was a little more challenging. Even into January, there were some layoff announcements with Amazon and Microsoft. We've got those behind us. We also were dealing with some more heavy supply deliveries. That's starting to abate as well. The market's stable. It's not overly strong, but there are some good foundational building blocks for it to improve over the next 12- 18 months. Really what we're focused on is when you look at supply, and we do have a chart on page 14 of our presentation.
In 2024, we delivered 2.4% of stock, and then that came down in 2025 to 1.7%. Those are still pretty elevated years of supply. Now we're sub 1% and declining. The supply backdrop looks much better now than it has for the last few years, which will allow us to put up better rent growth numbers with less job growth. On the jobs front, what we are seeing is AI companies, some of the big names are taking office space in the Seattle market in Bellevue. A lot of the leases that have been signed are in Bellevue.
There are some in CBD, but the vast majority have been taken down in Bellevue, which benefits us because 80% of our portfolio is in the East Side or North and South, and 20% is in CBD. CBD will do just fine, but I think Bellevue and the East Side will benefit more. Now, it's going to take time for these office leases to turn into employees because it's going to take time for them to build out their TIs and get bodies there. We think end of next year into 2028 is really when we're going to start to see better rent growth than what we've seen in the past.
Just to go back to the Amazon comment, they did retrench last year, but what we have seen more recently is they actually have job postings for the first time in a long time. They are back hiring in that market, which we think is a good sign for the overall health of that market. Things are slow right now, but we think there are some green shoots for the future.
How do you anticipate the new mayor of Seattle impacting business conditions for yourselves? [inaudible]
Yeah. So far what we've seen from the new mayor is let's start with rent control. The new mayor cannot change that. That's a statewide measure. On the margin, there has been proposals, but it hasn't been extreme from that perspective. Obviously, we don't really have a whole lot of track record with this new mayor, but I do think that the legislature, including the new mayor, recognized that if you temper, if you make it business unfriendly, well, you've seen what happened. You've seen the company will start to look elsewhere. What's important is you need to keep that supply coming in order to have affordable housing. We haven't seen anything in the extreme.
And then maybe just turning to Southern California and curious kind of the evictions or bad debt in L.A., how is that trending?
Yeah. So we are still above our long-term average in L.A. So around 1.5% of our rent is delinquent, versus historically we're around 80 basis points. So we're about two times the normal. And really the issue with L.A. is the courts are still delayed. We're four to five months to get somebody out. That market has always had a little bit higher structural delinquency. But if we can get the courts back to more normal, two to three months versus four to five months, that will help. So right now, L.A. is really the only market of all of our markets where delinquency is not back to our pre-COVID levels. So in total, we are at 50 basis points of delinquency as a percent of our rents. Historically, we're at 40 basis points. So when we get L.A. back to normal, we'll get our portfolio back to normal.
Great. I don't know if there's any other-
Just on the L.A. long-term thoughts of we do our tour each year. Just the last couple of years, we've seen this, it feels like, I'm sorry, like a deterioration, just like the jobs, entertainment, et c.
Yeah.
What is your long-term view on L.A.?
Yeah, that is a good question, and it is something that we study closely because that does impact our long-term view. When we look at L.A., we do view that it remains soft because it mirrors the broader U.S. economy, similar in diversification, maybe a little bit more in professional services. The U.S., we have all seen the BLS jobs. It is like 0.5%. So it is not going to do much in L.A. What we have seen is that this market has remained stable. So if we look at the economic occupancy, so that is financial less delinquency, so the true cash flow number, L.A. has been hovering around 94% for the better part of the year.
It has not gotten worse. So that is a good sign. When we look at our total revenue, first half of this year compared to the first half last year, it is up slightly. Once again, nothing exciting, but not deterioration. It is 80 basis points better. So those are some good indications with L.A. Part of that is also to even have a positive revenue number in this market, it is supported by the fact that it is very low supply in this. L.A. supply has been going down similar to what had happened in Seattle.
It peaked several years ago and has been decreasing steadily. So that is one element that has helped. On the demand side, what we are seeing is some green shoots. We are not expecting, and we have not experienced a whole lot of impact from the entertainment industry. So with Paramount announcing the layoffs and et c, it has not made a whole lot of difference because the entertainment industry peaked in 2015 with about 340,000 jobs.
Multiplier effect is a little over two, so the entire ecosystem employed maybe 760,000 jobs at the peak. Today, entertainment industry jobs is only 100,000. So that Paramount 5,000 here, 2,000 there, for the past two years it has been hovering around 100,000, is not really going to make a difference. What we expect is that the areas that benefited from the outflow of entertainment industry like Toronto or Atlanta, they are probably more vulnerable to that business shrinking because of application of AI. As far as the green shoot is concerned, we have a presentation on page 17, so feel free to look at that a little bit more.
What is interesting here is we are seeing these defense jobs and aerospace sector taking a foothold in the broader L.A. area, concentrating up and down the corridor from Long Beach to Huntington Beach. And what's interesting here is we're seeing job postings in aerospace incrementally increase. This is not a robust number, but it gives us some assurance that, okay, things are on the margin, it's stable, and there's some potential green shoots here.
More importantly, the VC funding in this space has more than doubled between this year and last year. And 1/3 of that funding has been allocated to Southern California. So there's a great little map there that you can see all the companies, but what's interesting here is that this sector is anticipated to grow up to $1.5 trillion in the next 10 years. Getting 30% of that, I think, would be fantastic. I'd be happy with, at this point, even 10%. So there are some pretty interesting things happening on the ground.
This would be a good segue to capital allocation and the way that you study markets. Essex has maintained its West Coast focus through many cycles. What's your interest today in potentially entering new markets?
No, that's a good question. My response has been pretty consistent in that there's a price for everything. And at this point in the cycle, we're seeing cap rates are not a whole lot different from one major metro to the other. And when you look to the fundamentals with supply in our markets at essentially, on average, half a percent of total stock, and with these demand catalysts coming our way that we're starting to see in Northern California, and in the future in Seattle and potentially Southern California, we're not seeing these kind of dynamics anywhere else in the country.
And so we do have conviction that the West Coast is the place to be. And our focus, and if you've seen us to be disciplined allocators, is continue to grow in a way that generates accretion. And we've been able to do that even though we've not been able to issue stock to do so, but we've been able to do that over the past several years, acquiring close to $2 billion of assets.
Maybe if you want to just comment on cap rates and the transactions you are seeing marketed and your interest level in growing.
Absolutely. Cap rates for the most part in our markets up and down the coast is around 4.5% to high- 4s for high quality institutional assets outside of Northern California. Northern California is lower than that. Cap rates are in the low- 4s to mid- 4s. Call it about 25 basis points on average lower. We have seen our cap rates to be quite sticky despite all the interest rate movements. In terms of scale, I will give you one data point. Last year, about $20 billion of transactions occurred in our market. We could have doubled the size of our company and purchased everything.
Although I think all of you will probably throw tomatoes at me if I do that and dilute the company. The focus for us is grow and add value concurrently, not just grow to grow. We have the right scale to operate efficiently, and I think scale and concentration are two terminologies that may be interchanged, but that concentration really matters when it comes to generating operating efficiency. 80% of our properties are within 3 mi- 5 mi of each other. We can run nine to 12 properties as one business unit, which makes it incredibly efficient for us.
There is a point of marginal diminishing return when you start to bolt on more properties to that. We have gone through all the analysis and have found the most effective way to run our business. We are currently running at a, last year when we looked, and this year is probably better, we are running at a 45 unit to one personnel ratio. Which is industry leading, and our operating margin is over 100 basis points above the peers, partly because we have this benefit of geographic concentration.
Great. Then maybe just touching on the structured finance and preferred equity investments. It was a little bit of a headwind to FFO this year, but now that it is right-sized, just how should we think about that going forward?
Yeah, so you are right. This year we had about 2.5% negative impact to our FFO growth because we had a lot of maturities late in 2025 and then heavy in 2026. The book is right-sized, so today we are accruing on $100 million, and that seems like a pretty good run rate from here. We have one small maturity next year, and we have done one small deal this year. So I think $100 million is sustainable for us. If we find deals that make sense for us on a risk-adjusted return, we will do a few more deals, but we are not going to grow the book back to where it once was.
We do like a small sliver of this business. It does keep us, especially our development team, gets to see other deals since we are not actively doing a ton of development. But overall, I think that dilution, that headwind that we had from the structured finance roll-down of our book is behind us, and we will not really see that in the numbers in 2027.
Just given that you have emphasized early innings in Northern California, but at the same time may be constrained by the cost of capital. How can you lean harder into being more opportunistic?
That's a great question. We've been able to do so by a combination of cash flow from operations, which is, for us, about $200 million before CapEx redevelopment, and selling assets. We also have private capital partners that are very interested in our markets. We have several levers that we can execute for us to achieve our goals.
Is that happening right now? Are you working with these private capital players to see if you could do It sounds, again, you passed on 99 development sites.
Yeah.
Was it because of cost? Could you be doing it for others and generating fees or no, it's more acquisitions?
Well, our philosophy with our joint venture partners is that we would transact on an asset that we would happily own. It's not so much for the fees, per se. It's really to leverage the cost of capital to make sure we're optimizing the total return to us. To answer your question, yes, we could do more development and use the fees to offset that dilution, but for us, that wouldn't be the best decision because we wouldn't have otherwise transacted on this development on our own balance sheet.
The market's so strong, why think so short term?
Well, I'm not sure what you mean by short term, because we've-
You don't want the dilution, which I maybe incorrectly translate that you don't want to wait two, three years to get the upside from development.
It's how we view the risk-adjusted return. For example, we would transact on a development if we can generate 100 basis points of additional yield relative to acquisition. So it's a relative game. So 20% profit, which means if we can buy a four and a half in order to green light a development, we will want to say, based on today's in-place rents, not trended, that development needs to generate five and a half. If it's not hitting the hurdle, we're not going to transact.
Can't achieve those? No.
Well, we found one.
Do you finance transactions, give you ROFRs or right to purchase or?
No. We have found that we went into that business because it's a good complement to the development business because so little gets developed in our market. Having said that, we're not going to give away the yield in the hopes of getting ROFR because there's a cost to that. At the end of that development, we may or may not want to acquire that asset, depending on what our cost of capital is and what the acquisition opportunities may be elsewhere. We certainly wouldn't want to give that up. That has been a very successful model for us.
Unfortunately, we are out of time, but I have three rapid-fire questions that we were asking all the REITs at the conference. Number one, if long-term rates stay higher for longer, which has the biggest impact on your sector's earnings? Is it higher refinancing costs, lower transaction activity, or less new supply?
I am going to go with higher refinancing cost.
Over the next three years, will third-party capital become a more important source of growth for public REITs than balance sheet capital? Yes or no.
If the stock continues to perform, yes.
Yes.
For it is. For your sector, will 2027 same-store NOI growth be higher, the same, or lower than 2026?
I'm not getting any help from you.
No, I think it's higher.
Higher.
For the sector.
For the sector, we'll go with higher.
Thank you so much, Angela and Barb. Appreciate-