Good day, and welcome to the Essex Property Trust Q3 2021 Earnings Conference C all. As a reminder, today's 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, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall. You may begin.
Good day, and welcome to our Q3 earnings conference call. Angela Kleiman and Barb Pak will follow me with comments, and Adam Berry is here for Q&A. I will provide an overview of our Q3 results, our initial operational outlook for 2022, apartment market conditions, and then conclude with the regulatory environment. Our Q3 results exceeded expectations, reflecting substantial improvement in West Coast economic conditions and housing demand. Net effective market rents are now 6.4% above pre-COVID levels, and it's notable that we have exceeded pre-COVID market rents despite having recovered only about 63% of the jobs lost during the pandemic. As a result of improving market conditions, we reported quarterly core FFO of $3.12 per share, $0.08 per share above both our sequential results and guidance provided last quarter.
This is the first of likely many quarterly sequential improvements in Core FFO. Southern California continues to deliver the strongest growth with net effective rents up 17.2% compared to pre-COVID, while Northern California is still down 5.2%. Return to office delays at many tech companies and slower job growth compared to other West Coast areas were factors in the pace of recovery for Northern California. Overall, September job growth in the Essex markets was 5.2%, substantially above the U.S. average of 4%. Turning to our outlook for 2022, we published our initial market rent estimates on page S-17 of our supplemental package.
We are expecting 7.7% net effective rent growth on average in 2022 with Northern California, the notable laggard in 2021, forecasted to lead the portfolio average in market rent growth next year. A key assumption driving our outlook for 2022 is the return to a predominantly hybrid office environment occurring over the first half of the year, supporting our 2022 job growth outlook and our expectation that the West Coast markets will resume their long-term outperformance versus U.S. averages. Our confidence in the Bay Area recovery next year is partially driven by rental affordability following a year of solid income growth, lower effective rents, and exceptional growth in single-family home prices.
Median for sale home prices are up 17% in California and almost 16% in Seattle, making for sale housing more costly relative to rental housing and often impeding the transition from renter to homeowner. Finally, despite large increases in for sale housing prices, our expectation for the production of for sale housing in 2022 remains very muted at only 0.4% of the single-family housing stock. We previously noted that many large tech companies in our markets have delayed their office reopenings as a result of the Delta variant this fall, which we believe is the primary factor in the slower recovery of Northern California compared to other Essex markets.
Nevertheless, recent tech company announcements regarding office expansion, open positions in the Essex markets, and new commitments to office space all support our belief that the leading employers remain fully committed to a hybrid office-centric environment on the West Coast. Page S-17.1 of our supplemental highlights recent investments by large tech companies which have continued throughout the pandemic and include Apple's 550,000 sq ft recent expansion in Culver City, their new 490,000 sq ft tech campus that will soon begin construction in North San Jose, and a recent acquisition of five office buildings with a total of 458,000 sq ft in Cupertino.
Google last quarter received needed approvals for its planned 80-acre campus near downtown San José, and YouTube's 2.5 million sq ft campus in San Bruno was just approved by the city last week. We continue to track the large tech companies hiring in terms of open positions and job locations, giving us confidence that we continue to grow alongside the most dynamic sector of the U.S. economy. Our most recent survey of open positions indicates 38,000 job openings in the Essex markets for the 10 largest tech companies, up 9,000 jobs or 26% as compared to the Q1 of 2020.
Strong economic growth on the West Coast is further supported by venture capital investments, which achieved new highs in Q3 2021 of $72 billion, of which 44% was directed to organizations in the Essex markets. Turning to our supply outlook for 2022, we are expecting 0.6% housing supply growth for the full year, including 0.9% growth for the multifamily stock, which is manageable relative to our expectations for job growth of 4.1% in 2022. Overall, our West Coast markets will remain well below the national rate of new housing supply growth and especially compared to the rapidly accelerating pace of housing deliveries across many low barrier markets next year.
Longer term, residential building permits in Essex markets saw a modest 3.5% increase on a trailing 12-month basis, which is favorable compared to the U.S., where permits have increased 13.6% compared to one year ago. While our markets often temporarily underperform the national averages during recessions, we remain disciplined in our approach to capital allocation, including the cadence of housing supply deliveries with permitting data supporting our West Coast thesis. Turning to the apartment transaction market, we continue to see strong demand from institutional capital to invest in the multifamily sector along the West Coast, as evidenced by increasing transaction volume and cap rates in the mid-3% range. Apartment values across our markets are up approximately 15% on average compared to pre-COVID valuations.
The company has recently seen more development opportunities, and we were able to purchase two commercial properties in the Q3, one located in South San Francisco that we expect to become a near-term apartment development opportunity, and another in Seattle that we will begin to entitle for apartments while earning an attractive 6% going-in yield with a high-quality tenant. We also recently closed two apartment acquisitions, as noted in the press release, and our acquisition pipeline is strong. Barb will discuss a new co-investment program in a moment, which is strategically important given our preference not to issue common stock at the current market price. Finally, the California statewide eviction moratorium ended September 30th. However, a few meaningful local jurisdictions have extended their separate eviction prohibitions.
The net result is that a significant portion of our portfolio remains subject to eviction moratoria and other regulations that will slow the pace of scheduled rent growth in 2022. Fortunately, the Federal Tenant Relief Program has come to the aid of many of our residents. Although the reimbursement process continues to be slow and requires significant coordination and support from the Essex team, I am grateful for this extensive team effort. With that, I'll turn the call over to Angela Kleiman.
Thanks, Mike. First, I'll start by expressing my appreciation for our operations team. As we are in the midst of a strong recovery, our team has been busier and working harder than ever. I also want to thank the support departments, especially our delinquency collections team, for their diligence to help our customers navigate the complex rent reimbursement legislation. On to today's comments. I'll provide an overview of our portfolio strategy relative to current market conditions, followed by some regional commentary and expectations for our markets. Our Q3 results reflect a combination of the operating strategy implemented early in the pandemic, and a healthy recovery in net effective rents that began in the Q2 as California and Washington finally reopened from the pandemic shutdowns.
As you may recall, in the Q2 of 2020 when the pandemic mandated shutdowns halted our economy, Essex quickly pivoted to a strategy that focused on maintaining high occupancy and coupon rents with the use of significant concessions. Now, over a year later, as our markets recover, we are starting to see the benefits of this strategy flow through our financial results. In the Q3, same property revenues grew by 2.7%, which is primarily attributable to a reduction in concessions compared to the previous period. By primarily utilizing concessions last year, we were able to limit the in-place rent decline to only 1.1% in the Q3. The benefit of this strategy is also coming through our sequential revenue growth, which increased 3.2% this quarter from the Q2.
With the market volatility we experienced over the past year, this is an extraordinary result and positions the company well going forward. From a portfolio-wide perspective, market conditions remain strong compared to a year ago, as demonstrated by the 12.6% blended net effective rent growth in the quarter. In addition, rents relative to pre-COVID levels have continued to improve, further enhanced by a delay to the typical seasonal slowdown in all our markets. Turning to some market specific commentary from north to south. Rents and jobs in the Seattle region have had a strong recovery, with net effective rents up 8.3% compared to pre-COVID levels and year-over-year job growth of 5.5% in September.
New supply continues to be largely concentrated in the CBD, which is less impactful to Essex because 85% of our Seattle portfolio is located outside of CBD. Looking forward to 2022 as outlined in our S-17 supplemental, total housing supply deliveries for the region is expected to decline compared to 2021, and we anticipate job recovery to continue, led by Amazon, which recently announced plans to hire over 12,000 corporate and tech employees in Seattle. As such, we are forecasting market rent growth of 7.2% in 2022. Moving down to Northern California, which is our only region where net effective rents remain below pre-COVID levels. Greater job loss and apartment supply deliveries caused net effective rents to fall further in Northern California since the onset of the pandemic.
In addition, the job recovery in Northern California has been at a slower pace than our other regions, with only 4.4% year-over-year improvement compared to a 5.2% for the entire Essex portfolio as of September. We believe this is partly driven by the more onerous mandates delaying normal business activities. Apartment supply, particularly in San Mateo and Oakland CBD, are also presenting challenges for nearby properties, leading to financial concessions for stabilized properties for over a week in these markets in September. On the other hand, we anticipate that Northern California will be our best-performing region in 2022, with market rent growth forecast of 8.7% on our S-17. As Mike discussed, we expect hybrid office reopenings to continue, which will drive additional job growth and healthy demand for apartment units.
With similar level of supply delivery expected in 2022 as this year, we are optimistic that Northern California is in its early stages of its recovery. Lastly, on Southern California, rent growth has continued to improve in the Q3, and net effective rents in September are 17.2% above pre-COVID levels. As we have mentioned in the past, Southern California is a tale of two markets, the urban areas in the downtown L.A. versus the more suburban communities, which have generally outperformed. In June, L.A. rents were still below pre-COVID levels, but as of September, they are now 6.8% above. While Orange County, San Diego, and Ventura have achieved rents between 17%-30% above pre-COVID levels. Job growth in Southern California continues to progress well, up 5.9% in September as the region's economy continues to reopen and recover.
With the exception of the downtown L.A. area, where concessions averaged one week in September, the rest of our Southern California markets have demonstrated solid fundamentals with no concessions recognized in September. We expect Southern California's strong rent growth to continue in 2022, led by Los Angeles, which has just begun to recover the jobs lost during the COVID recession. Apartment supply in the region is forecasted to increase next year compared to this year and could present pockets of interim softness counterbalanced by a continued favorable job-to-supply ratio across the region. As you can see on our S-17 market rent growth for Southern California of 7.1%, we anticipate this region to perform at a comparable level as Seattle. With this backdrop of stable occupancy amidst a favorable supply-demand relationship, our portfolio is well positioned for the continued growth.
I will now turn the call over to Barb Pak.
Thanks, Angela. I'll start with a few comments on our Q3 results, discuss changes to our full-year guidance, followed by an update on investments and the balance sheet. I'm pleased to report Core FFO for the Q3 exceeded the midpoint of our guidance range by $0.08 per share. The favorable outcome was due to stronger operating results at both our consolidated and co-investment properties, higher commercial income, and lower G&A expense. During the quarter, we saw an improvement in our delinquency rate, which declined to 1.4% of scheduled rent on a cash basis compared to 2.6% in the Q2. The decline is attributable to an increase in income from the federal tenant relief programs that were established to repay landlords for past due rents.
Year-to-date through September, we have received $11.6 million from the various tenant relief programs, of which $9.5 million was received in the Q3. Given the increased pace of reimbursements, we began to reduce our net accounts receivable balance in order to maintain our conservative approach to delinquencies and collections. As a result of the strong Q3 results, we are raising the full year midpoint for same property revenues by 20 basis points to -1.2%. It should be noted this was the prior high end of our range. There are two factors I want to highlight as it relates to our Q4 guidance. First, as Angela discussed, we are seeing strong rent growth in our markets.
While there will be a small benefit to the Q4, the vast majority of the benefit from higher rent growth won't be felt until 2022 when we have the opportunity to turn more leases. Second, our Q4 guidance assumes we continue to receive additional government reimbursements for past due rents and contemplates a continued reduction in our net accounts receivable balance. Thus, we expect our reported delinquencies as a percent of scheduled rents to be above our cash delinquencies, which is consistent with the Q3 reported results. As it relates to full-year Core FFO, we are raising our midpoint by $0.11 per share to $12.44. This reflects the better-than-expected Q3 results, and changes to our full-year outlook. Year-to-date, we have raised Core FFO by $0.28 or 2.3% at the midpoint.
Turning to the investment market. During the quarter, we raised a new institutional joint venture to fund acquisitions as we believe this is the most attractive source of capital today to maximize shareholder value. The new venture will have approximately $660 million of buying power, a portion of which is expected to be invested by year-end. As I discussed on our last call, we are seeing an elevated level of early redemptions of our preferred equity investments due to strong demand for West Coast apartments and inexpensive debt financing, which is leading to sales and recapitalizations. For the year, we expect redemptions to be around $290 million. Roughly 40% of these redemptions are expected to occur in the Q4. Given the current environment, we could see continued elevated levels of early redemptions in 2022.
In terms of new preferred equity and structured finance commitments, we are on track to achieve our 2021 objectives as outlined at the start of the year. Year- to- date, we have closed on approximately $110 million of new commitments. As a reminder, it typically takes three to six months post-closing to fund our commitments, given they tend to be tied to development projects. Moving to the balance sheet. As we expected, we are starting to see an improvement in our financial metrics, driven by a recovery in our operating results. In the Q3, our Net Debt to EBITDA ratio declined from 6.6x last quarter to 6.4x . We believe this ratio will continue to decline through growth in EBITDA over the next several quarters.
With limited near term debt maturities and ample liquidity, we remain in a strong financial position. That concludes my prepared remarks, and 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. The 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 poll for your questions. Our first questions come from the line of Nick Joseph with Citi. Please proceed with your questions.
Thanks. As we look to 2022, how do you think about Essex's ability to capture that MSA market rent growth of 7.7% that you discussed? I don't know, either from a regulatory standpoint or the lease roll perspective, just trying to tie the initial same store expectations to the market rate data that you provided.
Hey, Nick, it's Mike, and Angela might follow me with comments. You know, I think we're feeling very good about conditions around us. Again, we have high occupancy throughout and a very strong loss to lease, and that's been noted before. Everything looks like our markets are recovering. You know, we expect to outperform the U.S. with respect to job growth, certainly going forward. You know, we view the catalyst of the return to office in Northern California as being sort of the last piece. That's probably the relative underperformance that we've had thus far relative to the peer group. You know, we see that as still being a very strong part of our portfolio.
Historically, Northern California produces the highest CAGR of rent growth over long periods of time. We expect that dominance to show itself. You know, a lot of the reasons why were embedded in the various comments that you heard from all of us. Hopefully, that all made sense. The number of open positions for tech companies, the big investments that the tech companies continue to make within the Northern California markets, et cetera, I think it bodes well. We feel, you know, really great throughout our footprint. The key piece going forward, I think, is Northern California. We feel very good about that too.
Thanks. Maybe following up on that, the return of the office or hybrid. How do you think that impacts seasonality over the next few months, as employees maybe move back into Northern California specifically?
You know, I think that, you know, given that we carry high occupancy into this period of time, any incremental growth in jobs should have a very positive impact on market rents. Our expectation is, you know, I would say Northern California was probably shut down to a greater level than most other markets. Maybe L.A. would be number two, but it has had the most muted recovery. Yet it has, I would say, the strongest and most dynamic job base. We're looking forward to that. We're, you know, we were hoping it would happen earlier. Again, I think the Delta variant has postponed that. Again, we feel strong.
We think all the conditions that we would expect to see from number of open positions for these companies, major commitments to campuses and lease commitments for office space, et cetera, all seem to be focused on a return to office program, probably in a hybrid sense for these companies. I think that's before us in the not distant future.
Thank you.
Thank you.
Thank you. Our next questions come from the line of Haendel St. Juste with Mizuho. Please proceed with your questions.
Hey, thanks for taking my question. So first question, I guess, is on the topic du jour, inflation and all the ways that it's impacting the business. How are you thinking about that impact in regards to payroll, R&M, utilities, and what offsets could what levers can you pull to offset some of those costs into next year? Then maybe some broader comments on your technology platform, where you are in terms of the rollout of that and how that could be helpful here as well. Thanks.
Okay, Haendel. Hey, thanks for the question. It's a good one, and I'll let Angela handle the technology piece of it. Here, help me. What was your first part of your question? Sorry.
The inflation on wages.
Inflation. Yeah.
Yeah.
Yeah. I mean, we've studied the inflation thing, the historical precedent, you know, going back a long time, actually, into the early 1980s. You know, no doubt we are feeling quite a bit of pressure on the cost side. Certainly, you know, finding positions, especially on-site positions, is challenging and, you know, compensation is going up for sure. On the one piece that's, you know, good in California, obviously, is property taxes because Proposition 13 limits that increase. I go back to rents. Rents are obviously the big thing. You know, we're a high gross margin type of company, and therefore, you know, the rent growth really matters in this equation. I think in an inflationary world, rents do very well.
I would expect that our rents growth would more than compensate for whatever cost increases that we have. I think it's, you know, it would be. I'm not saying I want this to happen, but I think if we were in a stronger inflationary period, I think it would be a net positive in terms of the financial performance of the company. Obviously, if inflation goes up, all asset values decline in value. Maybe, you know, that would be one sticking point as well because, you know, probably cap rates change and some other things happen as well.
So.
Angela, you want to comment on.
Sure. I think Barb wants.
Yeah. I just want to follow up on that one point, Haendel. The other thing that we've done over the last several years is take advantage of the low interest rate environment and lock in our interest rates for long periods of time, and we have very little debt maturing next year and the following year. We're not susceptible to rising rates from that perspective. We've locked in our interest expense effectively, and we have very limited variable rate exposure as well. We feel good about where the balance sheet stands from an inflationary perspective.
Great. On the technology front, Haendel, what we have been doing is really focus on ramping up the contactless interactions, which also allows for efficiency and then allows more flexibility for our site team. We are going to continue, you know, that path and further refine and enhance those technology. What that means is that it will allow our staff to probably specialize more and hopefully continue to be more efficient, and that'll help. I don't think it'll be, say, an immediate relief as far as the payroll expenses that you're looking for, but over time, it should benefit the business platform.
Without putting words in your mouth, it sounds like the near-term outlook for inflation doesn't necessarily spook you? Perhaps there's a little bit of pressure building in the business, but maybe not to the degree to perhaps put a, you know, mid-single digit type of expense growth, outlook for next year?
Well, we're not giving.
We're not there.
Yeah, we're not guiding yet for next year.
Still working through the budget.
Barb drilled that into me prior to the call. Please don't give out any guidance. We're still working on that. Yeah, I guess the point I would make is in high gross margin businesses, you know, even if you get some expense pressure, you know, still the top line is so much more important. You know, I think in my view, you know, we always look at rents. You know, what's the relationship between rents and incomes? In an inflationary environment, if incomes are going up, we're probably able to pass through most of that in the form of rent. If that happens, you know, we will do very well in that scenario.
Got it. Fair enough. A second question if I could ask about the two office acquisitions here in the quarter. Maybe some comments around the math, the thought process. Whether you think of these as opportunistic and more one-offs or perhaps more reflective of the low cap rates in your markets, which could be making just more conventional acquisitions more difficult. If that's the case, thoughts on culling some of the portfolio a bit or maybe taking advantage of some of the pricing. Thanks.
Hi, Haendel. This is Adam. I'll touch on both of the two office acquisitions that Mike touched on in the opening remarks. They're both kind of separate, which is why I'll cover them separately. The first one, which is in South San Francisco, we've had that tied up for over three years. During that time, we worked with the city to determine what sort of zoning we could get. During that time, we were basically able to increase the density by over 100 units. When you take that coupled with the cap rate compression that we've seen in the market, the deal made more sense than really any development deal that we've penciled in the last couple of years.
There is in-place income on the existing use, which it's in the call it high 3 kind of cap rate range, which is fine. That'll get us through two entitlements, which we would expect in nine months to a year or so. The other one, somewhat of an outlier. It's a single tenant office deal in Seattle. Really good location. There's still another nine years on the lease, and we have a partial guarantee for that term. It's north of 6 cap on current income. It does pencil on today's multifamily underwriting, and it is actually zoned for multifamily, but we'll revisit that in the you know five, six, seven years from now to see what makes the most sense.
For now, that's a very solid covered land play from our perspective.
Great. I appreciate the color. Thank you.
Sure.
Thanks, Haendel.
Thank you. Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your questions.
Hi, this is Larry for John Kim. Thanks for taking my question. I was just wondering a little bit about the regulatory risks in your market. I know we've kind of touched on that here and there. But are these increased risks kind of being priced into valuation? Some of your other peers were citing that as a reason to reduce exposure in California. I was just wondering how you guys were thinking about that.
Adam. Well, I'll start, and I'll let Adam chime in here. Well, we've obviously dealt with regulatory issues over many years, really, you know, for the 35 years I've been here. Historically, the bigger the loss to lease gets because of rent control, let's say, the more buyers and sellers will start pricing in a portion of it or want a higher cap rate given the delayed impact of rents. But generally speaking, all apartments are valued based on market rents today, not then, and again, the loss to lease is a determination based on facts and circumstances. You know, with California rent control law, the statewide law, that's CPI + 5, max of 10%, annual increase.
I don't think that in and of itself will cause a significant valuation differential. I think that's the key part, that if you're moving, you know, rents by CPI + 5, let's call that, you know, eight or something like that, most buyers will think that is plenty of compensation for, you know, for the transaction. I don't think cap rates move all that much, because of that. Adam, do you want to comment on that?
Just one additional comment. The most onerous rent controls within California, you take San Francisco or Santa Monica or Berkeley, there's just very little that trades there. That's where you see that larger loss to lease, the bigger gap between in place and economic. That's where pricing would fluctuate more. As far as AB 1482 goes, the California statewide one, it doesn't really factor in to really any of the models from what I can tell.
Okay. Thank you. Thanks for the color. Going back to the inflation piece too, how is that affecting you know, your planned developments? I know you briefly talked about the other commercial acquisitions and how, you know, relative to multifamily, those are still good trades. You know, kind of moving forward in the development pipeline, like, is that something that you're really thinking about?
It's something we consider in all of our strategic decisions. We're not focused on the office market. I want to be very clear. The two opportunities that we had are like really one-off. No, I mean, we look at all of those factors in determining where and what to invest in.
Yeah. I think we estimate about 9% between today and when we would start construction, for example, on the South San Francisco deal that Adam talked about earlier. Could that be high or you know, we don't know. We build in an estimated cost escalation. You know, what really drives all these deals, if cap rates go from you know, 4.25-ish down to 3.5 or so, the built-in value of those transactions, of a development transaction, until, of course, land sellers adjust their price, it makes a ton of sense and there's a lot more value created in that process. Adam, do you?
Yeah. Just one final follow-up there is we're always looking at the spread between where stabilized acquisitions or stabilized assets are trading versus our development yield. Whether a deal is entitled or un-entitled, we're going to look for a different spread between what in-place cap rates are. That escalation that Mike referred to, we assume on everything, whether it's three months out, six months out, or two years out, and then that factors into the denominator. With this cap rate compression we've seen, especially on these two deals, and there are a couple of others potentially in the pipeline where that spread has increased, and those are the deals that we are pursuing aggressively.
Thank you. Our next question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your questions.
Hey, guys. Just a quick question. Could you maybe provide us some details on your loss to lease across the various different markets so we can compare them to the rental rates you disclosed for your macro forecasts?
Sure. Happy to. It's Angela here. At September, the portfolio loss to lease was 9.8%. You know, but it's widespread. It's from Northern California in the 4s, you know, to Southern California in the low single digits, around 13%. You know, and we understand that typically, you know, analysts look to this loss to lease to model next year. I want to just make sure that I provide a little more context on that because we want to consider a couple of factors. You know, first, this year was a unprecedented year because we started out the year with a huge negative rent growth and have turned positive. It's a very steep curve. This trajectory is not likely to repeat next year.
Because of that, and, you know, this is the delay in the seasonal peak, it has created a small drag on revenue for next year. Secondly, some markets, you know, those over 10%, which broadly speaking will be our Orange County, San Diego and Ventura Counties, they're above the 10% cap, you know, rent control cap. That will, you know, be a factor as well.
Got it. Angela, that was actually exactly what I was looking for. Just maybe one other question. When we think about leasing spreads versus list rates, is there a lead lag there? You know, some of the data we look at is the listing rates seem to be a lot higher than the signed leasing spread. So I'm just wondering if the listing rate is a leading indicator and how you think about that.
I'm not sure if I am following your question.
Yeah. What I'm suggesting is.
Are you talking about asking versus achieved? Is that what you mean?
Yes.
Okay.
Suggesting, are your asking in October, November, December higher than where it's been signed?
Yes, I see what you mean. Well, let's put it this way. For now, it has been higher, but that's pretty typical. What we try to do is forecast what the rent level is going to be one or two months out, you know, whenever we send a renewal. What that means is sometimes it's higher and sometimes lower. If we think that we're now, you know, if we start sending out renewals now for, say, December, January, it's not likely to be a whole lot higher. Back in, if we're sending renewals out in March for renewals in May or June, it tends to be higher. It really depends on the timing and the market conditions.
Thank you. Our next question comes from the line of Austin Wurschmidt with KeyBanc. Please proceed with your question.
Yeah, thanks, everybody. I was curious, going back to the market rent growth forecast, if you could just give some additional detail of kind of how you thought about, you know, a baseline scenario that maybe doesn't include some type of hybrid back to office and how you went about determining what that additional growth would be layered on top, with that back to office scenario playing out. We know you guys tend to take a conservative approach. Just trying to understand, you know, the baseline versus, you know, what the upside look like.
Yeah, it's a great question. Yeah, I'm not sure we approach it that way. I mean, our research group, Paul Morgan, he, they use a variety of datasets, and they're not looking at any one thing, not creating some base case scenario. The simple part of it is looking at, you know, what we expect job growth to do and how many units of demand are represented by the job growth, and then how much supply do we have. Fortunately, you know, again, we're 96% occupied in all these markets, so it isn't like we have a hole to fill before, you know, that before the demand over supply situation takes hold. We're already there. Included in some of the things he looks at, which is, you know, I think some pretty interesting data.
You know, for example, Seattle has recovered 79% of the jobs that they lost in the pandemic, and he's expecting them to be at 110% by the end of the Q4. They will actually be above their pre-COVID employment level, whereas almost all the other markets are still, you know, below pre-COVID level by the end of 2022. It's not that, not that simple. He considers affordability, which affordability is a key part of what we do. You know, if we look at things now because there's been such incredible growth in rents in Southern California, they screen and, you know, the way we do affordability is on a market basis, not a property-by-property basis, because we're trying to look at the overall dynamic in the marketplace.
Southern California, because it's had such great rent growth, is screening a little bit expensive. Northern California, which has the highest incomes and, you know, rents that are pretty moderate given what's happened here. You know, so that's what leads to the better growth rate for Northern California next year. You know, just by way of background, I'll give you a quick comparison. Rents in Seattle and Los Angeles, the median rent, the market rent, not Essex portfolio, is about $1,816 in both cases. But in Seattle, the median household income is $102,000, and in L.A. it's about $88,000. Paul would look at that relationship and say, you know what? That's a positive for Seattle.
It has about the same rents, has a lot more room to run with respect to incomes, and that would factor into his equation in terms of what we expect market rents to do. Does that make sense?
Got it. That's. Yeah. No, that's very helpful color. You know, in that scenario, if demand were to exceed, you know, just from a job growth perspective, you talked about kind of the jobs versus supply piece. If, you know, back to office does drive incremental demand above and beyond that, you know, is it conceivable to think that you could benefit from a pricing powers perspective but also see some upside to occupancy as well?
Well, occupancy is a little bit different element, and that really has to do with how aggressively we're pushing rents. You know, occupancy, some have noted, has actually declined a little bit, but that's really because we're pushing rents. When you push rents, you hold out a little bit longer, and you are willing to accept a little bit lower occupancy level. Going back to our basic thesis, if we have 530,000 jobs created next year, and the typical relationship between a household and a job is 2 to 1, so we have, you know, somewhere around 265,000 units of demand for apartments, and we produce a total supply of 64,000 homes, we should do pretty darn well in that scenario.
Again, affordability becomes the key issue, and affordability is, you know, different by market. You know, we screen relatively inexpensive in Northern California and relatively expensive in Southern California. Just looking at basic supply-demand, we should be in great shape next year. You know, we don't know exactly what's going to happen. We think 7.7% is a big number, but, you know, we'll wait and see.
Thank you. Our next questions come from the line of Rich Hightower with Evercore. Please proceed with your questions.
Hi, everybody. Thanks for taking the question here.
Hi, Rich.
I guess outside of restrictions within the confines of AB 1482 in California, are you guys self-limiting any markets or submarkets with respect to renewal rents just kind of in that, you know, sort of corporate spirit, you know, and being the good guy from vis-a-vis your tenants that you guys have employed in the past, you know, thereby sort of exacerbating that growth in the loss to lease as things go forward?
You know, that's a good question, and this goes toward, you know, the social responsibilities, you know, part of our corporate governance, right? We have a self-imposed cap of 10% for many years. Really, the approach behind that is to avoid being viewed as anti-gouging. That strategy has worked well for us for many years, and it really has not materially negatively impacted the returns of our shareholders.
Okay. Angela, which markets are you sort of employing that strategy at this moment, if you don't mind?
Well, it's broadly across the portfolio, and so it's wherever we have that hitting the loss to lease above 10%. It happens to coincide with AB 1482. It's Orange County, San Diego and Ventura, because they're all above 10% loss to lease.
Seattle, perhaps?
Yes. Seattle as well.
Okay. All right. Great. Thank you.
Not 1482, but yeah.
It's still.
10%.
Right. I mean, separate from 1482. That's what I meant. Yeah.
Right.
That, that's perfect. Yeah. Thank you.
Thanks, Rich.
Thank you. Our next questions come from the line of Brad Heffern with RBC Capital Markets. Please proceed with your questions.
Hey, everyone. I was just curious, in the Bay Area, if you've seen any change on the move-in stats, if maybe more people are coming in from outside the metro versus, you know, what you've seen more recently?
It's a good question. You know, the granularity of that data is kind of difficult to follow. It's hard to say exactly what's happening recently. We do have job growth and you know, the job growth is exceeding the national average. You know, from that, you know, from that statistic alone, we feel like there was some positive movement back to the Bay Area and clearly occupancy, et cetera, has confirmed that. But we don't think that the major shift has happened. We expect it to pick up here in the next couple of months as we approach year-end, and hopefully accelerate into 2022. That's the premise.
I'd say we need you know, more job growth than what we have currently to achieve the 2022 forecast that is on S-17. We'll do fine either way.
Okay. Got it. On delinquency, can you walk through sort of what the underlying trend has been? I know there's noise obviously related to the rental relief payments, but has the underlying level come down and how do you see that sort of playing out?
Yeah. Hi, Brad, this is Barb. You can see we report our delinquencies for the quarter. We were at 1.4% on a cash basis. Keep in mind, we did report July last quarter, and that was at 2.2%. That implies August, September had come down. That was around 1% on a cash basis, and then October is about 1%. That's really being driven by the reimbursements. As I mentioned during the call, we got $9.5 million in the Q3. Most of that hit in August and September. We've seen in October, we've seen a commensurate amount. That's kind of where we've been at. We've been stable. I would think the last three months, it's been pretty stable in terms of our net delinquencies.
Thank you. Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your questions.
Hey, thank you. Still morning out there for you. Just on that last question, when you say the delinquency is 1%, that is net of the amount that you collected from the delinquency reimbursements from, you know, California and other jurisdictions. Is that correct?
Correct.
Without that.
Yeah.
It would still be in that, like, you know, 2+ range. Is that around where it would be?
Yes. Exactly.
Okay.
It would be higher without those reimbursements. The reimbursements is what is driving that number lower. Correct.
Yeah. No, sure. Yeah, I was trying to understand what's baked in and if anything's changed in how you recognize bad debt.
No.
How that looks. I get you.
No.
Okay.
No, not at all.
Thank you for that. Okay, and just in terms of the people moving into San Francisco, I guess we'll focus on that one. You mentioned that in general, your portfolio is seeing people come back. I wonder, just given in San Francisco that, you know, rents are still down from pre-COVID levels, can you comment, are the demographics changing a little bit from the people who are moving in? You know, are they the same in terms of income, you know, jobs or, you know, are more people who are coming in sort of moving in from the outskirts, looking for a deal of some kind that would, you know, potentially impact your ability to retain those once, you know, market rents come back?
Yeah, that's. It's Angela here. That's a good question. We have not seen any meaningful change in the demographic profile. And I think this question was also posed early on when, you know, rents declined or when we were giving out significant concessions. I think at the end of the day, you know, it's becoming. It's all about jobs. While it's slightly more affordable, people are not going. We just don't see people randomly moving into the city, and then, you know, not being able to stay. Does that make sense?
Yeah. I appreciate that. Yeah, so just the other one follow-up, maybe just talk about development and the sort of mezz outlook. You kind of touched on this earlier, but you know, given everyone understands there's a lot of inflation with input costs, supply chain disruptions, hard to get, you know, labor, et cetera. But you made the comment that you're seeing increase in developments and, you know, a commensurate increase then in mezz opportunities. Can you just maybe elucidate that a little bit? Just, you know, you think that it would be a tougher environment, but you know, can you talk about what's driving that and then, you know, what kind of opportunities you're evaluating right now and potentially the size?
Actually, maybe I think there are several parts to that, and I think we may need to clarify the question a bit here. Overall, we think 2022 will have roughly 4% more supply than 2021. Part of that is because there was you know the delivery delays caused by COVID. You know eventually they will catch up into 2022, but not enough to be you know really meaningful in the scheme of things, especially again when you go through the job numbers that we have and the implied demand from you know 530,000 new jobs across our footprint. You know, notably on the supply side, Seattle is the one market that's down pretty substantially, about 12%.
That's another gold star, let's say, for the Seattle market there. Barb, you want to?
So.
Adam? Yeah.
Neil, as far as on the street opportunities that we're seeing, to kind of echo your point, with costs having risen. Now, that being said, costs are well down from where we were kind of at the lumber peak in mid-summer. Taking all that into account, we're seeing a steady flow of deals, but fewer deals it seems that are penciling. That's both on the mezz and pref side as well as on the direct development side. The one thing, the one point I made earlier about, with cap rates compressing on existing products, they're also diminishing some on the development yields. There are kind of competing factors as to how deals are being made today.
Like I started with, there is a flow of deals happening, but again, those that are actually penciling are, I would say, fewer and further between.
Neil, I just want to make sure that, you know, in my prepared comments, I did say that, you know, we had $290 million of preferred redemptions this year. Given the current environment, if it is to continue low interest rates and high valuations for West Coast assets, we could expect early redemptions of a comparable amount in 2022, I would imagine. It's, you know, we could still face headwinds there, just given this environment. We're seeing a lot of developers able to take us out early, for a variety of reasons. I want to make sure that you heard that, as well.
Thank you. Our next questions come from the line of John Pawlowski with Green Street. Please proceed with your questions.
Thanks. I have a question for Adam. I think in the prepared remarks, Mike referred to apartment values being up 15% versus pre-COVID levels. I'm curious in the hardest hit markets of the Bay Area, where you think current values are relative to pre-COVID levels.
Yeah. Thanks, John. Well, as Mike pointed out in the opening remarks, that's an average. As it relates specifically to the Bay Area, there's been very little to trade, very little of substance. I think that number in the Bay Area is going to be anywhere between 5% and maybe upwards of 20%. But again, there's been really just two Class A deals that have traded and then some kind of B and C deals that have traded. We're talking about a very limited data set.
Okay. Sorry, to clarify, 5%-20% down or up?
Up.
Okay.
Oh, you know nothing, right? You know nothing now, John. I'm just kidding.
Well, if nothing trades, it means that. Okay. One final question from me, and then I'll jump out. I'd like to just drill down on San Mateo. Obviously job growth is improving, migration is up, but sequentially, each and every quarter, revenues keep declining in San Mateo. Can you just tell me what's going on in terms of the renter behavior, the durability of demand gains over the last few quarters and when does it turn the corner?
Yeah. That's you know an interesting question in that the data set itself. I wanted to just give a little context because I think that matters. Our San Mateo market only actually has four properties in the same store. Because of that, you know, you are going to see a lot more volatility. In addition, there has been, while good job growth and it's a good market for us, there has been lease-up competition in the area. So, you know, we're talking about an interim period where you have competition from lease-up. While there's job growth, it's still at a slower pace relative to our other markets. You add that with a small data set, it's going to just be a lot more volatile.
It's not that there's anything, you know, fundamentally, that we're concerned about with this market.
Thank you. Our next questions come from the line of Amanda Sweitzer with Baird. Please proceed with your questions.
Thanks. Apologies if I missed this, but on your co-investment platform, has the interest from institutional capital to partner with you changed the economics of those deals at all? Or is the increased attractiveness that you talked about really been driven by lower debt costs in the market today and the higher LTVs that you can use in those agreements?
Hi, Amanda. It's Barb. You know, we've used the co-investment platform for many, many years, and we like it because it is an alternative source of capital when you know we don't like our equity, our stock price. We've used it from time to time. We do think it's a good source of capital for us. In terms of economics, you know, we were able to, you know, reduce the hurdle rates and improve the economics for Essex. You know, cap rates have come down over the past year, 75-100 basis points, and we were able to change terms accordingly.
The economics of the joint venture didn't change materially from what we've done in the past, but, you know, we'll continue to use this source of capital going forward, depending on market conditions.
That's helpful. That's it for me.
Thank you. Our next questions come from the line of Chandni Luthra with Goldman Sachs. Please proceed with your questions.
I think it's officially noon on the West Coast, so I'll say good afternoon, everyone. I'll start with your redevelopment program. If you could perhaps give some color, I believe you started that last quarter, where you're at and how you're thinking about it in 2022?
Sure. Happy to. It's Angela here. We started ramping up, and I mentioned that last quarter, and we're going to continue to do so, especially, you know, in light of the recovery, and the strength of the recovery and, of course, our expectations for market rent growth next year. Our goal at this point is really to double the number of renovations for next year compared to this year. Then ultimately, you know, get back to pre-COVID levels. Because it does take a little more time to ramp up these activities. As market conditions improve, we also make sure that we underwrite the improvements and ensure we don't have capital destruction and make sure that we are meeting the market and optimizing our returns. So it's not a turn the switch on.
We just want to be diligent about it.
Angela, as a follow-up to that, I mean, how's ROI, you know, looking at on sort of those redevelopments, is that consistent with, you know, pre-COVID levels? Is there a big range to think about there? Just trying to understand that, if you could throw some color on that as well, please.
Sure. No, happy to. We target our ROI at pre-COVID levels. Keep in mind, it's driven by market rents. What that means is that, you know, that ROI, the way we approach it is that we wouldn't proceed with a reinvestment opportunity if we're not achieving our target ROI. Therefore, you know, if you're concerned that there's been any compression or deterioration there has not been.
Gotcha. You know, my sort of second question would be, you know, one of your peers talked about earlier today about some impact on leasing velocity from Amazon's policy shift on return to office. Just wanted to, you know, check with you. What are you guys seeing from your standpoint? Thank you.
Let me make sure I understand your question. Are you asking about our leasing velocity, whether it has changed because of Amazon?
Yeah, I mean, Amazon's policy shift on return to office, you know, the announcement a couple of days ago.
The policy. Yes, I see what you mean. So we have not seen any impact from the Amazon shift, because, you know, keep in mind while, yes, they have the corporate mandate, but they also have a lot of workers, you know, throughout the region. And so that's and of course, all the businesses that support Amazon. Practically speaking, we have not seen an impact on our turnover. We have not seen an impact on our occupancy and certainly not an impact on our ability to raise rents.
Thank you. Our next question comes from the line of Daniel Santos with Piper Sandler. Please proceed with your questions.
Hey, good afternoon. Thank you for taking my questions. My first one is on your stock price. You didn't issue equity in the Q3 yet on our estimate. Based on the Street's estimate of NAV, you're trading at a premium instead of issuing equity, sort of are going to disposition and JV route. I just was wondering if you could give more commentary on your views on your stock price and maybe using more equity going forward.
Yeah, that's a good question. I mean, we've always remained very disciplined as it relates to what source of capital we use. We look at a variety of different sources, one being the equity, one joint venture equity, and one disposition. Keep in mind, with values up 15% from pre-COVID levels, that puts our NAV and, you know, where we think the value of the company is up quite a bit from where we were at the start of the pandemic. That's a factor that we look at when, whether we want to issue equity today or not. The other factor to keep in mind is we have a lot of money coming back from preferred equity redemptions. We're using that to fund the new investments we're making, along with using the joint venture platform.
We really do think it creates a lot more value for our shareholders, given the fees and the potential for promote hurdle and given where our stock price is trading. We don't believe we're at a material premium to NAV at this point.
Okay, that's helpful. Lastly, how much more are you expecting benefit from SmartRent, and what's your timing on that?
Yeah, and that's a great question. You know, the value of our SmartRent investment is about $75 million today. Our Q3 financials, there's a lag effect there because we report them, the shares are still held within RETV until we come out of lockout. Their financials are one quarter in arrears for us. We would expect a fairly substantial gain in the Q4. It could be up to $40 million. We would also have to recognize an unrealized deferred tax provision as well. That could be up to $12 million. Both of those numbers are not reflected in our full year guidance for total FFO. Just given the uncertainty, there's a lot of other moving parts within RETV that we don't try to predict, that gain or loss.
Those are the numbers related to SmartRent in and of itself.
Thank you. Our next question comes from the line of Alexander Kalmus with Zelman & Associates. Please proceed with your questions.
Hi, thank you for taking the question. I want to touch on SB 9 and 10 and what you expect the long-term impact to be on California housing supply there, what you're seeing on the ground, if anything yet.
Yeah. This is Mike, and good question. We're still waiting and sort of guessing as to what might happen with SB 9 and 10. Of the two, the one that's more impactful is SB 9, because that would effectively have the state override local zoning laws as it relates to the development of ADU units, potentially allowing more ADU units to be built in the suburbs. I want to note that there previously was a ADU law that was passed earlier this year, and this whole situation has been quite politically active with respect to the YIMBYs, the Yes In My Backyard, versus the NIMBYs, the No In My Backyard groups. That's going to be an ongoing battle.
I think personally, given that there was an ADU law that was out there before and it had relatively little impact, that's going to continue to be the case. There was a L.A. Times article that was recently written, and it said it estimated. I don't know where this estimate came from, but I'll just mention it for the sake of transparency. It mentioned that estimated 1.5% of single family homes are likely to use SB 9. I suspect that'll be high in. But the backdrop of this is that, you know, Governor Newsom and various other sources have indicated that the state is short millions of homes. The likelihood that SB 9 and SB 10 will change that, I think is very unlikely.
Right. Thank you very much there. Just wanted to touch on the trajectory of potential renewals going forward, given the CPI, you know, regulation. Would you consider, you know, pushing a little more on that lever in future rent negotiations to make sure that, you know, over the span of a few years, you're able to get to market quicker? Or do you see that being just playing out, you know, similarly how it has in the past in terms of the difference between renewals and new move-in spreads?
Well, you know, CPI + 5 is at. It's that, but it's capped at 10. It's not a metric that we have, say, a flexibility to push at our discretion. You know, we've been operating in this market even before AB 1482. We have assets that have had rent control, and over a long period of time it had, you know, comparable growth rates, and we've operated well under these circumstances. We just don't think this is going to fundamentally change our ability to achieve our return targets.
Thank you. Our next questions come from the line of Joshua Dennerlein with Bank of America. Please proceed with your questions.
Yeah. Hey, guys. Thanks for the question. I was just kind of curious how you're thinking about pushing rate in the fall, winter. Looks like some of your markets, you saw a little bit of an occupancy dip. Maybe if, you know, if it's a different strategy across markets, it'd be great to discuss that as well.
Yeah, happy to. You know, so this isn't an unusual year in that normally we peak around July. Starting, say, end of July, we start to have a deceleration for six months. This is an unusual year in that we had this huge ramp up. You know, we went from this, a big negative, I think it was like negative 10% of market rent growth in Q1. We peaked around, it depended on which markets, but Seattle and Northern California peaked around August, and Southern California is just peaking now, like, as we speak. So it's very different from that perspective. Having said that, you know, that natural seasonality does play itself out, and so the question is really a magnitude issue.
What we're going to, you know, continue to do is focus on, at this point, wherever we can, push rents, but more likely, as we head into November, December, now focusing on occupancy. You know, I think some people noted that in the Q3, we allowed occupancy to fall a little bit, but I want to emphasize that was because of the strength of the market. Now we are going to, you know, preserve those rents and focus on occupancy if we see that deceleration continue.
That's great. Maybe just to follow up on that comment that SoCal is just peaking now, is that late October peak, has it been a leveling off or starting to maybe see a little bit of pullback? Just kind of curious where it is.
It's kind of between mid-October and now, so say in the past week.
Okay. Okay, great. Appreciate it.
Thank you. There are no further questions at this time. I would like to turn the call back over to Michael Schall for any closing remarks.
Thank you, operator, and thanks everyone for joining our call today. We look forward to seeing many of you virtually speaking at the upcoming NAREIT. Until then, stay well, and again, thank you for joining the call.
Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.
Goodbye.
Have a great day.