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Essex Property Trust Inc
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Good day and welcome to the Essex Property Trust Second Quarter 2019 Earnings Conference 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 in 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.
Thank you, operator. We welcome everyone to our second quarter earnings conference call. John Burkart and Angela Kleiman will follow me with comments before we open the call to Q&A.
Results for the second quarter of 2019 exceeded our expectations with core FFO per share growing 6.1% compared to the second quarter of 2018. We are pleased to raise our full year core FFO guidance by $0.20 at the midpoint, which is attributable to strong operations and improving cost of capital and solid execution from the Essex team. Angela will provide more details about the quarter and the increase to our full year guidance in her remarks.
2019 is playing out mostly as expected with market rents for the Essex metros remaining unchanged at 3.1% as detailed on F-16 of the supplemental, generally the tech markets continue to outperform led by San Francisco and Seattle, while Southern California has lagged expectations. Looking at job growth on Page F-16 San Francisco's estimated job growth was revised upward from 1.7% to 2.6% pushing its estimated 2019 rent growth to 3.5%. As noted last quarter. Southern California job growth had a slow start to the year and has since experienced a modest acceleration. June trailing three month job growth in Southern California was 1.3% equal to our forecast on page F-16.
We will briefly comment on several indicators that support our expectation for continued job growth and housing demand, all of which are consistent with our belief that the West Coast vibrant economies remain well positioned for future growth, beginning with office development which continues to perform at a healthy pace and is required for job growth. For the nation, under construction office properties represent 2.1% of existing office stock; within the Essex footprint all counties except Orange and Ventura are producing new office space at a greater pace than the national average.
The Bay Area leads the West Coast in office development with over 16 million square feet or 4.9% of stock currently under construction. In Seattle, nearly 5 million square feet of office was under production or 3.3% of stock, not including the planned expansion of the Microsoft campus with an estimated 3 million square feet of office space. We also track the job openings at the top 10 public tech companies, all of which are headquartered in an Essex market. As of June 30, these job openings were up 19% year-over-year and remain near all-time highs since we began tracking the data several years ago.
It's worth note mentioning that Amazon continues to actively hire in Washington State where it has approximately 11,500 job openings. Venture capital financing remains at record levels in the Bay Area this past year with about $60 billion committed and the Essex markets accounted for 62% of all US venture capital funding. San Francisco led all US markets in BC funding the past year with almost $42 billion invested followed by Silicon Valley with almost $19 billion invested, the highest levels recorded over the past 20 years.
Unparalleled access to skilled workers and growth capital continue to attract entrepreneurs to the West Coast. Recent IPOs Uber, Lyft, Slack and Pinterest should catalyze growth given greater access to capital and improved liquidity, they join other publicly traded tech companies, many of which continue to expand in the Bay Area.
Google for example was actively buying or leasing additional office space in San Francisco and the Silicon Valley communities of Mountain View, Sunnyvale and San Jose. In San Mateo County, Facebook and YouTube expanded in San Bruno, Burlingame, and Menlo Park. We believe that a stronger IPO market will likely drive other long-term benefits to the local economies. By one estimate, several recent IPOs have created 6,000 millionaires which will ultimately unlock previously illiquid equity positions.
At some point, some of that wealth will likely be redeployed, which will increase consumption and set the stage for new start-ups down the road. A strong labor market, shortages of skilled workers, and low unemployment rates continue to push incomes higher. Essex weighted average unemployment rate was 2.9% as of May and the median household income grew an average of 5.3% in the second quarter. With market rents growing in the 3% range, rental affordability continues to improve in all of our markets. Turning briefly to apartment supply our delay adjusted estimate of around 36,000 apartment deliveries in the Essex markets in 2019 has not changed and we expect a similar level of deliveries in 2020 albeit with some meaningful regional variations.
Turning to the investment markets, our outlook has much improved relative to conditions experienced in 2018, significantly lower interest rates and strong equity markets have substantially improved our cost of capital. In 2018 we were a net seller of apartments using the proceeds to reinvest in development, preferred equity and to fund stock repurchases. We are now mostly focused on acquisitions and preferred equity investments. We are pleased to announce another accretive acquisition this quarter, which was a high-quality property in a market we know well. At this point, we hope to exceed the high end of our acquisition guidance range of $400 million. Overall market conditions for acquisitions have not changed much this year despite the dramatic reduction in interest rates. Apartment buyers continue to target value-add opportunities, which results in greater competition for these deals that leads to compression and cap rate spreads between value-add and core properties.
Even newer properties are being marketed, with a claim of a value-add component. In this environment, we remain focused on our disciplined underwriting process with market selection and timing our primary concern. Our disposition activity on the other hand will likely end up below the low end of our $300 million to $500 million guidance range given our improved cost of capital. Finally, we note that shortages in the construction labor force continue to cost development delays, both in the Essex pipeline and more broadly.
As noted on our prior calls, the combination of long entitlement processes in the coastal markets at a time when construction costs are growing significantly faster than NOI compresses development yields. For these reasons, we continue to believe that preferred equity investments in apartment development deals generally offer superior risk adjusted returns over direct development.
That concludes my comments. Overall, we are very pleased with our company's progress year-to-date and wish to thank all of the Essex employees for their hard work.
I'll now turn the call over to John.
Thank you, Mike. We are starting the second half of the year with strong momentum, achieving 3.5% revenue growth in the second quarter. Financial occupancy for the same-store portfolio was 96.6%, 10 basis points below the prior year's period and 30 basis points less than the first quarter, while market rents were up in Q2, an average of 3.4% over the prior year's period, setting us in a favorable position as we lock down peak market rents. Our turnover in Q2 2019 was 46.4% on a trailing 12-month basis, which is down 3.2% from the comparable period ending Q2 2018. Although there are some pockets of weakness to supply interest in the local market offering large concessions. The West Coast markets overall are performing above our original expectation, largely driven by better employment growth in the Bay Area. As a result, we are raising our same-store gross revenue guidance for the full year by 25 basis points to a midpoint of 3.3%. I'll note that third-party economic research estimates for Essex market rent growth continues to be inaccurate. For example, one vendor stated that our June 2019 rents were up only 40 basis points over the prior year when in reality, they were up 3.8%.
Strategically, we will continue to favor achieving market rents over higher occupancy, taking advantage of the strong market conditions to lock in higher rents. Regarding new multifamily supply, the pace of deliveries in Essex markets remains in line with the delay adjusted forecast we introduced last fall and we are maintaining our estimate of roughly 36,000 apartment units this year, which is consistent with 2018 volumes. Our estimates remain below third-party projections, but we expect additional construction delays in the back half of the year to bring third-party figures down closer to our forecast. Construction remains concentrated in a handful of urban core submarkets led this year by the downtowns of Los Angeles and Oakland. Deliveries also remain elevated in Seattle, but strong job growth is supporting the rapid absorption of new units and we are encouraged that the pace of new deliveries in Seattle is poised to decelerate in 2020. Beyond 2020, we would highlight that new multifamily permits in the Essex markets are down 11% over the past year on a trailing 12-month basis, suggesting that the near-term pace of deliveries represents a plateau followed by gradual deceleration of new supply growth.
Moving on to a market update. In Seattle, employment growth continues to outpace the US and other major East Coast markets posting year-over-year growth of 2.9% for the second quarter of 2019. Amazon job openings remain at peak levels while office absorption stored in the second quarter as large deals were delivered and occupied. Each of our four submarkets North, South, Seattle CBD and Eastside performed well, growing revenues between 3.2% and 4.5%. Moving down to Northern California, job growth in the San Francisco Bay Area averaged 2.5% year-over-year in Q2 led by San Francisco at 3.7% growth. As Mike mentioned, the continued expansion in the Bay Area is evident in the recent IPOs of sustained highs in VC funding.
In the second quarter, we started two lease-ups. Milo, a 476-unit property in Santa Clara is now 22% pre-leased offering one month free rent. Station Park Green Phase II with 199 units in San Mateo is 24% leased offering concessions up to six weeks. Last, we started pre-leasing 500 Folsom with 537 units in downtown San Francisco scheduled for initial occupancy in the third quarter. Year-over-year same-store revenue growth in the second quarter was strong on the Peninsula submarkets with San Francisco achieving 5.9% cemetery of achieving 4.4% followed by San Jose at 3.9% and Fremont with 3.6%. San Ramon and Oakland CBD came in at 2.4% and 2% growth respectively compared to the prior year's quarter.
Continuing South, Southern California continues to perform at the lower end of our markets, largely due to lower employment growth, the region and LA County each achieved 1.3% year-over-year job growth, which is in line with our jobs forecast on Page S-16. Revenue growth in Q2 was led by Woodland Hills with 5.2%, Long Beach with 4.7%, West LA at 4.4% and Tri-Cites with 2.1%. Our LA CBD revenues were down 2.2% due to the impact of the supply with the downtown lease ups offering six to eight weeks free rent plus other incentives, such as free parking.
In Orange County, jobs in the second quarter ticked up 1.2% year-over-year. Revenue growth in North Orange submarket achieved 3.3% growth, while the South Orange submarket achieved 1.8% growth over the prior year's quarter. Finally, in San Diego, year-over-year job growth in the second quarter was 1.6%, 10 basis points higher than the US, the Oceanside submarket continues to lead the San Diego market in year-over-year revenues achieving 4.8% growth in Q2, followed by North City and Chula Vista submarkets with 3.6% and 2.6% growth respectively. Currently, our portfolio is at 96.2% occupancy and our availability 30 days out is 5.2%. Thank you. And I will now turn the call over to our CFO , Angela Kleimen.
Thank you, John. I'll start with a brief review of our second quarter results then focus on the increase to our full year guidance. Beginning with the second quarter performance. I'm pleased to report that we have achieved a core FFO per share of $3.33 which represents a year-over-year growth rate of 6.1%. This result exceeded the high end of our guidance and represents an $0.11 beat to the midpoint, the key components of this out-performance are as follows, $0.03 from same property revenues, $0.03 from lower interest expense, non-same-store revenue and other miscellaneous items, and $0.05 from property tax savings and refunds primarily from lower Seattle millage rates for 2019. This is contrary to our experience from the past several years, where our Seattle property tax increase had been in the mid double-digit range. Favorable year-to-date results enabled us to increase the midpoint of our same-property revenues by 25 basis points. While the benefits from tax savings and refunds enabled us to lower the midpoint of our same-property expenses by 80 basis points. The combination of these revisions resulted in a full year same-property NOI growth of 3.7% at the midpoint, which is 65 basis points higher than our initial outlook and near the high end of our original guidance range. In addition, we are raising our core FFO per share guidance for the second time this year. For the full year, we are raising core FFO per share by $0.20 to $13.20 at the midpoint, approximately $0.13 of this raise relate to improved NOI expectations, and the remaining $0.07 comes from a combination of lower interest expense, acquisitions and preferred equity investments made to date. On the preferred equity investments, we have exceeded the high end of our guidance of $100 million and this is primarily a result of larger deal size in this year's transactions.
Lastly, onto the balance sheet. In the second half of the year, we have around $100 million of debt maturities and we have the ability to prepay $290 million of debt, which matures in 2020 without incurring any prepayment penalty. We will continue to be opportunistic as we consider our refinancing alternatives to optimize our cost of capital. Currently, we have approximately $1 billion available to us and our 1.2 billion lines of credit and our leverage level remains conservative at 5.5 times debt to EBITDA.
I will now turn the call back to the operator for Q&A.
Thank you. [Operator Instructions] Our first question comes from the line of Richard Hill with Morgan Stanley. Please proceed with your question.
Richard Hill, your line is now live. Please proceed with your question. Our next question comes from the line of Trent Trujillo with Scotiabank. Please proceed with your question.
Hi. Good morning out there. So these same-store revenue guidance raise was very nice to see. You brought up the low end of the range. So, Mike, with the positive market conditions you cited, how much consideration did you give to adjusting the top end of the range?
I'll start with that and then maybe Angelo will have a comment. Obviously, we hit the top end of the range in Northern California, but we were pretty close to the midpoint or a little bit above the midpoint and the other markets. And so, we thought there was plenty of room within the range. So we didn't need to move it. We cannot move rents super quickly because we have to turn the leases. And in the second half of the year we turned fewer leases than we do in the first half of the year. So I think that the guidance range is appropriate where it is now. Angela, do you have anything to add?
We had guided to a tougher first half and a lighter second half originally with the midpoint at 3. And given where the first half came in, certainly, we are comfortable with where our guidance range is at this point. But having said that, keep in mind that the second half now will contemplate heavier supply. And so, in that environment, it didn't make sense for us to raise the high end of the guidance range.
Okay. I appreciate the commentary there. John, you mentioned turnover keeps improving on a year-over-year basis. How long is that sustainable and is there a level of turnover, at which point you say you will start implementing larger rate increases?
Well, as far as the rental increases, we are very focused on our customers being fair in their entire experience which, of course, includes what they pay. And so, we typically will not raise rents above the marketplace, that's effectively set in the marketplace. As far as how low can turnover go, I would love to see it continue to go lower. I think what's driving the lower turnover at this point in time are a combination of factors, one of them being the fact that our assets are well located, of course, they always have been. So that hasn't changed. But what does change is the quality of life in many of the metros, the traffic continues to increase and as it increases it makes our assets better relatively than other options. So that is one angle. Another angle is we continue to focus on the customer experience at the sites, and we do have room to continue to improve that. We will continue to work on making all of our customers have the best experience possible. And finally, affordability overall in all of our markets continues to improve as incomes grow significantly faster than rents. And so, it's putting a lot less pressure on people to move for financial reasons, whether it's further away from their jobs or it's other areas. So I do think there is some continued room to run. I think it works best for both our customers and ourselves to have lower turnover. So we're pretty pleased with it.
Our next question comes from the line of Nick Joseph with Citi. Please proceed with your question.
Thanks. You're seeing more attractive acquisition opportunities versus the recent past. You mentioned you may have exceeded high end of acquisition guidance. So how large is acquisition pipeline today?
Yeah. Hey, Nick, it's Mike. The acquisition pipeline is pretty decent. I would say that the fact that we're going to exceed the high end of the range is more a function of not having a real aggressive high end of the range given conditions at the beginning of the year, which we had a much higher cost of capital. And as we fast forward to today, interest rates have declined pretty dramatically and there's a lot more interest in property. So I think it's more a function of there's enough deals out there and our pipeline is a few hundred million, but there is no guarantee we're going to close all or even some of those deals, but we are much more in the hunt this year. Again, if you go back to last year, we weren't able to make the numbers work. We were selling property. We are a net seller of property, selling property 8th & Hope in downtown LA, for example, for a sub-4 cap rate and buying stock back, the conditions are just so much different. So we are back much more interested in the acquisition market.
Thanks. So then just maybe on the funding side, historically, you've been pretty active on issuing to repurchase shares if it makes sense. Looks like for most of the second quarter, you're trading above NAV, but given that acquisition pipeline and kind of the use for net capital, so I think you're issuing ATM equities in the second quarter?
Angela will have an answer to this, but I'll start. I mean, the simple answer is that we're debt-to-market cap is about 22%. So we just don't need to deleverage the balance sheet. In fact, we don't have any interest at all in deleveraging the balance sheet further. And we feel like we've managed it to where we want to be sort of late in a economic cycle. And so we're perfectly comfortable with where it is now and in fact could increase leverage a little bit, not that we're necessarily planning to do that, but we feel comfortable doing that. Angela, do you want to add to that?
Sure thing. Hey, Nick. In terms of the equity issuance activity, if you look at our acquisitions to date, we really didn't have a need because it will require via a down structure and the preferred equity investments, they fund over time inevitably and so the funding is very small. But generally speaking, in addition to Mike's comment on our leverage level, we do look to match fund our investments relative to the cost of capital to optimize that yield. And so even though our staff may at any given point in time be trading at above consensus NAV, we will still look for ways to make sure they -- that funding is the most attractive and we have, as you know several alternatives to how we can fund an investment. And so it may, may or may not be the common equity issuance as the first thing.
Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.
Hi, thanks for the time. Mike, you mentioned you view preferred equity, there is a more attractive risk-adjusted return versus development. So I'm just curious what it would take for you to restart the development pipeline or what spread maybe you'd need between cap rates to justify the risks you see today.
Yeah, Austin, it's a good question. And again the driving dynamic there is that construction costs are growing faster than rents in general and with entitlement processes in California stretching out 3 years to 5 years, in many cases, you end up in a potential for lower yields on development than you otherwise have. I can cross out with the preferred equity where we're coming in just before the start of construction. So all about pre-development period is in the past and we're coming in and starting construction the next day. And so the risk-reward equation is much different. Having said that, we look at a lot of development in transactions and so it's not for not trying to make them work. We just had been pretty selective given where we are, our perception where we are in the economic cycle, and the risk-reward equation. And to get us interested in direct development, we would like to see between 100 to 150 basis point cap rate premium to stabilize yields, which for a quality property, let's say, are around 4% right now. So we'd be looking for that. And again, looking at the risk profile of what the entitlement process looks like, how long it's going to be in some of those other considerations in terms of our direct development appetite.
I appreciate the thoughts there. And then just second for me,you discuss 2020 supply is going to be or is projected at this point to be a similar level as 2019. But you did mention, there are some variations in where that supply is concentrated. Could you just give us a little more detail of some of the moving parts by region?
Sure, of course. Our research team goes and drives all most of these sites. And so we have really good intelligence and as John mentioned, some of the data vendors have much different numbers for multifamily supply projections, and we think our numbers have proven pretty accurate. So really, kudos to the economic research team for that. But, so, as you point out, yes, we have about 36,000 units in 2019 and about the same number in 2020. The big movers are number one in Orange County which goes down about 40% and actually San Jose goes up about 40%. It's not a tremendous number of units, goes from 2,700 units at 3,800 units and Oakland will go up about that same percentage. And then we will -- and then Seattle goes down about a third 2,900 units. So those are the driving forces. And again, it nets out to about zero increase.
All right. Thank you.
Thank you.
Our next question comes from the line of Shirley Wu with Bank of America. Please proceed with your question.
Good morning there guys and thanks for taking the question. So, John, earlier in your call you and even previously, you mentioned that this year it's emphasizing more of a rate growth drive from occupancy. And occupancy actually was down 10 basis points compared to what you would have imagined with 20 basis points you mentioned earlier this year. So I was wondering what's going on there and just the strong demand that you're seeing and if that's going to continue in the rest of the year. Or if you just continue to expect that occupancy to come down to about 20 basis point you mentioned previously?
Sure. So the simple answer is yes. For the year, I expect it to tick down 20 basis points from where it was last year. But within that, a little bit more detail. So, yeah, as was mentioned earlier, the supply picture, there's more supply that is coming on to the market in the second half, it's about an increase of about 25% and it is my expectation because seasonally demand goes down, just a normal aspect of our markets. So as the supply increases and demand slightly decreases just because of seasonal factors, I think there'll be an increase in concessions and that will cause us at the end of the day to compete harder by either offering concessions at some of the stabilized assets or increasing what we're doing or allowing some things to go vacant longer. At the end of the day, I expect that there'll just be a little bit more pressure and that's part of the answer as to why we increased guidance where we did and we're comfortable with it.
Great, thanks for that color.
Sure.
And moving on the CapEx side, I noticed that in 2Q, it was slightly higher than the usual run rate and I was wondering if that, you can get a little bit more color and if that was a one-time thing and how we should expect capex to trend for the rest of the year.
Sure. Yes, the original guidance anticipated an increase to 1,600 a unit range and I expect that to be closer to a run rate than where we were. There are numerous factors that have -- that drive this, the same factors that drive the increase in development costs that we talked about on a regular basis, increased labor and materials costs. So that's the big factor and then of course some of the newer buildings with the systems and other things that we have that we bought and built, they also typically run higher in capex as on a per unit basis, not a percentage but a per unit basis.
Our next question comes from the line of Rich Hightower with Evercore ISI. Please proceed with your question.
Hi, good morning out there guys.
Good morning, Rich.
So I've got a two-parter on affordability here. So I heard the stats, Mike, that you put out in terms of affordability and rent growth and income growth. I'm wondering if you're actually seeing affordability improved empirically in terms of the new leases that you're signing, if you're noticing that in sort of the screening mechanism. And then separately from that, we've started to see home values and home prices in the Bay Area maybe roll over a little bit, maybe in other West Coast markets as well. Is there any read through on affordability related to that or is that sort of a separate issue?
Yeah, those are, those are all great, great questions. It's hard to get down to a very granular level on this affordability issue. We've been tracking this for the better part of 30 years now, and it's one of those market indicators, kind of bigger picture indicators that we know is really important and by that, I would say, let me give you a couple of statistics. So between 2010 and 2015 we had 20% higher rent growth versus household income growth. So we had rent growth that dramatically exceeded household income growth and I think that caused some of the concerns that we've had and we've been talking about this affordability issue for the last couple of years, largely because of that, that statistic. And then from, if I look at it from 2010 to now, that 20% higher rent growth and household income is now 13%, so we've actually moved the needle pretty significantly as it relates to that rent to income ratio. So I think that is incredibly important and I think it's one of the things that we would put on the top couple of considerations for these markets. We have grown rents very substantially over long periods of time. I think between 2012 to 2017 our same-store revenue has gone up by about -- by an average of 7% per year. So that's a lot of, a lot of growth. And as we know, incomes were pretty stagnant coming out of the financial crisis. And so we, again, think that is a really important issue as it relates to home prices, which as you pointed out, I think they're down 6% in San Jose and up about 3% in San Francisco and everything else, all of our other metros are between those two numbers. And I guess what I would say is the year before was exactly the opposite, we had exceptional home price growth and I think there is a lagging indicator here with respect to interest rate. So I don't think you've seen home prices recover given pretty significantly lower interest rates. So I would expect these home price numbers to get better from this point on just given mortgage rates.
Okay. Yeah, I think that's helpful color. And my second one here, maybe as a follow-on topic. Do you care to opine at this point in the calendar on the Rental Affordability Act that is I think currently gathering signatures as far as the ballot initiative for next year?
Yeah. You know, the, we keep track of it. And for those that don't know what that is, it's essentially the industry is calling it Prop 10 2.0 and where there is a potential for a ballot proposition that would amend Costa-Hawkins in, on the 2020 ballot. And there has been a certain amount of money that has been contributed by Michael Weinstein to support a signature-gathering effort. It's, I think, too early to tell exactly where that's going, Rich. We obviously track it pretty carefully and we kept our entity, Californians for Responsible Housing alive and well and organized in case of this. So we'll wait and see what happens.
And because there's also the Assembly Bill 1482 which is the statewide rent control law, which started out as a, an anti gouging type of proposal and it's currently in the Senate and it would cap rents at CPI plus 7, at least that's the current proposal, again, it's in the Senate, could still be modified from here. But I think that that is pretty indicative of a better balance with respect to the discussion on housing, on the need for housing in California. Again, going back to the governor's campaign, campaigning on producing 3.5 million homes in California by 2025, that's about 600,000 a year. By way of background, we produced about 80,000 a year for the last 10 years on average. And so he as recognized the need for more housing and at the same time trying to balance that with the protection of the tenant base as well. So I think it's a more balanced discussion and I think that we will have to see where these things come. You're going to see action on AB 1482 long before you see -- get an update on what might happen with respect to Prop 10 2.0.
All right. Very good. Thanks, Mike.
Thanks.
Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.
Hey, good morning out there. Mike, maybe just following up that last question on the whole rent control and discussion on California. Are you seeing any seepage of what happened here in New York where the restrictions and then in the, the regulation that was passed when they renewed rent control are so onerous that it actually discourages landlords and housing, are you seeing any of that creep into the California political landscape where California wouldn't want to be outmaneuvered by New York or is it where Sacramento sort of being led by Governor Newsom that wants to promote housing and is more cognizant of factors or legislation that would inhibit that?
It's a good question, Alex, and thank you for that. I guess in New York, my perception is that that all happened very suddenly and there was a proposal and it was passed almost before people could
have time to properly react to it and understand the unintended consequences of it. Whereas I think it's different in California because we've had this dialog going back to the Prop 10 especially a year ago, and in so doing this dialog of regarding rent control in general has been ongoing. And again, this is why I think the governor, his comments are so important noting, another thing he noted was that there is a perverse incentive not to produce housing in California for variety of reasons, and again he is recognizing the need for balance in that equation.
And so I think we have a better discussion here and I think that it's been thought-through at a greater level than probably it has in some of the other states around the countries.
Okay. And then moving to Seattle or actually Bellevue specifically with all the investment that Amazon is doing in Bellevue and focusing their office development there, are you guys sort of reassessing how you want to play the Seattle market, do you think that we would see you guys do more investment in Bellevue or maybe your existing footprint, you're happy with where it is based on the growth that Amazon is looking at for Bellevue?
It all depends on yields and risk. We love Bellevue. We love downtown Seattle. I'd say in general, we're becoming more suburban focused than urban focused because of a number of issues. There's more supply in the urban core. I'd say actually both with respect to office development but also with respect to apartment development. And so trying to avoid the cities that are having these large concessions because you've got three, four or five lease ups competing with one another at the same time. So it's difficult to project forward that far. These concessions literally change on a weekly basis. And so I think our strategy is evolving too. Hey, let's just try to avoid the areas that have massive development given that the rent growth in those areas has been suppressed for pretty long periods of time now. So we will continue to monitor and I can't predict whether Bellevue or Seattle is going to outperform until we're a lot closer to looking at a deal.
Thank you.
Our next question comes from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed with your question.
Good morning. John, you talked about the development pipeline and concessions earlier. When you layer on new supply and stuff that was completed a year ago that might be having its first renewal, the five developments that you either currently have in lease-up or will in the next quarter or so, are any of those of a concern in terms of concessions that you guys think that you're going to need to lease some up? I think you said Milo was currently one month free. And then I think it was Station Green, the first phase was six weeks. Anything that's going to be outside of that sort of range?
Well, let me give a kind of a broad answer there. So when we delivered vacant unit, we are greatly incented and this is really why it's logical why many of the developers are doing what they're doing as far as free rent. It's not a matter that the market is weak. It's the matter that they're trying to drive a significant amount of absorption fast because your option one is vacant unit, option two is a lower net effective with the qualified resident and getting cash flow. So we have the same economics there and, of course, it's different when we own the asset, I mean, when we have -- for our same-store assets, right. But we are one of those players on the development.
So what we try to do is look for what works best in the marketplace and what the consumers are looking for and react to that. So I expect we'll increase our concessions over time. It is within our plan to do that because it usually happens as we get into the fourth quarter. But we make these decisions literally daily and definitely reviewed intensely weekly. So we'll just follow it. But all of our -- you can tell by the pre-leasing performance, the markets are strong, and we feel very good about all of our developments where they're at.
Any of them facing extreme new supply as Mike was alluding to before?
No, we are not in -- at this point we're not in a situation where we have extreme combat.
Okay. And then, Angela, if I look at the same-store expense growth year-to-date 2.9% sort of implies a low ones for the back half of '19, is that all on property taxes or is there something else that's going to drive same store expenses down to the low 1% range for the back half of 2019?
Yeah, you're right, it's actually, mostly driven by property taxes. So between the millage rate coming in lower than expected, and we of course have some refunds that we're recognizing in the second half. Those are the two key drivers.
Okay. So if I can squeeze one more in. Maybe other than market concentration, what's keeping you guys sort of BBB+ from the rating agencies versus an A- like Avalon and Equity?
Believe it or not, it's really market concentration.
Okay.
That's the key driver.
Yeah, I think the rating agencies are so focused on the number of states versus the relevance of the actual state. I mean, California as we all know, has the -- it's like the third largest GDP and incredibly diverse and large. Having said that, I think just the fact that it's one state is what's tough with the rating agencies to underwrite.
Our next question comes from the line of Karin Ford with MUFG Securities. Please proceed with your question.
Hi, good morning. Google announced it was looking to develop about $15 billion of real estate in the Bay Area with Lendlease, it sounds like a significant chunk of that is earmarked for residential. Do you see this as a significant medium- to long-term supply the threat that could be large enough to potentially affect rent growth, market rent growth in the region?
Yeah, this is Mike. They're not alone. Microsoft has a program. I think Stanford University has some discussions about mainly student housing, but there are some other proposals of corporations getting involved in housing. It remains difficult to figure out exactly what's going to happen in the short term, I don't think there'll be any actually short-term impact, these are mostly over longer periods of time. And I think a lot of the corporate housing is probably strategically important to them and their hiring given that one of the key reasons not to come to the Bay Area is concern over housing and housing price.
So if you can assure someone that's relocating to the Bay Area that they have a home, I think that's a major positive in the hiring process. Overall, I don't think that any of this given the cost of housing and the size of these programs, I don't think it's going to have a material impact on the markets, but again we'll face that down the road ways.
Got it. And then my second question is going back to your development pipeline. You've got an extraordinary amount of lease-up and development coming in the Bay Area in next six quarters, including 500 fulsome and you talked today a lot about the strong environment in those markets. Do you think your yields on those could outperform your underwriting and can you share were the deals are penciling today?
I think that we've talked about stabilized yields a little bit and maybe I'll echo those comments stabilizing somewhere in the 5.5 range. And this is not today and it won't be next year, but it will be a couple of years out. As you can imagine, development deals have, for example, retail components and the retail components are important because you don't want to have -- a lot of people don't want to move into a construction projects, so you want all of that construction to be done. So that yield is a few years out. And so I think that for the next year or so, you will see some positive increment but not dramatic.
And is that 5.5 yield number on trended rents are on rents today?
No, on stabilized rents.
Stabilized rents. Okay, thank you.
Our next question comes from the line of Drew Babin with Baird. Please proceed with your question.
Hey, good morning. A quick follow-on question on the…
Good morning.
Good morning. On the lease-up properties coming in getting delayed, did that explicitly caused an increase to the FFO guidance where some of these properties you might have some initial drag, obviously, taking on the expenses, mid lease-up that might now occur or early next year? Is there any kind of dynamic there in '19 versus '20 with those development projects getting pushed out?
Yeah, Drew on the FFO guidance, the delay impact which ultimately I think you're looking at the higher capitalized interest on our S-14, it's a couple of pennies, let's say $0.02 and for this year. So what that means is, of course, some of that dilution is going to get push next year as we continue to lease out, but I think the one positive is that this dilution instead of being as concentrated as we saw that occur this year, it'll be more moderated and it will just occur over time similar to the impasse of supply delivery, that if they all come at once it's obviously much tougher to digest if they were to, say, happen more ratably over time. It's much more manageable.
Okay, thanks for that. And I guess one more topic kind of related to the corporate housing question. Should some of these projects really, the rubber meet the road, and some of them getting titled, some of them proceed, would Essex under the right economic conditions ever consider partnering with one of he corporations in some kind of project? And I guess, what would you need to see for that to make sense for Essex?
Drew, this is Mike. A lot of these corporate housing entities have -- or proposals have included an RFP-type process, and so there might be some opportunity to work with some of these companies, and they'll be exposed more broadly to the development community. So it probably isn't going to be just us and it will be several projects over periods of time. So I'd say it's too early to tell exactly what it means. And again, we track pretty closely as you know the total amount of competing property that's going to be entering the rental pool down the road. So if we saw a huge impact, I think during the construction period gives us time to react as well. So what exactly would those terms be, we work in a joint venture on many development deals and the markets for those terms depending upon what side you're on change over time. And we're looking to actually at some joint venture development deals as we speak. They're complicated enough that I don't think I can reduce them to magnitude. We're going to look at more broadly at the yield premiums that -- to acquisitions measured today with market rents today that I talked about a little while ago. And whether we do it in a joint venture or ourselves really is a function of how much risk is there upfront in the deal, how much money do we have to spec and how long a period of time do we have to spec it in the pre-development period before you begin construction, and every deal is a bit different.
Okay. I appreciate the color. Thank you.
Did we lose the -- I don't hear anything.
Operator, are you still there?
Operator?
Our next question comes from the line of Wes Golladay with RBC Capital Markets. Please proceed with your question.
Hey, good morning everyone. Glad we're still on. Going and looking at that slide you put in last quarter, you had the one about the permits falling quite a bit, I'm trying to use that slides to have good supply data. I wonder if you guys can give us some insight on when you think peak supply will be in your markets, it looks like next year will be comparable, but is it going to be the same thing in 2022 as well in 2021?
Well, yeah, no, this is John. Our expectations, it starts to tick down. So as I mentioned, we're really at a plateau right now and we expect it slowly starts to tick down going after next year. So yeah, where you, like, put it that way, we're at peak supply right now.
Okay, fantastic. And then when we look at those permits, I mean, they're falling quite a bit since we started by the middle of last year, is that mainly due to the cost that you cite where the rents are not growing fast enough or do you think the political uncertainty is also having a big factor in that?
I think, yeah, I mean…
Both, yeah, both. It's all the above. It's how much risk do you take and what types of yields are you expecting, how do you get compensated for that risk. And I'd say maybe adding to that is the project sizes are getting bigger and bigger and that the cost per unit is -- has increased pretty dramatically. So you need more, more equity and a lot of these deals. And as we see this in the preferred equity environment where in that pre-development period costs are going up faster than rents and when we come in with preferred equity sometimes, these deals are short of equity given cost increases and that's causing some delays there. So it's all this. But yes, it all involves the relationship between construction costs and development deals.
Okay, and one final one, if I may. Do you have the new and renewal leasing for the quarter and you're most -- your loss to lease?
Sure, I can give that to you. So the new leases for the quarter, second quarter were up 3.4% year-over-year or prior year's quarter and the renewals in Q2 came in at 4.4% year-over-prior year, and loss to lease you asked we are at 3.5%, which at this point in time because of seasonality is going to be at the high point. So I'll compare it to last June. So last June we're at 3.3%, so it's about 20 basis points better than last year and within that, So Cal has ticked down some, so it's a 2% loss to lease and Nor Cal and Seattle have gone up, so Nor Cal is 4.6% and Seattle is a 5%, all average rate of 3.5% for June.
Next question comes from the line of Rich Anderson with SMBC. Please proceed with your question.
Thanks, good morning out there. So I recall many years ago you guys were kind enough to offer a 10% cap on annual rent increases. And I'm wondering, obviously, that's a moot point today. And, Mike, I'm asking is that situation of excessive rent growth fundamentally over in your opinion in your markets or is it simply supply and that has to kind of readjust where you could get there or is there, the political side that if you've dare to go there again that you get, you reignite sort of the rent control conversation to a higher level?
Yeah. Hey, Rich. It's a good question. I think where we are in the cycle is probably a key consideration there. You tend to get more rent growth when you go through a recessionary period, there's very little development, and so jobs start growing and you end up with a supply demand imbalance for housing and you can push rents more aggressively than we can now, now being constrained primarily by income growth and affordability type issue. So as it relates to the 10%, you're exactly correct. We internally capped our renewals at 10% for many years, well, when we had much more robust rent growth and we would do it again. I think it's, number one, the right thing to do, but I also and always concerned about we are always concerned about the impact on local regulators, etc. For example, when residents get a very large rent increase, they often go into the city Hall and tell the local officials about these huge rent increases and we get phone calls and push back almost immediately. And in fact, in some cases, in connection with CA and some of the rental groups, we take part in trying to mediate some of these situations. So I think it's just a good practice to cap renewal rents at 10% and it's something that we've done and we would do again.
Okay, great. And then on your earlier comments on office development, I found interesting as I usually do, but I'm wondering if you guys also track pre-leasing of that office development, which is really where the rubber meets the road as it relates to future demand for multifamily, there could be some stupid development in there?
Yeah, Rich, it for sure will, can change and -- but eventually, I think the, those office buildings we would all agree will be completed. So yeah, you're right. In the short term absorption really matters. In the longer term, the fact that the property exists is probably what matters more. John, you want to comment?
Yeah, and all this add in, the developments on the West Coast overall that Mike was referencing there about 75% pre-leased on average across the market. So huge pre-leasing going on and that is the nature of most office development these days, they typically have a big portion of their tenants before they break ground or at least in our markets.
And let me let me end with one final comment, Rich, and that is, we're always concerned that people are going to find California less desirable and some of the tech jobs move to Austin, for example. So again, the fact that big investments are being made in our markets is really important to us. We view that as sort of a leading indicator. What are the tech companies doing? Can -- everyone is concerned about migration out of California, we're concerned about it as well. Again, we try to cobble together a number of sort of leading indicators to give us some sense of what decisions are being made by developers and some of the big tech companies.
Yeah, I think it's a good practice. I appreciate it. Thanks very much.
Our next question comes from the line of John Pawlowski with Green Street Advisors. Please proceed with your question.
Thanks. Angela, could you remind us what you're expecting for property taxes in Seattle and property tax growth rate would be this year and are the favorable reassessments, do you think it's the beginning of a multi-year trend, the fever finally breaking in Seattle?
Well, on the tax piece, we're expecting the full year to come in at the middle ground. Say, in the high 1%, so say, 1.07, 1.08-ish, somewhere around there. In terms of the trend, boy, that's a tough one. I wish I had that crystal ball. It's interesting because in the past three years, our Seattle property tax has gone up between say 15, I think it was 15% for two years and 17% one of those three years. And this year it was a decrease. And so, that -- and we actually didn't budget it, the 15, but I certainly didn't budget a decrease. And so I'm not entirely sure what's going to happen next year. I think we're going to just try to take up best estimate, talk to our consultants and get some advice on that, but if you have a better solution, by all means, please call me.
I guess the shorter question is, is there anything lumpy one-time benefits this year that won't persist in Seattle?
Nothing significant. We have a some refunds but there -- those numbers are not big enough to drive year-over-year comp.
Okay. And, Mike, on the regulatory front, in Washington, what are your political contacts saying about 2020 legislative session and rent control chatter gaining steam again in Washington?
I don't have any recent information on that. So I don't -- I haven't heard of any major movement in Washington at this point in time.
Our next question comes from the line of Hardik Goel with Zelman & Associates. Please proceed with your question.
Hey guys, congrats on the strong quarter on the guidance raise. I just had a couple of questions for you. The first one on a comment, I think, John made, so permits are declining year-over-year across your markets, but the lay environment that persisted, do you think there is risk that even though supply is plateauing now and it's kind of getting smoothed out with consistent delays that there is still this pipeline of supply that has started but not yet completed or may be stuck in pre-development that already has been permanent in past quarters that will continue to dribble out supply even beyond 2020, early 2021 and onwards.
And my second one is easier. Sorry, you go ahead. I'll ask it afterwards.
Yes. Okay, so, again, as we've said, we literally drive all the different sites. We take down from a process perspective, we have multiple vendors providing information as to permits that are obtained, sites that are started etc. And then we have a mobile program where our people drive all the sites and upload information into the cloud as to where they're at, what's going on, and we clean up that data quite a bit and reconcile what we get from the vendors to what we see on the street. So I think we have our hands around what's going on really well probably better than most.
And so, that's what's in construction right now. And then the permits, we reconcile the permits to the actual as built and obviously there is typically some leakage going back the other way, things, more things get permitted than actually get built for various reasons. But at the end of the day, I think we have our hands around it pretty good. I think we're at this point in time supply has plateaued. We'll start to see it tick down, and it would take something else like us increasing rents or something to change the picture, but as Mike had said many times, construction costs are growing faster than rents. So at this point it's, it looks like we've hit the peak.
Thanks. That's very helpful. From my second one, should be pretty straightforward, I guess. On the Seattle kind of tax savings, how much of that was just the market and will probably benefit others where in who own assets there and how much of that was something that was an Essex push where you have an appeals process or some kind of mechanism where you try to get a favorable appeal or saving?
Yeah, that's a good question. It's mostly market driven. So this is a Seattle millage rate assessment, and so it's assessed across the board. As far as the savings, we go through our refund process every year and there is some benefit there, but that's not at all a key driver.
Got it, thanks. That's all from me.
Thank you.
Our next question comes from the line of Haendel St. Juste from Mizuho. Please proceed with your question.
Hey, I guess, good morning out there.
Welcome, Haendel.
Hey, Mike, I guess I'll start with an oldie but goodie. What's your current view on the Essex footprint? California is not getting easier, cost, taxes, regulations, keep on increasing, senior peers going to Denver, you been once, been in Portland, the weather is nice and there's -- it seems to be parity in Honolulu, I'm curious, if your view on your footprint here has changed or evolved at all, and if so, how?
Well, Haendel, it's a good question and it's the -- probably the most essential and important question of all of them and here we go through a process each year of reviewing strategy with our Board and we kind of start with that, that very question and we look at many major metros around the country and try to distill them down into supply and demand and what it means. And so, it's an ongoing question and an ongoing process here at Essex. From where we ended up on this in the last year is we think that the resiliency of the technology world is something that's going to probably be with us for several cycles and that that along with the supply constrained nature of these markets and the difficulty of building here is going to keep a premium on housing and there is this virtuous cycle of high cost of housing drives wages higher which allows rents to go higher, which you see in very few places. And so we concluded and continue to conclude we are well-positioned in the West Coast markets.
Thank you for that. And then, I guess, back to, I guess, the growth, as you very well know, it's very hard to buy in California. Not much trades hands, Prop 13 being a clear headwind. So building is really the only game for the multifamily guys for growth in the Golden State. So I guess I'm curious if there's anything your shadow or future pipeline that's penciling yet or getting close to penciling given the continued rent growth, notwithstanding the rising construction costs you guys had mentioned. And if so, where? And as an add-on to that, maybe you could talk about potential interest in doing mixed-use development as well.
Yeah, it's a good question. And we do have some land inventory. There is a Phase 4 of Station Park Green and there are a couple of other smaller projects that are behind our current pipeline that we will likely be active on. And as I said earlier, we continue to look for development deals and the challenge there as we stated earlier is that construction costs are growing faster than the rents, which means we have to see a fairly quick period between when we're financially committed to when we start construction because that's the period of greatest exposure. So it's pretty challenging. I would say, again, we continue looking and we have some deals that we are working on remains to be seen whether we move forward with them or not. So -- and again transitioning over to the preferred equity where we don't have that upfront risk because we're not financially committed from when during the entitlement period from when then period starts until when you start construction. We come in at construction and we eliminate that part of the risk and we've been very active in preferred equity and we will continue to do that. As Angela mentioned, we're above the top end of the range this year in terms of commitments there. So it's -- this is kind of a mosaic and we put the pieces together and every deal is unique unto itself, and we try to make decisions that makes sense in the broader scheme of things. And it's hard to bring it down to kind of the larger trends because every deals is a little bit unique. So I would say that more of the same that we will look at development deals whether they have a mixed-use component because obviously there are many deals that have mixed use components. There are other, actually other REITs and other land owners that are interested in having a multifamily component. There are no shortage of discussions out there for sure and we will look at all of the above and try to make good value decisions and make sure that I think the key part is that we're compensated for the risk that we take relative to our other opportunities.
Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Michael Schall for closing remarks.
Thank you, operator, and I'd like to thank everyone for joining the call today. We hope that you were having a safe and enjoyable the summer, and we look forward to seeing many of you at the BofA Merrill Lynch Conference in September. Have a good day.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.