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Essex Property Trust Inc
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Good day and welcome to the Essex Property Trust Third Quarter 2021 Earnings Conference Call. 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 Third Quarter 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 Third Quarter results, our initial operational outlook for 2022, apartment market conditions, and then conclude with the regulatory environment. Our third quarter results exceeded expectations, reflecting substantial improvement in West Coast economic conditions and housing demand, net effective market is now 6.4% above pre - COVID levels. And it's notable that we've exceeded pre - COVID market rent despite having recovered only about 63% of the job’s loss 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 mini 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 F17 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 to return to a predominantly hybrid office environment occurring over the first half of the year. Supporting our 2022 job growth outlook at our expectation that the West Coast markets will resume their long-term out performance 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 is 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 re-openings as a result of the Delta variant this fall, which we believe is the primary factor in the slow 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 F17.1 of our supplemental highlight’s recent investment by large tech companies which have continued throughout the pandemic and include Apple's 550 thousand square foot recent expansion in culver city. their new 490 thousand square foot tech campus, that will soon begin construction in North San Jose. And a recent acquisition of five office buildings with a total of 458 thousand square feet in Cupertino. Google last quarter received needed approvals for its planned 80-acre campus near Downtown San Jose. And YouTube's 2.5 million square-foot 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 in 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 9000 jobs, or 26% as compared to the first quarter of 2020. Strong economic growth on the West Coast is further supported by Ventura capital investments, which achieved new highs in Q3 '21 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 expectation 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 rapid 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 under-performed 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 continued to see strong demand from institutional capital to invest in the multi-family sector along the West Coast. as evidenced by increasing transaction volume and cap rates in the mid-3 percent 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 2 commercial properties in the third quarter. 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 2 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 require a significant coordination and support from the Essex team. I am grateful for this extensive team effort. With that, I will 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 department especially our delinquency collections team, for their diligence to help our customers navigate the complex rent reimbursement legislation's. Onto today's comments, I will provide an overview of our portfolio strategy relative to current market conditions, followed by some regional commentary and expectations for our markets. Our third quarter 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 second quarter as California and Washington, finally reopened from the pandemic shutdowns.
As you may recall, in the second quarter of 2020 when the pandemic mandated shutdowns halted our economy. Essex quickly pivoted to a strategy to focus on maintaining high occupancy and coupon ramps with the use of significant concessions. Now, over a year later, as our markets recover, we're starting to see the benefits of this strategy flow through our financial results. In the third quarter, 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 third quarter.
The benefit of this strategy is also coming through our sequential revenue growth, which increased 3.2% this quarter from the second quarter. With the market volatility we experienced over the past year, this is an extraordinary result and position the Company well going forward. From a portfolio wide perspective, market conditions remained 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’s 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 into 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 S17 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 in 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 Jose 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 S17. As Mike discussed, we expect hybrid office reopening 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 Third Quarter 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 LA versus the more sub-urban communities, which have generally outperformed. In June, LA 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% to 30% above pre-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 LA area, where concessions averaged one week in September, the rest of our Southern California Markets has demonstrated solid fundamentals with no concessions recognized in September. We expect Southern California 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 into 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 anticipated 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 third quarter results, discuss changes to our full-year guidance, followed by an update on investments and the Balance Sheet. I am pleased to report core FFO for the third quarter 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 second quarter.
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 third quarter. 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 third quarter results, we are raising the full-year midpoint for same-property revenues by 20 basis points to minus 1.2%.
It should be noted this was the prior high end of our range. There are 2 factors I want to highlight as it relates to our fourth quarter guidance. First, as Angela discussed, we are seeing strong rent growth in our market. While there will be a small benefit to the fourth quarter, 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 fourth-quarter 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 third quarter 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 third quarter 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 markets, 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 fourth quarter. 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 approximately -- we have closed on approximately a 110 million of new commitments. As a reminder, it typically takes 3 to 6 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're starting to see an improvement in our financial metrics driven by a recovery in our operating results. In the third quarter, our net debt to EBITDA ratio declined from 6.6 times last quarter, to 6.4 times. 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. [Operator Instructions] Our first question comes from the line of Nic 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 on there 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.
Hi, Nick. It's Mike and Angela might follow me with comments. 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. And everything looks like our markets are recovering. We expect to outperform the U.S. with respect to job growth, certainly going forward and we view the catalyst of the return to office in Northern California as being the last piece that probably be the relative under performance that we've had thus far relative to the peer group. And we see that as still being a very strong part of our portfolio.
Historically, Northern California produces the highest CAGR of rent grows over long periods of time. And we expect that dominance to show itself and a lot of the reasons why we're embedded in the various comments that you heard from all of us, so hopefully that will make sense. The number of open positions for tech companies, the big investments at the tech companies continue to make within the Northern California markets, etc. I think it bodes well, so we feel -- we really feel great throughout our footprint. But the key piece going forward, I think, as Northern California, we feel very good about that too.
Thanks. Maybe following up on that, the return on the officer or hybrid. How do you could get impact seasonality over the next few months, as employees maybe move back into Northern California, specifically?
I think that 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. And so again, our expectation is -- I would say Northern California was probably shut down to a greater level than most other markets. Maybe LA would be number 2, but it has had the most muted recovery, yet, it has I would say, the strongest and most dynamic job base. So again, we're looking forward to that. We're hoping it would happen earlier.
But again, I think the Delta variant has postponed that. But we feel strong. We think all the things -- 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, etc, all seem to be focused on a return to office program, probably in a hybrid sense for these companies. So, 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, does your 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 you perhaps -- what levers can you pull to offset some of those costs into next year? And then maybe some broader comments on your technology platform, where you are in terms of the rollout of that and how that could be a healthier as well. Thanks.
Okay. Haendel. Thanks for the question, it's a good one. I'll let Angela handle the technology piece of it. I lost -- help me. What was your first part of question?
Inflation.
Yes. So, I mean, we've studied the inflation thing, the historical precedent going back a long time actually into the early 80's and no doubt we are feeling quite a bit of pressure on the cost side as certainly finding positions, especially on-site positions as challenging and compensation is going up for sure. On the one piece it's good in California, obviously, is property taxes because their Prop 13 limits that increase?
And so, I'd go back to rents. Rents are obviously the big thing we're up. High gross margin type of Company, and therefore, the rent growth really matters in this equation. And I think in an inflationary world, [Indiscernible] do very well. And so, I would expect that our rents growth would more than compensate for whatever cost increases that we have.
And I think 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. So maybe that would be one sticking point as well. Because probably cap rates change and some other things happen as well.
Ed, do you want to comment on?
Sure. but I think Barb will.
I just wanted to follow up on that one plan. 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, so we're perceptible to rising rates from that perspective. We've locked in our interest expense effectively. And we have very little limited variable rate exposure as well. So, we feel good about where the balance sheets advanced from an inflationary perspective.
Great. And on the technology front, Haendel, what we have been doing is to really focus on ramping up the contact list interactions, which also allows for efficiency and allows us more flexibility for our site team. And so, we're going to continue that path and further refine and enhance those technology and what that means is that it will allow our staff to probably specialize more in hopefully continue to be more efficient and that will help. I don't think it will be said, an immediate relief as far as the payroll expenses that you're looking for, but over time, it should benefit the business platform.
So, if that's getting worse -- it sounds like the near-term outlook for inflation doesn't necessarily book you. Perhaps there's a little bit of pressure building in the business, but maybe not to the degree to perhaps put the mid-single-digit type of expense growth outlook for next year.
Well, we're not driven. We're not guiding that for next year.
Still working through the budget.
And Barb drilled that into a prior to the call. Please don't give any guidance we are still working [Indiscernible]. I guess the point I would make is, in high-gross margin businesses, even if you get some expense pressure, you still the -- the top-line is so much more important. So, I think in my view, we always look at rents. What's the relationship between rents and incomes? And so, in an inflationary environment, if incomes are going up, we're probably able to pass through most of that in the former rent. And if that happens, we will do very well on that scenario.
Got it -- Got it. Fair enough. And the second question, if I could ask about the two office acquisitions here in the quarter. Maybe some comments around the math, the thought process. And so, we do think of these as opportunistic in more one-offs or some of them perhaps more reflective of the low cap rates in your markets, which could be making more conventional acquisitions more difficult and if that's the case, the thoughts on calling some of the portfolio a bit or maybe taking advantage of some of the pricing? Thanks.
Hi, Haendel. This is Adam. So, I'll touch on both of the 2 ops on acquisitions that Mike touched on in the opening remarks. They're both separate, which is why I'm -- I'll cover them separately. The first one which is in South San Francisco, we've had that tied up for over 3 years, and so during that time, we work with the city to determine what zoning we could get. During that time, we are basically able to increase the density by over 100 units.
So coupled -- 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. So, there is in place income on the existing use, which [Indiscernible] than the call it high three cap rate range, which is fine. And that will get us through to 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 9 years on the lease and we have a partial guarantee for that for that term. So, it's north of a 6 GAAP on current income. It does pencil on today's multi-family underwriting, and it is actually zoned for multi-family, but we'll revisit that in 5, 6, 7 years from now to see what makes the most sense. But for now, that's a very solid covered land play from our perspectives.
Great. I appreciate the color. Thank you.
Sure. Thanks, Haendel.
Thank you. Our next questions come from the line of John Kim with BMO Capital Markets, please proceed with your questions.
Hi, this is [Indiscernible] calling for John Kim. Thanks for taking my question. I was just wondering a little bit about the regulatory risks in your market and we've touched on that here and there, but are these increased risks being priced into valuation? Some of your other peers were reciting that as a recent reduced exposure in California and I was just wondering how you guys are 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, many years really, for the 35-years I've been here. And historically, the bigger the loss to lease gets because of rent roll let's say, the more buyers and sellers will start with pricing in a portion of it or want to higher cap rates given the delayed impact of rents. But generally speaking, all apartments are valued based on market rents today. Not that again, the loss to leases is a determination based on facts and circumstances.
So here with California rent control lots of statewide law at CPI plus 5 maxes of 10% annual increase. I don't think that, that in and of itself will cause a significant valuation differential. And I think that's the key part that if you're moving your rents by CPI plus 5, let's call that A or something like that, most buyers will think that that is plenty of compensation for the transaction. And 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 very little that trades there. So that's where you see that the larger loss to lease, the bigger gap between in-place and economic and that's where pricing would fluctuate more. But as far as AV 1482 goes, the California Statewide one, it doesn't really factor in to really anyone to models from what I can tell.
Okay. Thank you for the color. Going back to the inflation peak two, how is that affecting your plans, developments in it and you briefly talked about the other commercial acquisitions and how relative to multi-family, those are still good trades. But moving forward in the development pipeline, is that something that you are 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 though, the two opportunities that we had are like fairly one-offs. But we look at all of those factors in determining where and what to invest in.
I think we estimated 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? We don't know. But we build in an estimated cost escalation. But what really drives all these deals? The cap rates go from 41/4 down to 3.5 or so. The built-in value of those 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. We're always looking at the spread between where stabilized acquisitions or stabilized assets are trading versus our development yield. Whether deal is entitled or un -entitled, we're going to look for a different spread between what in-place cap rates are, and so that escalation that Mike referred to, we assume on everything whether it's 3 months out, 6 months out, or 2 years out.
And then that factors into the denominator. And so, 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 questions come from the line of Rich Hill with Morgan Stanley. Please proceed with your questions.
Hey, guys, just a quick question. Could you maybe [Indiscernible] some details on your loss to lease across the various different markets so that we can compare them to the rental rates you disclosed for your macro forecasts?
Sure, happy too, Angela here. At September, the portfolio loss to lease was 9.8%, and it's a widespread, it's from Northern California into force to Southern California in the low single digits, around 13%. And so -- and we understand that typically analysts look to this loss of lease, to model next year. And so, I want to just make sure that I provides a little more context on that, because we want to consider a couple of factors.
First, this year was an unprecedented year because we started out the year with a huge negative rent growth and has turned positive. It's a very steep curve. This trajectory is not likely to repeat it next year. Because of that, and this is the delay in the seasonal peak. It has created a small drag on revenue for next year. And secondly, some markets, those over 10%, which broadly speaking will be our Orange County, San Diego, and Ventura, San Diego and Ventura counties. They are above the 10% rent control cap. And so that will 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 the leasing spread versus list rates, is there a lead lag there? Some of the data we look at is that listing rates, seem to be a lot higher than the sign leasing spread. So, I'm just wondering if the listing rate is the leading indicator on how you think about that?
I'm not sure if I am following your question.
Yes. So, what I am suggesting is --
Are you talking about asking versus achieved? Is that what you mean?
-- Yes. And I'm suggesting, are you're asking in October, November, December higher than where you've been citing?
Yes, I see what you mean. Normally, it is -- well, let's put 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 whenever we send to renewal. And so, what that means is sometimes it's higher, sometimes it's lower. So, if we think that we're now in, we're sending out renewals now for say, December, January, it's not likely to be a whole lot higher. But back in for ascending greener without, in March for renewals, May or June, it tends to be higher, so it really depends on then the timing and the market conditions.
Thank you. Our next questions come from the line of Austin Wurschmidt with KeyBanc, please proceed with your questions.
Yes. Thanks, everybody. I was curious, just going back to the market rent growth forecast. If you could just give some additional detail of how you thought about baseline scenario that maybe doesn't include some type of hybrid back to office and how you're going 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 so just trying to understand the baseline versus what would the upside look like.
Yes. It's a great question. And I'm not sure we approach it that way. 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 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? And so fortunately, again, we're 96% occupied in all these markets so it is like we have a hole to fill before that -- before the demand oversupply situation takes hold. We're already there.
But included in some of the things he looks at which I think some pretty interesting data. For example, Seattle has recovered 79% of the jobs that they lost in the pandemic and he is expecting them to be at a 110% by the end of the fourth quarter. So, they will actually be above their pre-COVID employment level. Whereas almost all the other markets are still below pre-COVID level by the end of 2022. So, it's not that simple. He considers affordability, which affordability is a key part of what we do, and we look at things now because there has been such incredible growth in rents in Southern California, they screen and 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.
And Southern California because it has such great rent growth, is screening a little bit expensive, and Northern California, which has the highest incomes and rents that are pretty moderate given what's happened here. That's what leads to the better growth rate for Northern California next year. And I'll just by way of background, give you a quick comparison. So, 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 a 102 thousand and in LA, it's about 88 thousand. So, Paul would look at that relationship and say, that's a positive for Seattle. It has about the same rent, has a lot more room to run with respect to income and that would factor into the equation in terms of what we expect market rents to do. That makes sense?
Yes. No, that's very helpful color. And so, in that scenario, if demand were do exceed just from a job growth perspective, you talked about kind of the jobs versus supply piece. So, it's back-office says drive increment old demand above and beyond that. It is conceivable to think that you could benefit from a pricing cars perspective, but also see some upside to occupancy as well.
Well, occupancies are a little bit different element and that really has to do with how aggressively we're pushing rents, and so your 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. But going back to our basic thesis, if we have 530 thousand jobs created next year, and the typical relationship between a household and a job is 2 to 1.
So, we have 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 on that scenario. Again, affordability becomes the key issue. And affordability is different by market screen, relatively inexpensive in Northern California and relatively expensive than Southern California. But just looking at basic supply demand, we should be in great shape next year. We don't know exactly what's going to happen. We think 7.7% is a big number, but 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. I guess outside of restrictions, within the confines of AV 1482 in California, are you guys self-limiting any markets or sub-markets with respect to renewal rents, just kind of in that sort of corporate spirit, and being a good guy from vis -a - vis your tenants that you guys have employed in the past, thereby sort of exacerbating that growth in the loss to lease is things go forward?
That's a good question. And this goes toward the social responsibilities, the part of our corporate governance, right? We have a self-imposed cap of 10% for many years. And really the approach behind that is to avoid being viewed as anti-gauging, and that strategy has worked well for us for many, many years, and it really has not materially negatively impacted the returns of our shareholders.
Okay. And Angela, which markets are you 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 of lease of up 10%. And so, it happens to coincide with 1482. So, it's Orange County, San Diego, and Ventura, because they're are above 10% loss of lease.
Then Seattle, perhaps?
Yes, Seattle as well.
Okay. All right. Great. Thank you.
Not 1482. Yeah, it's in 1482.
I mean separate from 1482. That's what I meant. Yes. That's correct. yes. 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.
Hi, 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 what you've seen more recently?
It's a good question, and the granularity of that data is difficult to follow. And so, it's hard to say exactly what's happening recently. We do have job growth, and the job growth is exceeding the national average. So, from that, from that statistic alone. We feel like there were some positive movements back to the Bay Area and clearly occupancy, etc 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. And that's the premise. But again, we don't -- we need -- I'd say we need more job growth than what we have currently to achieve the 2022 forecast is on S7. But we'll do fine either way.
Okay. Got it. And then 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?
Hi, this is Barb. So, you can see we report our delinquencies for the quarter we were at 1.4% on a cash basis. And keep in mind, we did report in July last quarter and that was at 2.2%. So that implies August, September had come down. That was around 1% on a cash basis. And then October is about 1%. And that's really being driven by the reimbursements, as I mentioned during the call, we got 9.5 million in the third quarter. Most of that hit in August and September, and we've seen -- in October we've seen a commensurate amount, so that's where we've been at. We've been stable I would think the last 3 month. It's been pretty stable in terms of our net delinquencies.
Thank you. Our next questions come 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 delinquencies, 1%, that is net of the amount that you collected from the delinquency reimbursements from California and other jurisdictions. Is that correct?
Correct. Correct.
So, without that, it would still be in that like two plus range? Is that around where it would be?
Yes. Exactly. but not those reimbursements that -- the reimbursements are what is driving that number lower infact.
You know. Sure. Yeah. I was trying to understand what's baked in and if anything has changed in how you recognize bad debt -- bad debt and how it looks, I get you. Okay. Thank you for that. Okay. And just in terms of the people moving into San Francisco, I guess, focus on that one. You mentioned that in general your portfolio is seeing people come back and I wonder, just given the in San Francisco that rents are still down from pre-COVID levels, can you comment on -- are the demographics changing a little bit from the people who are moving in? Are they the same in terms of income, Jobs, or are more people who are coming in moving in from the outskirts looking for a deal of some kind that would potentially impact your ability to retain those once market rents come back?
This is 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 rents declined, or when we were giving out significant concessions. I think at the end it's all of our jobs and so while it's slightly more affordable, people are now going -- we just don't see people randomly moving into the city and then not being able to stay. Does that make sense?
Yeah, yeah. I appreciate that. Just the other one follow-up, Maybe just talk about development and sort of mezzo outlook. You kind of touched on this earlier, but given everyone understands, there's a lot of inflation with input costs, supply chain disruptions, hard to get, labor, etc. But you made the comment that you're seeing increase in developments and a commensurate increase in mass opportunities.
Can you maybe elucidate that a little bit? You think that it would be a tougher environment, but can you talk about what's driving that, and then what, 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. But overall, we think 2022, will have roughly 4% more supply than 2021, and part of that is because there were the delivery delays caused by COVID. And eventually they will catch up into 2022, but not enough to be really meaningful in the scheme of things, especially again, when you go through the job numbers that we have and the implied demand from 530,000 new jobs across our footprint. Notably on the supply side, Seattle is the one market that's down pretty substantially about 12%. So that's another Goldstar, let's say, for, for the Seattle market there. Barbara got a -- Adam.
Neil as far as our it's on the street opportunities that we're seeing, just kind of echoing your point with costs having risen now, that being said, cost of well down from where we were at the lumber peak in mid-summer. But taking all that into account, we're seeing a steady flow of deals, but fewer deals, it seems that are penciling. And that's both on the MSA perhaps side as well as on the direct development side.
The one thing the 1 point I made earlier about -- with cap rates compressing on existing products, that they're also diminishing some on the development yields. There are competing factors as to how deals are being made today, but like I started with, there is a flow of deals happening. But again, those that are actually penciling, or I would say fewer and further between.
And then Neil, I just want to make sure that in my prepared comments, I did say that we had 290 million of preferred redemption this year. And given the current environment, if it gets 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. 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've 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. Firs question for Adam. I think in the prepared remarks, Mike referred to permanent value is being up 15% versus pre-COVID levels. Curious in the hardest hit markets to the Bay Area where you think current values are relative to pre - covid levels.
Yes. Thanks, Jonathan, 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 has been really just 2 Class A deals that have traded, and then some B and C deals that have traded. So, we're talking about very limited dataset.
And that's to clarify 5% to 20% down or up?
Up.
Up. Okay.
And you know nothing. Yeah John. I'm just kidding.
Nothing trades that means it. Yes. Okay. One final question from me and then I'll jump out. The -- let's just drill down on San Mateo. Obviously, job growth improving migrations 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 rents the behavior, the durability of demand gains over the last few quarters? And when does it turn the corner?
Yes, that's an interesting question in that the data set itself, I want to just give a little context because I think that matters. Our San Mateo market only Ashley's has four properties in the same store. And so, because of that, you are going to see a lot more volatility. And in addition, there has been good job growth and it's a good market for us. There has been lease up competition in the area.
We're talking about an interim period where you have competition from these is a -- while their job growth is still at a slower pace relative to our other markets. And then you add that with a small dataset. It's going to just be a lot more volatile. It's not that there's anything 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 increase attractiveness that you talked about really been driven by lower debt cost in the market today, and the higher LTVs that you can use in those agreements?
Hi, Amanda. Thank you for it. We've used the co-investment platform for many, many years and we like it because it is an alternative source of capital when we don't like our equity, our stock price. And so, we've used it from time-to-time. We do think it's a good source of capital for us. And in terms of economics, we were able to reduce the hurdle rates and improve the economics for Essex.
Cap rates have come down over the past year, 75 to a 100 basis points and we were able to change terms of accordingly. So, the economics of the joint venture didn't change materially from what we've done in the past, but we will 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 question.
I think it's sufficiently known on the West Coast, so I will 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 were at and how are you thinking about it in 2022.
I'm very 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 in light of the recovery and the strength of the recovery, and of course, our expectations for market rent growth next year. And our goal at this point is really to double the number of renovations for next year, compared to this year. And then ultimately, get back to pre - COVID levels.
Because it does take a little more time to ramp up these activities and as market condition improve, we also make sure that, we under right the improvements and ensure we don't have capital destruction, and make sure that we're meeting the market, and optimizing our returns. And so, it's not a turn the switch on, we're just much more -- we just want to be diligent about it.
And then Angela as you follow-up to that, how's ROI looking at on those redevelopments? Is that consistent with pre -COVID levels and is there a big range to think about there? I'm just trying to understand that. If you could throw some color on that as well, please?
Sure. I'm happy to -- we target our ROI at pre-COVID levels. But keep in mind it's driven by market rents. And so, what that means is that ROI unlike -- the way we approach it is that we won't proceed with a reinvestment opportunity, if we're not achieving our target ROI. and therefore, if you're concerned that there has been any compression or the duration there has not been.
Got you. And then my sort of second question would be your peers -- one of your peers talked about earlier today, about some impact on leasing velocity from Amazon policy shift on return to office. Just wanted to check the deal. What are you guys seeing from your standpoint? Thank you.
Let me make sure I understand your question. Are you talk -- are you asking about our leasing velocity? Whether it has changed because of Amazon.
I mean, Amazon policy shifts on return to office. The announcement a couple of age ago.
Yes. I see what you mean. So, we have not seen the impact from the Amazon shift. Because keep in mind that while yes, they have the corporate mandate, but they also have a lot of workers throughout the region. Then so that's of course all the businesses that support Amazon. But practically speaking, we have not seen an impact on our turnover, we are not seen an impact in our occupancy, and certainly not an impact on our ability to raise rents.
Thank you. Our next questions come from the line of Daniel Santos with Piper Sandler, please proceed with your questions.
Hey, good afternoon. And thank you for taking my questions. So, my first one is on your stock price. You didn't issue equity in the third quarter yet on our estimate and based on the Street's estimate of NAV, you're trading at a premium. Instead of issuing equity are going to this position and [Indiscernible] route. So, I just -- was wondering if you could give more commentary on your views on your stock price and maybe using more equity going forward.
Yes, that's a good question. We always remain disciplined as it relates to what source of capital we use. So, we look at a variety of different sources; one being the Equity, one joint venture equity, and one disposition. And keep in mind, with values up 15% from pre - Covid levels that puts our NAV where we think the value of the Company is, is up quite a bit from where we were at the start of the pandemic. And so 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 you think it creates a lot more value for our shareholders given the fees and the potential to promote hurdle and given where our stock prices stream. we don't believe we're at a material premium to NAV at this point.
Okay. That's helpful. And then lastly, how much more are you expecting benefit from smart rents and what's you’re timing on that?
Yes. And that's a great question. The value of our smart rent investment is about 75 million today. And our third quarter financials, there's a lag effect there because we report them -- the shares are still held within our RATV, until we come out of lockout. And their financials are one quarter in arrears for us. And so, we would expect a fairly substantial gain in the fourth quarter. It could be up to 40 million.
And then 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 is a lot of other moving parts within [Indiscernible] that we don't try to predict that gain or loss. But those are the numbers related to smart rent in and of itself.
Thank you. Our next questions come from the line of Alex Kalmus with Zelman & Associates, please proceed with your questions.
All right. Thank you for taking the question. I wanted to touch on SB 9 and 10, and what you expect the long-term impact to be on California housing supply their plus what you're seeing on the ground if anything yet?
This is Mike and good question. If we're still waiting and guessing as to what might happen with SB9 and 10. And of the 2, the one that's more impactful is SB9, because that would effectively have the state override local zoning laws as it relates to the development of ADU units. And so potentially allowing more ADU units to be built in the suburbs. So, 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 YIMBY's, the yes, in my backyard, versus the NYMBY's, the known my backyard groups. And that's going to be an ongoing battle.
So, 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 LA Times article that was recently written and it said -- it estimates, 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 SB9. I suspect that will be high. But the backdrop of this is that Governor Newsom and various other sources have indicated that the state is short millions of homes, and the likelihood that SB9 and SB10 will change that, I think is very unlikely.
Alright. Thank you very much there. And just wanted to touch on the trajectory of potential renewals going forward given the CPI regulation. Would you consider pushing on that lever in future rent negotiations to make sure that over the span of a few years, you're able to get some market quicker or do you see that being just playing out similarly how has in the past in terms of the difference between renewals and new move-ins spreads?
Well, CPI plus 5, It's set but it's kept the 10. So, it's not. a metric that we have flexibility to push at our discretion. And we've been operating in this market even before AV 1482. We have assets as its hat front control. Over a long period of time, it had comparable growth rates and we've operated well under these circumstances. So, we just -- we 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.
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. And maybe it's a different strategy across markets, would be great to discuss that as well.
Yeah, happy to. What we're -- so this is an unusual year, and then normally we peak around July. And so starting 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. We went from a big negative, I think, like negative 10% of market rent growth in Q1 and we paid around -- It depends on which markets, but Seattle and Northern California peaked around August. And Southern California is just peaking now, as we speak. So, it's very different from that perspective, having said that, that natural seasonality does place us out and so the question is really a magnitude issue.
What you're going to -- what we're going to continue to do is focus on this point wherever we can push rents, but more likely as we head into November, December, now focusing on occupancy. And I think some people noted that in the third quarter, we allow occupancy to fall a bit, but I want to emphasize that was because of the strength of the market, and now we're going to preserve those friends and focus on occupancy if we see that deceleration continued to -- continues.
That's great. And maybe just a 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 like when we feel a little bit of pull back? Just curious where it is?
It's 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 May rate. 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 line at this point. Have a great day.