Unlike other REITs, Essex’s portfolio sits in one region: the West Coast. During some periods, such as when the tech sector struggles, that focus can put the company at a disadvantage.

Right now, however, Essex may find itself in a favorable position. Supply is a headwind for many REITs, especially in Sun Belt markets expecting around 5% of total housing supply to hit. In contrast, less than 1% of total supply is expected in Essex’s markets, though Oakland sticks out as a problem spot, according to the company.

Still, with uncertainty in the economy, the company’s executives expect rent growth of only 1.25% on average in its markets this year. But if tech companies start adding higher-paying jobs, there is upside for Essex. 

“To this point, recent layoff announcements have been much smaller in scale with companies citing larger strategic plans to redirect talent and investments toward artificial intelligence projects, which we view as a long-term benefit for the West Coast,” said CEO Angela Kleiman on the REIT’s earnings call earlier this month. “With low levels of housing supply in our markets, a modest increase in demand could accelerate rent growth.”

Here are three takeaways from the REIT’s earnings report and call:

West Coast market dynamics

Southern California should lead the way for Essex with revenue growth at 3%, followed by Northern California at 1%. Seattle will be flat on a year-over-year basis, according to CFO Barb Pak.

When it comes to rent growth, Seattle shows more strength. Southern California should produce rent growth above 1.25%, while the Emerald City will be a close second. Northern California will hinder Essex’s rent growth at around 1%, according to Kleiman. 

Oakland, in particular, is a problem, with rent growth projected to be well below 1%. “The North Cal region itself is really dampened by Oakland because of the amount of supply,” Kleiman said.

But there have been positive signs in the area over the last quarter. “We saw the greatest improvement in Northern California and the Bay Area,” Essex Senior Vice President of Operations Jessica Anderson said on the call. “And a large part of that was concession burn-off.”

Delinquency issues improve

For apartment operators, renters not paying rent has been a massive issue since COVID-19 hit. In some West Coast markets where Essex operates, the challenges have been particularly difficult, with eviction moratoriums that stretched for multiple years.

As of its earnings call, Essex had $130 million in uncollected rent, according to Pak. However, Kleiman said the company has made “substantial progress” in 2023 by reducing delinquency as a percentage of rent from over 2% in Q1 to 1.4% by year-end. 

Kleiman is encouraged that eviction proceedings are moving through the legal system faster than they were during and immediately after COVID-19 hit. Evictions still take much longer than they did before the pandemic, when they took an average of two months after a tenant became delinquent, but the situation is improving.

“Last year, when we were talking about L.A., it took about 10 to 12 months,” Kleiman said. “And currently, we're down to eight months. Everywhere else used to be nine to 10 months. Now it's down to six months. So we're making good progress there, but that remains an open item for us as far as the risk is concerned.”

Still, the delinquency issues present “variability” as Essex’s management team projects the year. “That is one aspect of our business that we don't have as much control as we would like because we are subject to how long it takes for the court to process these delinquency units,” Kleiman said.

Pref equity questions

After Highlands Ranch, Colorado-based REIT UDR announced that it had assumed ownership of a property in Oakland where it had provided pref equity, analysts focused on Essex’s capital commitments on the earnings call.

Essex took a $33.7 million impairment on one property where it provided pref equity in Oakland. The asset’s loan matures this coming October. 

“The sponsor continues to fund equity shortfalls and is actively putting money into the project, and we are working actively with them on the refi that will be coming up here in the fall,” Pak said.

Pak left the door open to Essex eventually assuming ownership of the property, though the asset’s ultimate fate will be determined during the refinancing discussions.

“We do believe in the asset long term and the market long term,” Pak said. “We're obviously in a very depressed market in Oakland. But it's going to take time for that market to recover. We need to see supply abate, which will start to happen in 2025 and really into 2026.”

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