When the tech sector layoffs hit in late 2022, no apartment owner seemed more exposed than Palo Alto, California-based Essex Property Trust, whose entire portfolio sits on the West Coast.

But Essex’s properties have largely weathered the storm as the company recently increased its market rent growth expectations for the West Coast by 50 basis points to 2.5%. Overall, the REIT expects its core metros to generate 1.7% job growth for the entire year. Through June, they have increased job growth by 2.6% on a trailing three-month average.

“The layoff announcements from the largest technology companies have proven less consequential than headlines suggested, with only a fraction occurring within our markets, and the vast majority of those affected quickly finding new employment,” Essex CEO Angela Kleiman said on the company’s second-quarter earnings call last month.

Essex’s management team covered many topics outside of the tech world. Here are three takeaways from the earnings report and call.

Pushing past evictions

Earlier this year, Essex’s management team focused on maintaining occupancy in its portfolio as it prepared for more evictions. “This approach helped us exceed revenue expectations in the first half of the year and left us well-positioned to push rates during peak leasing season, which continues today,” Essex Senior Vice President of Operations Jessica Anderson said on the call. 

Essex pushed new lease trade-outs from 0.5% in May to 1.7% in June and a preliminary 2.1% in July. “These results were achieved despite increased turnover driven by eviction-related move-outs,” Anderson said. “Given ongoing delinquency court backlogs, we will continue to work through evictions for the rest of the year and anticipate some of this activity spilling over into 2024.”

Even with lingering evictions, Essex shifted to more of a focus on rent growth instead of occupancy in mid-May.

“The layoffs subsided, and we started seeing strengthening,” Anderson said. “And then, in addition to that, with regards to the evictions, they've been coming back at a pretty steady pace, which is manageable.”

Seattle lags

In Q2, Seattle lagged Essex’s core large West Coast regions with blended net effective rent growth averaging negative 0.2%. By comparison, the city generated a portfolio-leading net effective rent growth of over 16% in Q2 2022, making it a difficult YOY comp.

However, Anderson also noted Seattle was the company’s most seasonal market, making it sensitive to changes in the operating environment. 

“You may recall during the back half of 2022, the Seattle market experienced increased supply during a period of softening demand, which heavily impacted rents as we headed into 2023,” Anderson said. “However, throughout the second quarter, we saw a steady strengthening of demand, particularly in Seattle’s CBD that coincided with Amazon's mandatory May 1 return to office of three days a week.”

In Northern California, blended net effective rent growth averaged 1.5% in Q2. While new supply hurt Oakland, San Jose thrived. “Despite the tech employment headlines, we still experienced corporate housing activity associated with the large tech companies, albeit muted from last year, which helped support seasonal demand,” Anderson said.

Southern California posted blended net effective rent growth of 4.1% in Q2, driven by strength in San Diego, Ventura and Orange County. 

“Los Angeles is pulling the average down with a 1.9% blended lease trade-out for the quarter,” Anderson said. “However, because of the eviction activity in this market, rent growth and occupancy are expected to run lower relative to the rest of Southern California for the remainder of the year.” 

Monitoring the transaction market

Like many areas of the country, property sales on the West Coast remained muted in Q2, falling about 55% YOY with cap rates from mid 4% to low 5% for institutional-quality assets, according to Kleiman. 

However, investors continue to scour the market for properties. “Interest from a healthy group of buyers ranges from local syndicators to large institutional and foreign investors,” Kleiman said. “As expected, leverage buyers remain largely on the sidelines, waiting for more clarity on interest rates.”

Essex Chief Investment Officer Adam Berry said the REIT continues to underwrite every deal it sees and notes that there continues to be a large bid-ask spread between buyers and sellers. 

“As far as when we will be back in the market, I think that's really highly dependent on where our cost of capital is,” Berry said. “So given where we're trading today, it's hard to make accretive deals in the mid-4s to low-5s.”

Although Essex provided guidance with no acquisitions in 2023, Berry said the company will continue to monitor the market. “If there are deals that make sense strategically that fit in with our existing portfolio, whether through economies of scale or other methods, then we will focus more on those deals,” he said.

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