What's Happening Next in Multifamily? Explore 1Q 2022 earnings soundbites from Essex Property Trust, Inc. (NYSE: ESS).

Essex 1Q22 Takeaways

All of our markets have positive sequential rent growth with NorCal leading the portfolio, improving sequentially by approximately 3% in each month of 1Q. We expect further improvement in NorCal as progress is made on return to office programs for the large technology companies following several COVID-related delays.
The top tech companies also continue to hire rapidly in the Essex markets with over 50,000 job openings posted for California and Washington, a 79% increase compared to March of 2020. The other indicators, including job growth, venture capital deployment, and office investment continue to support our thesis that Northern California will remain the epicenter of the technology industries.
A significant recent example came from Google, which announced a plan to invest more than $3.5 billion in additional office and data centers in Mountain View, Downtown San Jose, and elsewhere across the Bay Area.
Essex markets reported job growth of 6.7% on a trailing 3-month basis versus the broader U.S. average of 4.7% and marking the second consecutive quarter that Essex markets have outpaced the nation in job growth. We expect this outperformance will continue as Essex has still only recovered 83% of the jobs compared to pre-covid levels versus the U.S. recovery of 95%.
We expect service and hospitality-related jobs to continue a strong growth trajectory supported by increased travel generally and the demand for services from the well-paid workforce on the West Coast.
The confluence of increasing job growth, a lower unemployment rate of 3.6% in the Essex markets, and expensive for sale housing all contribute to favorable rental housing tailwinds.
Our bottoms-up supply analysis indicates that new deliveries will moderate for the rest of 2022, and we are also expecting a 15% decline in apartment supply in 2023 and which includes a 54% reduction in new supply expected in Northern California.
All of our markets remain on the lower end of the supply growth spectrum versus other U.S. metros.
Geopolitical events, turbulent financial market conditions, and high levels of inflation create uncertainty, which may become a headwind for transactions. However, cap rates generally don't move quickly and are mostly a function of investor demand.
As to the West Coast specifically, strong evidence of recovering apartment market conditions, higher inflationary growth expectations, and significant capital pursuing apartments appear to have mostly offset the impact of higher interest costs keeping cap rates unchanged at this point.
Our review of cap rates for recent apartment transactions across the Essex markets indicates most institutional quality assets trading in the mid-3% range for stabilized properties with little deviation across markets, building class, and location.
1Q22 performance exceeded our expectations and included some of our strongest leasings spreads reported in the company's history, with net effective new leases up 20% and renewals up 11.7% compared to the same period last year.
Washington portfolio. Rents in the Pacific Northwest had a strong start to the year, improving sequentially each month since December. In addition, we successfully decreased concession in downtown Seattle throughout the quarter. Our supply forecast reflects a modest rate in deliveries throughout 2022, and the Seattle job market remained strong with March average trailing 3-month growth rate of 6.1%. Moving forward, we anticipate steady performance from our Seattle region with a loss to lease in April of 7.7%.
On to NorCal. Rents in this region are being lifted by the return to office of large tech companies and a solid rebound in job growth. After a typical seasonal slowdown in the fourth quarter, construction usage in San Francisco and San Jose declined throughout the first quarter, leading to a steady improvement in net effective rents. Looking ahead, we expect the supply picture to remain steady for the rest of the year, and on the demand side, job growth is accelerating with the March average trailing 3 months growth rate of 6.7%.
As NorCal is in its early stages of recovery, we are seeing a steady increase in loss to lease, which stands at 5.1% in April, and we continue to expect this region to lead our market rent growth in 2022.
Turning to SoCal, which has been our best-performing market throughout the pandemic, we continue to be confident about SoCal as rents did not experience the typical seasonal decline in the fourth quarter and have continued to improve each month in 1Q.
For 2022, we have forecasted a modest increase in supply delivery and anticipate concessions may temporarily elevate in areas near those development lease-ups. On the demand side, Southern California was our top-performing region with the March average trailing 3-month job growth of 7.9%.
When we see market strength, we would change our strategy from favoring occupancy to pushing rents, especially when we see - when we are anticipating more market strength coming ahead of us. So it is very much intentional.
You’re seeing some interest rate pressures, obviously, but with the growth that we're seeing throughout our markets and with the amount of capital in the market chasing deals. We're really not seeing a dramatic move in pricing for deals that are kind of on the market right now.
We're seeing a somewhat less froth than what we've seen over the last, call it, 6 to 9 months. But that's that extra 5% the groups have moved after the second-best and final round that we're not seeing today.
Having positive leverage (i.e., cap rates over debt cost) helps a lot when it comes to deal making. And so, we're no longer in that world. a bit of an impediment on the deal side caused by negative leverage once again.

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