Out of all of the public REITs, Essex Property Trust, with its foothold in Seattle and Northern California, may be most susceptible to the recent layoffs in the tech sector.

In its 2023 guidance, the Palo Alto, California–based apartment REIT is taking issues in these markets into account. 

“Looking ahead, layoff announcements and lower job openings among large tech companies signal a softer employment outlook for 2023, which we incorporated into our forecast assumptions,” said CEO Mike Schall on the company’s Q4 2023 earnings call last week (which will be his last call as he is slated to step down in April).

Despite the near-term questions in the tech sector, the earnings call showed that Essex sees signs of growth as it continues to find efficiencies. It projects same-store revenue to rise between 3.25% to 4.75% and net operating income to increase between 2.30% to 4.90% in 2023.

Tech layoffs and eviction troubles

In addition to the tech sector issues, Essex is grappling with eviction issues in its West Coast markets, causing elevated bad debt that is producing a 70-basis-point drag on fiscal year revenues, according to its earnings report. Over 60% of Essex’s delinquent units are in California’s Los Angeles and Alameda counties. 

“Courts are really bogged down,” said CFO Barb Pak on the earnings call. “It's taking longer to evict in our other [outside of Los Angeles and Alameda] markets and that is a factor as well in the 2023 guidance to recapture those units.”

The issues with evictions and tech layoffs showed up in Q4. Haendel St. Juste, managing director of REITs for investment bank Mizuho Securities, said that Essex’s Q4 blended lease rate growth of 3.8% came in just below his expectations and is a 580 basis point deceleration from Q3. New lease rate growth came in at 0.8%.

“Moreover, January new lease rates declined 0.6%, implying new lease rates in late Q4 2022 were also likely into negative territory,” he wrote in an investor note.

The difficult environment forced Essex to switch to a strategy focusing on occupancy late in 2022. “Our switch to favoring occupancy helped us moderate the seasonal weakness and the elevated turnover caused by higher evictions,” incoming CEO Angela Kleiman said on the earnings call. “Excluding L.A. and Alameda counties, I am pleased to report that we have made significant progress recapturing approximately 50% of delinquent units compared to one year ago.”

Kleiman said things are improving. “Our net effective new lease rates troughed at the end of November, and we have been able to reduce concessions while gradually increasing new lease rates from December to January on a sequential basis,” she said.

Tech and property investment

Like other REITs, Essex is focusing on making its sites run more efficiently. It has completed phase one of its property collections operating model, which centralizes administrative and leasing functions and combines nearby properties into one centrally managed business unit. 

With these upgrades, administrative expenses only grew 0.7% last year. Essex is projecting a 3% increase in 2023. In phase two of the project, it expects savings from a reduction in third-party vendor contracts and efficiencies when churning units. “The maintenance collections pilot is progressing well and is expected to conclude midyear,” Kleiman said.

The REIT is also rolling out a proprietary revenue management system. “We have been developing this capability over the past two years and are excited for a platform with an integrated pricing and operating strategy tailored for the nuances in our markets,” Kleiman said.

Overall, Essex posted a 4% increase in overall expenses in Q4, which was driven by higher utilities and maintenance costs. Pak said that the company expects expenses to rise about 5% this year, driven by a 10% increase in utilities and a 20% jump in insurance costs. “The biggest driver of [expense increases] is non-controllable,” she said.

Like other REITs, Essex isn’t making strong commitments to make acquisitions or dispositions in 2023, saying those activities will “be subject to market conditions and cost of capital,” according to Essex’s earnings release. 

“Given the challenging investment environment and our elevated cost of capital, we have not provided specific estimates for new acquisitions,” Pak said.

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