Like its Chicago-based REIT peer Equity Residential, Essex Property Trust reported solid fourth-quarter 2024 results this month, but its funds from operations guidance came in below Wall Street’s expectations for 2025.
However, Haendel St. Juste, managing director of REITs for investment bank Mizuho Securities, wrote in a research report last week that the Palo Alto, California-based REIT is “notoriously conservative” and 200 basis points of “headwinds” from redemptions of mezzanine redemptions and debt refinancings are partially responsible for that guidance.
“We also believe that Essex’s near-sector-leading same-store [revenue], with upside from a nascent recovery in Seattle and San Francisco, is far more meaningful to its story and near-term growth prospects,” St. Juste wrote in a report shared with Multifamily Dive. “Other upside drivers include potential LA demand boost (not included) in the guidance and Essex’s fairly tepid economic/job growth outlook for its markets.”
St. Juste believes the recovery in San Francisco and Seattle will be an “impactful tailwind” that will set the West Coast REIT up for improved earnings in the second half of 2025 and into 2026.
“The West Coast is well-positioned with improving economic fundamentals as job growth is forecasted to outperform the U.S. after lagging in 2024,” CEO Angela Kleiman said on the earnings call last week.
Tech markets rebound
Seattle and San Jose, California, are expected to lead Essex’s portfolio with approximately 4% rent growth as tech employers hire workers and bring them back to the office in those areas.
“It is notable that recent office expansion announcements demonstrate the intention that the majority of new hirings will be focused in headquarter locations, which favors the West Coast economy, particularly the northern regions,” Kleiman said
However, Seattle and San Jose were still dealing with concessions in December, though they had abated in San Jose. “[In] Seattle, the supply delivery is comparable to last year,” Kleiman said. “And so, we don't expect a meaningful change in terms of the concession environment.”
Essex sees investments in the technology sector continuing to drive gains in Northern California. “When we look at all the leases that have been signed, it's not dominated by AI,” Kleiman said. “It’s companies like Snowflake. That is a data company. We have some fintech; we have some software companies. So it's pretty well diverse.”
Even though the U.S. artificial intelligence sector is reeling after the Chinese firm DeepSeek’s announcement that it could produce artificial intelligence to compete with OpenAI at a lower price, Kleiman thinks that news could ultimately drive innovation. “As far as DeepSeek is concerned, we do think that, ultimately, more competition will spur more innovation and investments in this sector,” she said.
Southern California
Essex’s properties didn’t incur any loss in the recent wildfires in Los Angeles. The REIT also didn’t forecast impacts from the wildfires in its 2025 projections. “We had assumed the market starts to recover from some of the eviction noise that occurred in 2024,” said Essex Chief Financial Officer Barb Pak on the Q4 earnings call.
Although Essex has received inquiries from people who lost their homes to the fires, that has not really translated to new leases, according to Kleiman. “What we heard was that the fire victims are waiting for clarity from their insurance providers before making housing decisions,” she said. “So it's going to take a lot more time to work through the system before it has any impact.”
Since single-family homes were the majority of those residences destroyed by the fires, most displaced families will need larger units with multiple bedrooms, which are in short supply. “I just don't see that as a huge impact in the near term,” Kleiman said.
BY THE NUMBERS
| Category | Q4 | YOY Change |
| Revenue | $411.2 million | 2.6% |
| Net operating income | $288.8 million | 1.7% |
| Operating expenses | $122.5 million | 4.7% |
| Funds from operations | $3.69 | 4.9% |
| Average rent | $2,676 | 1.9% |
| Occupancy rate | 95.9% | -20 bps |
SOURCE: Essex
As the Los Angeles area begins to rebuild from the devastating wildfires, investment is being made in the region to prepare for the upcoming World Cup and Olympics and through the film industry tax credit, which removes some of the income tax owed to California by the production company.
“The fourth quarter is the first time we saw jobs in the film industry improve for the first time in several years,” Kleiman said. “So these things do give us hope about LA.”
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