When the apartment REITs report 2024 earnings in early February, one of the main topics will undoubtedly be West Coast performance.
While the Los Angeles wildfires’ impact on the rental market will be a significant concern, another big discussion point will likely be the performance of San Francisco and Seattle properties after major employers introduced return-to-office mandates over the last few months.
In their third-quarter calls, several REIT executives said the rental performance of those cities was improving.
Before his company’s Q3 call in October, Equity’s Residential’s Chief Operating Officer Michael Manelis spent a week visiting the Chicago-based REIT’s properties in San Francisco. In that short amount of time, he sensed a lot of optimism from his on-site teams as prospects were showing up for tours again.
“The migration patterns show people from further out coming back near in,” Manelis said. “When they walk into the [leasing] office, they're talking about the fact that they need to be back into the office for work several days a week, and that's driving a lot of their decisions.”
Manelis wasn’t alone. On Q3 calls, many REIT executives and analysts noted an emerging silver lining in San Francisco and Seattle, with return-to-office and the promise of a hiring boost.
“Job postings at the top 20 technology companies have been steadily recovering, demonstrating a sentiment shift from retrenchment in 2023 to positioning for future growth,” CEO Angela Kleiman said on Essex’s Property Trust’s Q3 earnings call in October. “Additionally, these same companies continue to increase their return-to-office requirements, which has resulted in increased demand to San Jose and Seattle regions.”
San Francisco
The recovery in San Francisco has been a long time in the works. After seeing widespread departures during the initial wave of the COVID-19 pandemic, occupancy fell to 92.2% in 2021, according to RealPage data.
While national occupancy fell 70 basis points over 12 months to a decade-low of 94.1% in January 2024, it increased 40 bps year-over-year to 95.4% in San Francisco, making it a top-five national market and the only large U.S. apartment market to record occupancy growth at the time.
Still, the city has a way to go before returning to its 2019 rent levels. Fortunately, Salesforce’s return to office last October provided a boost for operators, as workers moved back into the city to lease apartments. Earlier in the year, the San Francisco-based company, one of the city’s largest employers, announced that select employees in sales, workplace services, data center engineering and onsite support technicians needed to return to the office four or five days a week, according to the San Francisco Standard.
“When you have a big company like Salesforce making that announcement, you see the activity on the ground,” Manelis said. “A lot of the other peripheral companies start to follow some of those bigger tech companies.”
In addition, incremental public safety and quality-of-life improvements have boosted leasing traffic and occupancy in San Francisco, Mike Lacy, senior vice president of operations for Denver-based REIT UDR, said on the firm’s Q3 earnings call in October.
Making things even more appealing for apartment operators, little new apartment competition is coming online in San Francisco. “Overall, starts are way down, and there have been almost no new competitive starts for the last year, which supports improving conditions for the next couple of years,” Manelis said. “We are optimistic about this market and its ability to drive our results in 2025.”
Seattle
While San Francisco struggled during and after the pandemic, Seattle saw an uptick last year.
EQR CEO Mark Parrell also said Seattle’s “quality of life” was better than that of its neighbor to the south. “San Francisco is better but not quite as good,” he said.
But that was only part of the story. “Seattle is one of the regions that has performed much better than we originally anticipated through 2024 in part due to Amazon's call back and people sort of slowly and steadily getting closer to or in the Seattle MSA,” Sean Breslin, AvalonBay Communities' chief operating officer, said on the Arlington, Virginia-based REIT’s Q3 earnings call in November. “There are other employers doing the same thing.”
After Amazon’s September announcement that it would require workers to return to the office five days a week in January, EQR also saw an uptick in interest in its Seattle apartments.
“The big recent story here is the five-day-week return-to-office announcement from Amazon, which is the 800-pound gorilla in the market,” Manelis said on the October call. “For the past several weeks, our local teams have reported increased interest from Amazon folks who are living further away from the office and looking for apartment homes in the downtown and South Lake Union submarkets.”
Manelis said those Amazon employees were concerned about increased rental rates or the lack of availability of certain apartments in the marketplace. “So they're actually buying early from us,” he said.
While return-to-office trends have benefitted Seattle and San Francisco, this movement could boost other coastal markets. For instance, with the Trump administration calling federal workers back to the office five days a week, Washington D.C. has the potential for strong growth.
“I’m not sure we felt the full impact of that yet across all of our coastal regions as people are sort of inching their way back to what they think is a normal state,” Breslin said.
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