Essex Property Trust (NYSE:ESS) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Essex Property Trust reported increased full-year growth outlook for same-property revenue and core FFO per share, driven by strong performance in Northern California with blended rent growth of 7.3%.
Seattle saw a recovery with a 2.1% blended rent growth, while Southern California remained stable. The company anticipates full-year blended rent growth of 2.9%, near the top of their guidance range.
Looking ahead to 2027, West Coast multifamily fundamentals are expected to support growth above the U.S. average, with limited housing supply and strong investment in the technology sector.
A recent acquisition in East Bay, Northern California, priced over $200 million, is expected to yield mid-5%, showcasing the company’s strategic capital allocation.
Essex Property Trust’s balance sheet is strong, with manageable debt maturities and hedged interest rate exposure, supporting flexibility in a volatile rate environment.
Full Transcript
OPERATOR
Good day and welcome to the Essex Property Trust third quarter 2026 earnings call. As a reminder, today’s conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time.
A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the Company’s filings with the SEC. It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you, Ms. Kleiman. You may begin.
Angela Kleiman (Chief Executive Officer)
Thank you for joining Essex’s third quarter earnings call today. I’ll cover our operating performance for the quarter, considerations heading to next year, and conclude with a transaction market update. Barb Pak will follow with prepared remarks, and Rylan Burns is here for Q&A. We are pleased to achieve another increase in our full-year growth outlook for same-property revenue growth and core FFO per share. This outperformance has been primarily driven by Northern California, which has exceeded expectations. As such, we are now anticipating full-year blended rent growth of around 2.9%, close to the high end of our guidance range.
Moving on to regional highlights, beginning with Seattle, this market has gradually recovered from a soft start to the year. Blended rent growth turned positive in the second quarter and remained positive in the third quarter, generating 2.1% growth. This improvement has been led by the Eastside, benefiting our portfolio allocation in the region. Turning to Northern California, which continues to lead the nation in multifamily performance, we achieved blended rent growth of 7.3%, which was elevated by a strong leasing season with an extended peak that continued through September.
As for Southern California, operating conditions remain stable with Orange County and San Diego leading the performance across this region. Our blended rent growth of 90 basis points in the third quarter was in line with plan. Looking ahead to 2027, the outlook for the broader U.S. economy and labor market remains uncertain. Even against this backdrop, West Coast multifamily fundamentals offer a compelling case for continued growth above the U.S. average, with encouraging green shoots supporting the potential for further momentum. Total housing deliveries are expected to remain at a historical low of approximately 40 basis points of total housing stock, positioning our markets comfortably to generate rent growth within a modest job growth environment.
At the same time, technology sector innovation continues to attract investments and drive economic activities, supporting our expectation for job and income growth above the national average. Together with favorable rental affordability, these fundamentals provide a solid foundation for the next several years. Concluding with an update on the investment market, West Coast transaction volume for institutional-quality assets in the third quarter was generally consistent with the same period last year. Recent increases in treasury rates are still being factored into the transaction market. It would not be a surprise if fourth quarter volume declines as buyers and sellers adjust to the new rate environment, although historically our data shows that rate moves have less impact on pricing and cap rates in markets with strong rental fundamentals.
Lastly, I’m pleased to announce that yesterday we closed on an acquisition of a 474-unit community built in 2022 located in the East Bay in Northern California. Priced over $200 million and well below replacement cost, this asset is expected to generate a mid-5% yield. It is another example of our investment team’s deal acumen in a competitive environment, leveraging our strong reputation and geographic scale in our market to generate operating efficiencies from day one.
Essex remains disciplined in focusing our capital allocation strategy to maximize FFO and NAV per share growth. We continue to be well positioned to capitalize on market volatility with our efficient operating platform and strong balance sheet. With that, I’ll turn the call over to Barb.
Barb Pak (Executive Vice President and Chief Financial Officer)
Thanks, Angela. Today we’ll cover our third quarter results, discuss updates for our full-year guidance, and conclude with comments on the balance sheet. Beginning with our third quarter results, we reported core FFO per share of $4, representing a $0.01 beat to the midpoint of our guidance range. The primary driver relates to better same-property revenues, which grew 3% on a year-over-year basis, led by the continued solid performance of our Northern California portfolio.
Turning to our full-year outlook, revenues continue to exceed expectations, and as such we are raising the midpoint of same-property revenue growth by 10 basis points to 2.9%, driven by better scheduled rent growth. As for operating expenses, we remain on plan and are reaffirming our full-year midpoint. Our expense guidance reflects higher controllable spend in the fourth quarter, which we have previously discussed. Taken together, we are raising the midpoint of same-property NOI growth by 20 basis points to 3%, representing sector-leading growth.
As we conclude 2026, the strong operating results led to a two-cent increase in our core FFO midpoint. Finally, a few comments on the balance sheet. Amid the current interest rate environment, our total debt maturities for 2027 at pro rata share are around $575 million, of which the lion’s share is the $350 million in bonds that mature in May. This represents a very manageable amount of maturities next year given the size of our balance sheet. Further, we are well positioned as it relates to our floating rate exposure, which is around 12% on a pro rata basis, of which just over 40% is tied to the SIFMA index, which floats at a cheaper rate than SOFR.
Lastly, over the course of 2026 we have been proactively hedging our floating rate exposure by executing approximately $600 million of swaps at pro rata share at an all-in fixed rate of 4.9% to replace swaps that expire over the next six months. While we will feel the effects of higher interest rates next year, we are favorably positioned relative to the peer group in a rate environment with net debt to EBITDA of 5.4 times and well over $1 billion of available liquidity. We have ample flexibility to meet our commitments, navigate the current rate environment, and pursue opportunities that support long-term FFO and NAV per share growth. I will now turn the call back to the operator for questions.
OPERATOR
Thank you. We’ll now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you.
Our first question is from Nick Ulico with Scotiabank.
Nick Ulico (Analyst)
Thanks. I guess just maybe starting out with the blended rate growth, I think historically you don’t typically see an acceleration in the new lease rate growth in the third quarter versus the second quarter. But at the same time you also have Northern California as a region being very strong right now and it sort of seems like it’s strengthening in the third-party data year to date. So I guess I’m just wondering, maybe just talk about what new trade growth looked like in Northern California versus the other regions in the third quarter.
Andrew
Hey Nick, it’s Andrew here, and thanks for your question. And you’re absolutely right. Typically, sequential growth in blends from second to the third quarter is not— or you typically see a deceleration because it’s just normal seasonality for this business. And in fact, Northern California has bucked that trend and we have seen a slight increase on new lease rates. So new lease rates from second quarter to third quarter actually improved by 20 basis points.
That is unusual. But then again, this market has had tremendous momentum as it starts its recovery. And this is a good sign that if we look at our blends this year compared to last year, sequentially, this year is doing better overall, not just in Northern California. I’ll give you an example: Seattle last year, sequentially, new lease rates actually declined by over 700 basis points. This year it’s only about 120 basis points. So all our other markets are doing just fine with, of course, Northern California leading the charge.
Nick Ulico (Analyst)
Okay, thanks. Thanks for that, Angela. And then secondly, in terms of LA, I know you’re getting closer to that 95% financial occupancy you’ve talked about. How should we think about the other components needed to help drive some better rental rate improvement in that market? Thanks.
Angela Kleiman (Chief Executive Officer)
Yeah, Nick, good question on LA. Certainly it’s a market that we’ve been monitoring very closely. A couple of things I think have worsened— green shoots in LA, although these things will take time, but supply continues to decrease. So over the past two years supply has decreased by over 40% in the LA markets. And even though there’s been layoff announcements related to the entertainment industry, it’s no longer meaningful. It’s a small portion of the economy with less than 100,000 jobs in the past couple years.
So there’s some noise there, but certainly isn’t anything that we are concerned about. But what we’ve been really focusing on is the defense and aerospace green shoots. And that industry is expected to grow faster in GDP over the next 10 years than the rest of the economy. And it’s estimated to surpass over one and a half trillion in the next 10 years. And a third of that funding is allocated to Southern California. So it’s great that there’s a catalyst for demand growth to come in this market and certainly it’s the first we’ve seen in a long while in terms of a major industry taking a foothold in this market.
OPERATOR
Our next question is from Steve Sakwa with Evercore ISI.
Steve Sakwa (Analyst at Evercore ISI)
Thanks. I guess, good morning out there. Maybe just kind of following up on the last line of questioning. I know we still have the fourth quarter to go here and I’m sure you’re focused maybe more on just overall blended rate growth and not any one component. But I guess it does feel like new rent growth this year will probably be slightly weaker than the new lease growth posted last year, with renewals obviously better this year. As you kind of look forward, is there a path to new lease growth accelerating next year in a, let’s call it a mixed or challenged job market, given that you’ve got low supply?
Or I guess what gets new lease growth to really accelerate moving into ’27?
Angela Kleiman (Chief Executive Officer)
Hey Steve, thanks for your question. And it’s a good point that you made to not get overly focused on a particular metric like new lease growth because we are focused on the blends, and we have to be, because that’s ultimately what flows to the bottom line. So as I’ve said in the past, we can actually fabricate or even generate a fantastic new lease rate growth. All we have to do is pull back on occupancy or pull back on renewals. But that is not going to maximize total revenues either.
And just keep in mind, new lease rates, when you leave a unit vacant one week, cost you 2%. So we’re not going to run our business focusing on pushing new lease rate growth. That does not mean that the market fundamentals are not sound or not improving. And if we look at new lease rate growth this year compared to last year at the same time, it certainly has done much better. And so once again I point to the sequential number. Last year, new lease rate growth sequentially went about 40 basis points for the entire company as a whole. This year, sequentially new lease rates is only down 120 basis points. So that would tell me that we actually have improvements in new lease rate growth, and that’s continuing in terms of the overall outlook.
Steve, on the jobs, for example, that’s really what’s going to drive new lease rate growth, is that when we look by region, of course Northern California remains very strong with great momentum there. But Seattle, interestingly, is starting to show some positive trends. And when we track the top 20 tech openings, Seattle for the first time has reached its pre-COVID average in job openings. It’s the first time in the last two years. And with the office expansion announcements that occurred last year and supply deliveries continuing to decline, we do anticipate that Seattle will have a nice rebound toward the end of next year.
Los Angeles remains stable. It’s gradually improving with green shoots with the defense sector and supply decrease as well. So I think all our markets should actually do better than last year. If nothing else, look at our earn-in — it’s quite a bit better this year compared to last year.
Steve Sakwa (Analyst at Evercore ISI)
Well, thanks for that because you just teed me up for my next follow-up question, which is could you talk about the earn-in as we sit here today for next year, and maybe where are renewals going out kind of for the fourth quarter and into, I guess, early part of ’27? Thanks.
Angela Kleiman (Chief Executive Officer)
Yeah, the renewals are going out in the mid 4% range in the fourth quarter. And so it’s on plan, and it’s actually a little bit stronger than what we had originally hoped. Now, that means that asking is actually higher. Just I know that you guys wrote a piece and you were looking at the asking rents, and so asking rents are higher — they’re in the low to mid 5s. And we anticipate that we’ll land around mid 4s on the renewal side and the actual renewal.
OPERATOR
Our next question is from Brad Heffern with RBC Capital Markets.
Brad Heffern (Analyst at RBC Capital Markets)
Yeah, hey, everybody, is there any update you can give on where October spreads are trending? Obviously, I’m sure you’re seeing the normal seasonal fallout, but I know you also had the longer than normal leasing season, so I’m wondering if that’s playing into it at all.
Angela Kleiman (Chief Executive Officer)
Yeah, on the October spreads, it’s — let me take a quick look. It’s generally in line with plan. It’s obviously starting to taper off. Keep in mind, we are now, you know, hitting our seasonal low here, and Northern California is leading the pack in new and renewal. Northern California on new is well north of 10%, with everybody else on the new side starting in the negative territory, as it should be in October.
Brad Heffern (Analyst at RBC Capital Markets)
Okay, got it. Thanks for that. And then can you just go through concessions by market and how those have changed, if they’ve changed?
Angela Kleiman (Chief Executive Officer)
Sure, happy to. So concessions by market. So overall, let me just start with portfolio average so you have data here. So concessions third quarter compared to last year compared to this year — not a whole lot different. So third quarter last year, portfolio average around six days. This year a little bit more, a few days more — around 10 days. Nothing to get excited about. Heading into the fourth quarter, we’re around a week. So similar to last year’s levels.
And if we’re talking about by market, let me see. So Northern California, effectively no concessions; PNW is less than a week; and Southern California a little over a week. So once again, these are all normal and very stable levels.
OPERATOR
Our next question is from Eric Wolf with Citi.
Eric Wolf (Analyst at Citi)
I might have missed this in your answer to Steve’s question, but did you say that the earn-in is still around 150 basis points? I just wanted to confirm that.
Angela Kleiman (Chief Executive Officer)
Oh, yes, thank you for that follow-up. I didn’t finish my answer. So our earn-in, which we originally published at around 150 basis points about a month ago — we are assuming a slightly higher earn-in, probably an additional 5 to 10 basis points. And just for context, last year was about 85, so it’s certainly much better this year.
Eric Wolf (Analyst at Citi)
Yep, makes sense. And then the second question, you mentioned some positive indicators in Seattle that could cause it to inflect late next year. I think you said late next year, so I wanted to confirm that. But there’s also been some news around Microsoft trying to buy out 60,000 employees. Does that impact your thoughts on near-term fundamentals, or you think all the other positive indicators that you’re seeing will more than offset that?
Angela Kleiman (Chief Executive Officer)
Yeah, that’s a good question. Yes, we saw the Microsoft announcements, but what we’ve been looking at and tracking very closely is also the unemployment and continuing claims for the market, and it has remained well below the long-term average. So this tells us that layoffs have been absorbed very quickly or they’ve been rehired. And more importantly with this market, employees are doing what they’re supposed to do, which is moving business units to reallocating their resources to higher-profit businesses.
And so once again, this doesn’t really concern us too much when we look at everything else. All the other fundamental data points point to a healthy environment. The one comment I will add is that remember when Amazon had all these layoff announcements? Well, they ended up rehiring a lot of the layoff employees. So there’s going to be that continued movement, but it hasn’t been in such a way that it’s disrupted normal market functions.
OPERATOR
Our next question is from Alexander Goldfarb with Piper Sandler.
Alexander Goldfarb (Analyst at Piper Sandler)
Hey, morning. Morning out there. Two questions for you. The first question, Angela. Aerospace and defense certainly has been getting a lot of attention — in 25 plus years in REIT land never really received this amount of attention. As we think about Southern Cal, especially SpaceX and the other companies that are down there, is this more just like sort of cocktail conversation, or are your communities seeing actual evidence where increased hiring is actually showing up to rent apartments in your Southern Cal?
That’s my first question. Then I have a second.
Angela Kleiman (Chief Executive Officer)
Okay. Hey Alex, thanks for your question. I think the difference with respect to the aerospace defense now versus what’s been discussed in the past is that now there’s actually been commitments, or investments earmarked, that’s been published. And so 1.5 trillion is an eye-popping number. And Havas stated that a third of it allocated Southern California is, as far as we’re concerned, really terrific indication of where that industry is headed. As far as having SpaceX headquartered in the LA region and, of course, Anduril in the Long Beach area — having two major industry giants having a footprint in those markets are also very good indication for that market.
Now, having said that, once again, these are relatively new and money is just getting allocated. Companies are just starting to hire. And so it would be too early — way too early — to see that translate to job growth. It just, you know, it’s just never happened that quickly — that announcement and then immediate job hire. It always takes time and is feasible to find the right talent, find the right office space for them, and grow that business.
Alexander Goldfarb (Analyst at Piper Sandler)
Okay, and then the second question is on Seattle. I don’t know if you saw the article, but there was a recent business survey — local businesses not too happy with the way Seattle is going, thinking about leaving, what have you. Obviously the Microsoft news. But can you just break down the market? Because you talk about strength from the east side, weakness in the CBD where you have less exposure. There’s obviously the political overhangs. And just trying to understand the market — if Seattle retains its economic engine, or if there are disruptions where it may be a bifurcated market even next year.
And therefore the hopeful growth that many of us think about is coming may not actually occur because of other dynamics in the market, whether it’s a split between Eastside and CBD or where companies are allocating their hiring there versus Bay Area or elsewhere.
Angela Kleiman (Chief Executive Officer)
Yeah, that’s a good question. Seattle — Alex, what we see is certainly Eastside has been a beneficiary of some of those migrations, not just from downtown Seattle, but from other markets as well. And we do see that continuing because certainly no employers are making noises about leaving the Eastside. I think that article really relates to the concern about the legislation. And I think when legislation becomes business-unfriendly and discourages housing, I think that’s a concern for all of us.
And I do think that it’s a good starting point to have a conversation with the legislation, with Seattle and the city of Seattle. I’m hopeful that they’ll take note. I know in the past when these conversations occurred, there were adjustments and both sides were at the table trying to work things out. And so I’m hopeful that that will occur once again. But ultimately, with Eastside being the beneficiary, I think Essex is in a solid position. But don’t forget, keep in mind, the other overhang in downtown Seattle has been supply, and supply is starting to abate. So at least there will be some relief on that.
OPERATOR
Our next question is from Jana Gown with Bank of America. Thank you.
Jana Gown (Analyst at Bank of America)
Good morning. Just wondering if you can go over latest thoughts around capital allocation. You mentioned the recent Oakland acquisition was in the mid 5s. How do you kind of weigh that relative to share buybacks? And also curious if you’re seeing increased opportunities in lending or preferred equity.
Rylan Burns (Executive Vice President and Chief Investment Officer)
Hey Jana, this is Rylan here. Just starting with the capital allocation strategy. What we’re really trying to do, consistent with the past, is source the highest risk-adjusted returns, pair it with our lowest cost of capital to drive NAV and FFO per share. So you mentioned several potential investment opportunities that we’ve done this year. When we think about our menu of options from acquisitions, development, preferred equity, reinvestments, stock buybacks, debt paydown, we’ve allocated to five of those six in 2026.
So we’re going to remain nimble. Our strategy is not going to change, and when we see an opportunity to create NAV and FFO per share, that’s where we’re going to lean in. As it relates to the most recent question about the deal that we just announced yesterday, again, this is really consistent with what we’ve been doing for the past several years, where we’ve been allocating acquisition capital into newer assets where we can drive efficiencies from our operating model in markets where we have conviction of growth. As you mentioned and Angela mentioned, this is a mid-5 initial yield, and we believe the East Bay is in the path of growth.
We’ve seen this before in previous cycles where you see really strong rent growth in a tight housing market in San Francisco and the Peninsula that’s moving into Oakland and down south through Milpitas. And we believe this is coming with a high level of conviction on the East Bay. We’re really comfortable with the basis in this property and, most importantly, we think we can create value. We’ve got two communities nearby so we can take costs out, improve the retail leasing.
So this is, I think, a nice win for our investors. But bigger picture, as we think about capital allocation, that whole menu is on the table for us and we’re going to continue to lean in where we can drive the most value for our shareholders.
Jana Gown (Analyst at Bank of America)
Thanks, Rylan. And then just with the increased volatility in rates, curious if you are seeing more opportunities on that lending side.
Rylan Burns (Executive Vice President and Chief Investment Officer)
Yes, I’d say it’s still a little bit too early. I think the market’s still adjusting to the moving rates that we’ve seen in September. But as the financing market gets a little bit tighter, that should create more opportunities for us on the preferred equity book as well as on the acquisition side. So it’s still early. I think buyers and sellers are still adjusting. I think you’ve heard the public commentary in terms of bid-ask spreads widening. I think that’s fair on the West Coast as well.
So we’re again underwriting everything, trying to create opportunities, and I do think it will create additional options for us in the near future.
OPERATOR
Our next question is from Austin Werschmidt with KeyBanc Capital Markets.
Austin Werschmidt (Analyst at KeyBanc Capital Markets)
Great, thanks. Hello, everybody. Just with respect to the mid-4% renewal rate growth that you highlighted on achieved rates in the fourth quarter, are you guys more focused on building occupancy today ahead of next year? And I’d be curious where occupancy has trended subsequent to quarter end. Or is the move from the 5.3% renewal rate growth you achieved in the third quarter to the mid-4s— is there some other factor that’s causing you to pull back a little bit?
Angela Kleiman (Chief Executive Officer)
Hey Austin, it’s Angela here. Thanks for your question. So we typically favor occupancy heading into our seasonal slow in the fourth quarter, and you’ll see us continue to deploy that strategy. With the caveat that in certain pockets of Northern California, we’re continuing to see strong momentum. That, of course, will allow us to continue to favor rents, and we’ll see how long that lasts. But we certainly will try to maximize that momentum as much as possible.
Austin Werschmidt (Analyst at KeyBanc Capital Markets)
And then as far as where occupancy sits today?
Angela Kleiman (Chief Executive Officer)
Oh, occupancy today is 96— 96.3, I think. Yep, 96.3.
Austin Werschmidt (Analyst at KeyBanc Capital Markets)
And then just last one for me on the expense side: it looks like the guidance implies a fairly big pickup late in the year. Anything specific that’s driving the increase? And then any considerations for expenses ahead of next year? Thank you.
Barb Pak (Executive Vice President and Chief Financial Officer)
Hi Austin, it’s Barb. As we’ve said the last several quarters, we did expect a second-half increase in our controllable expense spend. It’s just timing on when we were going to finish up some of the projects that we had going on this year. So that is what’s really driving the Q4 expense increase of about 5% on a year-over-year basis. It’s really driven by that controllable side, which has been light year to date. So no change from our original plan this year.
And as we look to 2027, we’re still working through the budget process, but as I look at things today, when I look at the key categories that we publish on S-10, I don’t see too many deviations in year-over-year growth from what we expect in 2026, with the exception of property taxes. We did have some favorable Prop 8 appeals this year which allowed our property taxes to be only a 60-basis-point increase on a year-over-year basis. I would assume that that’s going to be more in line with our historical average of 3% to 4% next year.
So that’s one line that I think has a little more press than the other lines.
OPERATOR
Our next question is from Jamie Feldman with Wells Fargo.
Jamie Feldman (Analyst at Wells Fargo)
Great, thank you for taking the question. I guess as we’re thinking about next year, can you quantify how to think about the earnings impact from the JV swap resets, including the 496 million moving from 2.7% to 5.3% and then the remaining 128 million? How do we think about the rate and timing when we’re building out our models for next year?
Barb Pak (Executive Vice President and Chief Financial Officer)
Yes, Jamie, this is Barb. That’s a good question. So we do have three swaps maturing within the joint venture portfolio— one December 1st of this year and then two at the end of March next year. We have executed new swaps for 80% of that at an all-in fixed rate of 5.3%. And while our rate is going up, it’s obviously a byproduct of the market— it’s not an Essex-specific issue, just rates are higher. What I can tell you is if we waited to hedge and we didn’t hedge, our rate would even be higher today, in the high 5s.
So we feel good that we do have a better-than-market rate going into next year. The impact to our interest expense from the swaps that we have executed, at pro rata share, will lead to a $0.09 increase to interest expense in the joint venture portfolio. And as you mentioned, 20% is not hedged and that is going to be floating at this time, and that will add a couple more pennies to interest expense depending on what SOFR rate you assume. We’ll monitor the markets. If we see an opportunistic window to hedge that, we might, but right now it doesn’t make sense to hedge that.
So all in, $0.10 to $0.12 increase next year on interest expense from the swaps at pro rata share.
Jamie Feldman (Analyst at Wells Fargo)
Okay, thank you for that. And then the term loan— I don’t think that’s hedged either. Are you making an interest rate bet overall, or it just was cost-prohibitive, or you just felt like you could be patient on it?
Barb Pak (Executive Vice President and Chief Financial Officer)
Yeah. That term loan we did in September— once again, we don’t have a lot of variable-rate exposure. Really, our exposure to SOFR is 7% at pro rata share, so it’s very low on a total basis, and that includes the $275 million term loan that we just did. When we closed that term loan and we looked to go swap it, it didn’t make sense. It was very prohibitive. We were paying up for a lot of interest rate increases that may or may not happen. We’ll monitor the market and look to see if there’s a window that makes more sense, but at the time it didn’t, and it still doesn’t today.
OPERATOR
Our next question is from John Kim with BMO Capital Markets.
John Kim (Analyst at BMO Capital Markets)
Good morning. I wanted to ask about San Francisco— it’s the gift that keeps on giving. But I wanted to ask how much further you think it has to go. We noticed occupancy kind of fell sequentially, and so when you look at rent-to-income ratios or other metrics, where do you see San Francisco pricing versus income? And then do you think other markets like Oakland, East Bay, South San Francisco— they’ll play catch-up to San Francisco just given affordability?
Angela Kleiman (Chief Executive Officer)
Yeah. Hey John, I’ll try to hit all of your questions. If I missed something, just holler. As far as when you’re talking about sequential occupancy, we took it down from 96.1 to 95.6. That’s intentional because we were able to push rents, and in that environment that was more of an offensive play. So it’s actually a good sign. And landing where we land for San Francisco is actually quite a good number. As far as what’s to come in this market, or what’s left in the gas tank— and Rylan will talk about affordability in a second— what we’re seeing is that market rents are still catching up and coming. At this point, just to get back to the historical long-term CAGR, we’re maybe halfway there at the most. And I’ll give you one example: if you just take affordability— and Rylan will talk about all the other markets— in Northern California, just to return to pre-COVID affordability levels, rents could actually increase by over 20% with no wage growth.
That gives you the magnitude just from this one metric. We have seen, coming out of the Great Financial Crisis, the strength in this market where the momentum actually lasted many years. You have a high cost of homeownership, which continues to favor rental affordability, and historically low supply— that’s continuing— and of course demand catalysts. Rylan, you want to cover?
Rylan Burns (Executive Vice President and Chief Investment Officer)
Yeah, John, just to give you some more specifics: when we look at the rent-to-median-income ratios in Northern California— San Francisco, that ratio has increased with the rent growth that we’ve seen by about 150 basis points compared to a year ago. It’s currently sitting at 25.7%. This compares to the long-term average, or 20-year average, of just under 30% and a historical peak of 36% over the previous two decades. So a long way to run there. Oakland and San Jose— we’re starting to see some improvements, but these ratios in Oakland are 21%, in San Jose just under 21%, again with historical peaks in the 30% range. So affordability remains a tailwind in this market for us, and we continue to have conviction that there’s more room to run there.
John Kim (Analyst at BMO Capital Markets)
Okay, thank you. I think you hit all parts of my multi-pronged question. Wanted to ask about LA. You talked about green shoots in the market and it being stable. You kind of threw cold water in response to Alex’s questions on aerospace demand, at least seeing a near-term pickup. So what are some of the green shoots you’re seeing in 2027 in terms of rent growth and employment growth?
Angela Kleiman (Chief Executive Officer)
Yeah, well, first of all, we don’t have enough visibility when it comes to employment growth because LA is a reflection of the broad U.S. economy. It does have more professional services, so that is a good stable that essentially supports the overall LA market. We do have, of course, supply continuing to decline, so that in itself will signal that you just don’t need as much job growth to generate rent growth— so that’s another thing that’s good.
As far as my comment on the defense industry— and obviously I didn’t mean to throw cold water on Alex; he makes a good point— I do think that it’s a catalyst, it’s a future catalyst. My comment only relates to timing, which is we really don’t know. We know it’s coming; we just don’t know when. And it’s the same question I got about Northern California two years ago when everybody was asking, when is it going to happen? Our view was, well, we see something happening.
We couldn’t pinpoint exactly when. So it’s a similar thought process.
OPERATOR
Our next question is from Adam Kramer with Morgan Stanley.
Adam Kramer (Analyst at Morgan Stanley)
Hey, great, thanks for the time. Wanted to ask about same-store expense growth in the quarter. Seattle was a bit elevated, maybe relative to the other markets and relative to expectations. So just wondering if there’s anything in there to call out, and then maybe just how to think about that specific market going forward within the context of your guidance.
Barb Pak (Executive Vice President and Chief Financial Officer)
Hi Adam, it’s Barb. No, nothing specific to call out. There was a little bit more controllable expense spend in the quarter versus a year ago, so that led to a little bit more elevated year-over-year growth. And then property taxes obviously go up there more than in Southern California and Northern California, so that also led to a little bit elevated. But I think it’s timing related on the controllable expense spend. So I don’t see anything unusual in that market that would lead to higher expense growth, all else being equal, than the other markets going forward.
Adam Kramer (Analyst at Morgan Stanley)
Okay, great. And then maybe a little bit of a bigger picture one. I know we’ve talked a little bit about A and D sort of industry and what that can mean for broader SoCal. Maybe just, you know, for the Northeasterners on the call here, myself included, just maybe by submarket or sort of however you want to slice it, just what are the regions, areas that you think are seeing this benefit or are seeing this benefit right now? And then maybe just talk about your exposure to those specific submarkets that are benefiting from the A and B spend here.
Angela Kleiman (Chief Executive Officer)
Yeah. Hey Adam, it’s mostly concentrated in the South Bay. So I talked about Anduril having a headquarter in Long Beach and of course SpaceX in Hawthorne. But those are kind of the two bookends, if you will, and then everything else, there’s quite a few. I think we have a map in one of our presentations recently, which we can send to you after the call so you can get a good visual. So it’s really broader South Bay, which is good. That’s a widespread footprint.
OPERATOR
Our next question is from Rich Hightower with Barclays.
Rich Hightower (Analyst at Barclays)
Hey guys, good morning out there. So obviously we’ve talked a lot about the strength in NorCal specifically, but I’m wondering, could you walk us through maybe different submarkets where you’re bumping up against some of the AB 1482 limits in California, and then also add to that maybe where your loss to lease sits currently?
Barb Pak (Executive Vice President and Chief Financial Officer)
Yes, happy to go through that. So in the Bay Area, definitely San Francisco is bumping up against that AB 1482, and San Mateo, of course. Parts of Alameda are starting to get close, but not quite there yet. And San Jose is also up there. So I would say most of the markets other than, of course, the East Bay, which is why we’re excited about our investments there. As far as loss to lease, I have that. Okay, so loss to lease in September this year is sitting at about 1.4%, leading the charge is, of course, Northern California, close to 8. And just for context, much better than same time last year. Last year we were actually 30 basis points gain to lease. So hopefully that gives you a good reference point.
Rich Hightower (Analyst at Barclays)
That’s great. Very helpful, I guess. Secondly, so that’s all good news, I guess. In terms of maybe cautious news, is there anything kind of in the upcoming, you know, Louisiana mayoral race or other statewide, you know, ballot initiatives? I’m thinking of the California wealth tax. I mean, is there anything on your radar that you’re strategically planning ahead for if something goes the wrong way there?
Angela Kleiman (Chief Executive Officer)
Yeah, that’s a good question. It’s really hard to anticipate where the legislation is moving toward. And so, you know, we continue to run our business as we’ve always done in the past 32 years in terms of just focusing, optimizing our revenues and in our capital allocation strategy. As far as the LA mayor race, from our observations, it’s a really tight race. Karen Bass has received support from major players like Rick Caruso and the LA Police Union, while Raman has gained traction due to frustrations with legacy administration. So it’s hard to see where things are going to land. I do think that there’s been a recognition that we have a housing shortage, and there’s been certainly a focus on how to work with housing providers, and I’m hoping that’ll continue.
Where I’ve seen recent legislation that’s been proposed that has an onerous anti-business component to it, they have not passed committee. So that’s a good sign that the legislatures at least have some understanding of what’s important to voters. And having a healthy economy is important. And so we’re hoping that that trend toward moderation will continue. And as far as the governor’s race so far, Becerra, from his campaign, seems to understand once again the importance of partnering with private businesses and focusing on addressing housing shortage. And there’s not a whole lot of noise coming from his camp about rent control because I think they’re aware that that is just so ineffective and it actually discourages housing production. And so they’ve been focusing on measures to hopefully produce more affordable housing, which is great for the overall economy.
OPERATOR
Our next question is from Amy Proband with UBS.
Amy Proband (Analyst at UBS)
Hi, thanks. To start, maybe another follow-up to some of the previous questions on Northern California. How should we be thinking about tailwinds to blends in Northern California as we move into 2027? Could there be some opportunities on the renewal side as you bring your existing residents up to market rate? So just thinking about where we are currently in terms of new lease growth compared with renewal growth and if, all else equal, that creates a built-in tailwind on the renewal side for next year.
Angela Kleiman (Chief Executive Officer)
Well, I think, you know, probably a good indication is if you look at our earn-in this year of 150 basis points, and the majority of that is Northern California. So we have a good head start to the year on Northern California. And the renewals were capped at AB 1482, which is inflation plus 5%, max at 10. And so there is still some, you know, there’s still some room there, or I should say some tailwind there. On the new lease side, you just take the rent to market, so the new leases are not capped.
The question really is how long does it take to capture the new lease rates. And so a perfect example is if market rent growth is growing at 15 and a tenant can stay in place where the rent is capped at 10, the tenant is more likely to just remain. And so that ability to capture the 15% will just be a little more prolonged. But as far as I’m concerned, that’s all good for us. Keep in mind, Essex Property Trust historically has operated with our self-imposed 10% cap because we did not believe in anti-gouging either, and we’ve done just fine in those environments.
Amy Proband (Analyst at UBS)
Great, thanks. And then in terms of the same-store revenue guidance build-up, what are you including in terms of occupancy and non-rental revenues? Were there any changes within, outside of blend, within your updated guidance?
Barb Pak (Executive Vice President and Chief Financial Officer)
Hi Amy, it’s Barb. No, the update for same-store revenues—the increase is 100% driven by scheduled rent growth. Just top line.
Amy Proband (Analyst at UBS)
Great, thank you.
OPERATOR
Our next question is from Wes Golladay with Baird.
Wes Golladay (Analyst at Baird)
Hey, good morning everyone. Over the last few years you made a point to allocate capital to Northern California. Can you talk about what drove the decision to sell a relatively new asset in San Jose? And did you consider buying your partner’s interest?
Rylan Burns (Executive Vice President and Chief Investment Officer)
Hey Wes, this is Rylan here. Yes, this was a joint venture asset as you mentioned, and again we thought we got a fairly good value for that asset. There’s been a lot of people that have been looking to allocate capital into Northern California over the past year. We did have a discussion about potentially buying this out, but as I alluded to more recently, the recent acquisition in Hayward we felt provided a better risk-adjusted return. So, you know, this remains an ongoing discussion in all of our joint venture assets.
We do think we have an inside track there if we want to buy some of these assets. But again, with finite amount of capital, we’re looking to allocate to the best risk-adjusted returns. And in this instance, selling this asset and redeploying into the East Bay made more sense for us.
Wes Golladay (Analyst at Baird)
That’s all for me. Thank you.
OPERATOR
Our next question is from Julian Bluein with Goldman Sachs.
Julian Bluein (Analyst at Goldman Sachs)
Yeah, thank you for taking the question. I just want to ask about your supply outlook into next year. I think some of the third-party data suggests we could see an increase in supply in 27. I think permitting is up from the bottom a couple years ago. So I was just wondering, I think on page S16 you show supply coming down. Are you sort of factoring in delays? Is there something else playing into that view?
Rylan Burns (Executive Vice President and Chief Investment Officer)
Hey Julian, this is Rylan here. Yeah, this is something we’ve discussed for many, many years—the differences between our supply forecasts, which account for delays, as well as the actual lease-up pace of buildings in a more likely manner. So we have high conviction, high-level numbers. We think supply is coming down around 20% in our markets versus next year, and we have pretty good conviction about what that supply number is going to look like. So I would continue to look at our supply numbers and one of the reasons why we’re incrementally more optimistic about our markets next year. Was there a second part to the question?
Julian Bluein (Analyst at Goldman Sachs)
No, that was it. And then my second question is around—I appreciate the comments around, you know, the mid 4s renewals stepping down in the third quarter being a bit a function of prioritizing occupancy. But I was just looking, I don’t think we’ve seen a deceleration in renewals from 3Q to 4Q over the last few years. Is there something different this time around, or is it more just a function of how strong that third quarter renewal was? And any specific market showing a bigger sequential step down in renewals?
Angela Kleiman (Chief Executive Officer)
Yeah, we certainly had a very strong third quarter renewal, which obviously, as you astutely noted, makes it look like there’s a big deceleration. But obviously that’s not the case. In terms of the composition of the renewals, Northern California, of course, is hitting much higher, kind of in the 8% range, as you would expect, close to that AB 1482 cap. And then Southern California is hovering around the 2–3s and Seattle somewhere in the 3 to 4. So that averages to our renewals achieved at close to 4.5%. But once again, these are all normal numbers and we’re not seeing any cracks.
OPERATOR
Our next question is from John Pawlowski with Green Street.
John Pawlowski (Analyst at Green Street)
Hey, thanks. Good morning. I have two questions on LA. The first is on operating fundamentals. Angela, I think you used the characterization as stable. I guess I don’t see the stability in the revenue growth trend. And so you started the year 1Q year-over-year revenue growth of 1.7 and decelerated to 50 basis points year over year in 3Q. Despite easy comps, sequential revenue is pretty weak. So what are you seeing in the portfolio that gives you confidence the LA market is stable?
Angela Kleiman (Chief Executive Officer)
Yeah, we’re seeing a couple of things. The delinquency in LA has remained stable and it’s going to ebb and flow in terms of getting back to that normalized run rate. But when we look at occupancy, it’s been hovering around that gross occupancy, around that mid-95%. Once again, that’s a good sign. If there are cracks, you would see the occupancy fall right away. But ultimately, if you look at sequential revenues, LA County, which is on our S9, it’s not great, but it’s still an improvement.
Ten basis points sequential revenue improvement in LA County—I’ll take it. So I’m not seeing a meaningful backslide. I’m just seeing either stable or slight improvement. And if I look at year-to-date numbers on a revenue perspective for LA County, once again it’s up 1%. So I don’t want to get too caught up on quarter-to-quarter noise, but once you look at all the metrics, it points to a stable environment.
John Pawlowski (Analyst at Green Street)
Okay, second question is on the transaction market in LA. It’s obviously not a loved market from capital providers right now. Rylan, I’m curious for more urban submarkets, high-rise product, where you think kind of market clearing rates are for urban high-rise Los Angeles apartments these days?
Rylan Burns (Executive Vice President and Chief Investment Officer)
Hey John, we have not seen a ton of transactions. I think you’re asking particularly about downtown LA and high rise. I don’t disagree with you. That’s been, given the vacancy in that specific submarket and some of the operating challenges we’ve seen in recent years. That is a tougher ask and relatively not well bid. I hesitate to put a specific cap rate out there. We do think there is a market-clearing transaction. It’s probably closer to a positive leverage number, but haven’t seen enough transactions to give you a real pinpoint on where that cap rate would transact today.
John Pawlowski (Analyst at Green Street)
Okay, thanks for the time.
OPERATOR
Our next question is from Haendel St. Juste with Mizuho Securities.
Haendel St. Juste (Analyst at Mizuho Securities)
Yes, thank you. So wanted to go back, I think it was an earlier question that Yana asked on the MEZ book. I guess I’m curious if there’s been any rethink in the MEZ book strategy. I think you mentioned on a prior call or two that you had a target sizing for the book of 100 million by year-end. Looks like you added a small loan at some point during the quarter. So I guess is the newer, higher-rate environment causing a rethink? I’m curious if that book could be larger or smaller over the next year.
Rylan Burns (Executive Vice President and Chief Investment Officer)
Hey Haendel, this is Rylan here. As we said for the past couple of years, we wanted to normalize the size of this portfolio relative to our business. So it has grown considerably and it’s going to be, as you said, 100 million at the end of this year. We’re just being really, really diligent as it relates to incremental investments within this pref book. They have to offer significantly better risk-adjusted returns than several of the other options we have to allocate capital, which I mentioned earlier.
I do think with the move in rates and the tightening a little bit on the financing market, this should create some more opportunities. The other factor that’s happened in the past few years, with development starts coming down considerably on the West Coast, that’s historically been a good engine for the preferred equity book. I don’t envision that changing going forward, but I do think you might see some more opportunities on stabilized assets if the financing market remains somewhat tight over the next few years.
So it is something we continue to engage with sponsors on and we will continue to look for good opportunities where we’re getting compensated for that risk.
Haendel St. Juste (Analyst at Mizuho Securities)
Thank you, Rylan. That certainly helps. Angela, maybe if I could ask you just maybe a bigger-picture question on kind of the growth profile for Essex Property Trust here over the intermediate term. San Francisco has been such a strong market the last year, should be strong next year as well, but the comps are getting a little more difficult. Sounds like Seattle and LA are moderating and it sounds like there’s some green shoots of optimism, but certainly feels like the core is slowing, and then there’s higher interest expense that you’re dealing with.
The West Coast JV and the MEZ book being a bit smaller is less additive. So how do we—maybe are there other offsets that perhaps we’re not considering? But how do we kind of put this all together and think about the growth profile for Essex Property Trust over the next year or so? It certainly doesn’t sound like there’s an acceleration kind of story ahead of us in the near term.
Angela Kleiman (Chief Executive Officer)
Hey, Haendel, you know, I think this is a complicated question in terms of what’s going to happen next year and when acceleration can occur. Obviously Northern California and what’s happening there, that’s clear to everybody on what the potential is and that momentum that’s continuing. As far as Seattle and LA, a growth profile, we do see that there’s more upside than downside as far as relative to past performances, because it’s, you know, Seattle has had a tough start to the year but we’ve seen it turn positive and LA has remained stable with a potential demand catalyst in the aero-defense industry.
And in both markets, supplies are continuing to decline. So if nothing happens between—or if I should say if conditions remain the same between this year and next year, our fundamentals are slightly better just from the supply picture and some potential demand catalysts there. Now that’s a top-line conversation, right? And the question is, well, when are you going to see acceleration? I think that relates to the view on the broader economy. And so when we look at third-party forecasts, we’re not seeing anything that’s all that different than kind of more of the same. But it’s also too early to predict because we don’t know what the results of the midterm election is going to be, so hard to say. But I would go back to the West Coast—we have a bull case.
There is a path to that growth. Timing is difficult to predict, but I will point back once again to what happened not too long ago. Coming out of the Great Recession, we had five-plus years of acceleration, and so certainly it’s possible and there’s a path to that. As far as bottom line, you know, that interest-rate expense pressure, I think that is not an Essex Property Trust situation. That is not just all REITs, it’s really all companies are going to be faced with that headwind. And so I don’t think that in itself is a callout for the West Coast story.
OPERATOR
Thank you. Our last question is from Alex Kim with Delmen and Associates.
Alex Kim (Analyst at Delmen and Associates)
Hey, morning out there. Thanks for taking my question. Rylan, I know earlier this year you mentioned that the South Linden project was trending favorably relative to your initial underwriting, with an expected stabilized yield around 6%. Given the continued strength in Northern California rents, is that yield expectation improving? And are you guys getting any closer to moving forward with the other development in Mountain View that you discussed in September?
Rylan Burns (Executive Vice President and Chief Investment Officer)
Alex, thanks for the question. Yes, you know, as you’ve seen the rent growth up and down the Peninsula, through San Francisco and through San Mateo, South San Francisco is also benefiting. So again, the yields continue to improve on our underwriting costs. Thankfully, we’re doing a great job managing that project, and we’re hoping to deliver it ahead of schedule. So more to come in the next couple of quarters as we continue to make progress. But everything’s going to plan on the 7 South Linden project, and then we are making headway on the entitlement process as it relates to the Middlefield project.
So we’ll probably have more to report on that in the next coming quarters. But again, looking for those select opportunities where we think we’re getting compensated for the risk-taking inherent in development. So excited about both those projects, and we continue to look for new opportunities to add value through our development pipeline.
Alex Kim (Analyst at Delmen and Associates)
Got it. Thanks. And Angela, staying on Northern California, could you talk a little bit about the differences you’re seeing in rent growth between urban San Francisco and more suburban markets across the Bay Area? Are you seeing a more meaningful divergence in new lease pricing or demand between those areas? And is one outperforming the other as we head into 2027?
Angela Kleiman (Chief Executive Officer)
Hey, Alex, good question. On the Northern California rent growth, if we look at the blends, you know, there’s, of course, some divergence, as you would expect. We see, let’s see, Santa Clara, San Mateo, and San Francisco counties outperforming, and they’re closer to, you know, on the blends in Northern California, they are running much higher. They’re closer to, say, above 7%. And with Alameda and Contra Costa—so the East Bay market—lagging at about 5.5%.
So that gives you an indication of kind of that, probably about, say, call it 300-basis-point spread between those two key areas. And so this is why we are leaning in on our East Bay thesis, because we’ve seen this all before.
OPERATOR
Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you again for your participation.
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