Michael Schall
President & Chief Executive Officer at Essex Property Trust
Thank you for joining us today and welcome to our second quarter earnings conference call. Angela Kleiman and Barb Pak will follow me with prepared remarks and Adam Berry is here for Q&A. I will start with a summary of our second quarter results and then highlight the strong underlying momentum in the Essex portfolio, especially in the markets benefiting from the return-to-office programs of large tech companies and finish with a brief overview of the apartment transaction market.
We are pleased to announce our fourth consecutive quarter of improving results with core FFO up 21.1% from the same quarter last year, exceeding the high end of our guidance range and achieving the second best quarterly growth since the Company's IPO in 1994. Given our strong year-to-date results, we increased our guidance ranges for same-property revenues, NOI and core FFO for a third time in 2022 which Barb will discuss further in her commentary.
Beginning with operating fundamentals, net effective rents for new leases are now 16% above pre-COVID levels and 20.6% higher year-over-year compared to the second quarter of 2021. Job growth remains robust at 5.6% for June year-over-year, substantially outperforming the U.S. and reflecting the ongoing recovery from the massive COVID-related job losses in 2020.
Page S17.1 of our earnings supplement demonstrates the surge in rents in the tech markets of Northern California and Seattle, the largest and last markets in our portfolio to fully recover from the pandemic. Net effective rents have increased between 18% and 20% year-to-date, reflecting momentum from return-to-office programs and very strong job growth.
Fundamental research from our data analytics team indicates job openings at the largest technology companies have moderated recently off the very high levels throughout the pandemic, with job openings now about 15% above pre-COVID levels compared to about 77% last quarter. Unlike other industries within our markets, the tech sector was better positioned to pivot to hybrid work in response to the pandemic and accelerated hiring. As a result, labor demand for the most highly skilled workers at the large technology companies remained solid, implying job formation in excess of the number of recently announced layoffs in our markets which we highlight on page S17.2 of our earnings supplement.
Given the focus on tech layoffs recently, it's relevant to note the definition of what constitutes a tech company has broadened to include businesses that have digitized a variety of analog processes and thereby represent a much broader umbrella of organizations not necessarily located in the Bay Area, including Peloton fitness offerings, Carvana's auto sales process and mortgage companies like Better.com. Likewise, the venture capital slowdown is now impacting companies across many industries and geographies, consistent with this broader scope. Conversely, it's the largest tech companies that drive employment in our North Cal and Seattle markets and they are more insulated from capital market fluctuations, given their growth opportunities and extraordinary financial strength.
Rounding out the overall employment picture in Northern California, we continue to see a recovery of jobs that were eliminated during the pandemic. COVID-related regulations were so stringent that much of the local surface economy workforce had to be fundamentally rebuilt. For example, the Essex markets added 420,000 relatively low paying jobs on a trailing three-month basis, including a 20% to 25% increase in the leisure and hospitality sector which supports returning tech workers and their demand for services.
Our commentary usually focuses on high-paying jobs but the service jobs are also important because most of their employees need to report to a physical location each day and they support the ecosystem that creates livable and desirable communities. The strong demand for housing is supported by apartment affordability in our Northern California markets which has improved sharply relative to long-term averages, reflecting a higher growth rate for median incomes relative to median rents.
From a historical perspective, these markets screen affordable for the first time in the last decade and rental housing is significantly more affordable versus home ownership. The value of the median-priced home in California is up about 13% year-over-year and with higher mortgage interest rates, apartments are clearly the more affordable option. We estimate that it is now over 2 times more expensive to buy than rent in the Essex markets.
Affordability trends will be impacted by the apartment supply picture of moderated deliveries in the second half of 2022 and a further decline expected in 2023. Sharply lower rents in Northern California during the pandemic resulted in fewer apartment starts in 2020 and 2021 and therefore, a significant drop in new Bay Area apartment deliveries into 2023. Production levels of for-sale housing is also muted on the West Coast with only about 0.4% of existing stock being built annually and production is difficult to increase given zoning restrictions and land availability.
Looking ahead, we recognize that the Federal Reserve is working to fight inflation which often leads to a recession. Our experience indicates that no two recessions are alike and clearly, the current situation is unique given West Coast remains in a recovery mode from the pandemic. Given this backdrop, we believe that the following factors will help moderate the impact to the West Coast rental markets in the event that economic conditions deteriorate later this year.
First, large technology companies significantly accelerated hiring during the pandemic, largely because there were beneficiaries of the pandemic-driven preference for touchless interaction. Many newly hired employees were asked to work remotely until offices reopened which is now occurring and is a key component of our recent market rent growth in Seattle and the Bay Area.
Second, we have extremely tight labor markets and strong job growth on the West Coast, a significant portion of which relates to the recovery of jobs lost in the early part of the pandemic. Recovery of jobs, especially in leisure, hospitality and service sectors has been resilient and should continue for the foreseeable future.
Third, the normal migration pattern from the West Coast includes workers' approaching retirement who plan to lower their cost of living and use the equity in their homes as part of their retirement plan. We believe that most of these workers left during the pandemic given California's extraordinary lockdowns and therefore, it's likely that retirement-related migration will be muted for at least a few more years.
Finally, foreign immigration was significantly slowed throughout the pandemic. In recent months, new visas for foreign workers are increasing with the large tech companies being a primary beneficiary, restoring an important source of apartment demand.
Before I turn the call over to Angela, let me quickly touch on apartment investment activity. The extraordinary uncertainty and volatility in the financial markets and higher interest rates have disrupted the apartment transaction markets, resulting in fewer closings given diverging buyer and seller expectations. We are in a period of price discovery for apartment transactions and the absence of financial distress means that buyers and sellers are not forced to transact.
Therefore, we expect fewer apartment transactions for the foreseeable future. It's difficult to pinpoint cap rates in this environment, although limited recent activity indicates cap rates in the high 3% range to low 4% range. We have seen an increase in apartment development activity that was decimated in the pandemic, driven by the strong rent recovery in suburban areas which should lead to more preferred equity investments going forward.
With that, I will turn the call over to Angela Kleiman.
