Michael Schall
President and Chief Executive Officer at Essex Property Trust
Thank you for joining us today, and welcome to our First Quarter Earnings Conference Call. Angela Kleiman and Barb Pak will follow me with prepared remarks, and Adam Berry is here for Q&A.
Today, I will comment on our first quarter results, recent housing demand and supply trends, in a brief overview of the apartment transaction market. We are pleased to announce our fourth consecutive quarter of improving core FFO per share and same-store revenue growth, with this quarter's core FFO exceeding our guidance midpoint by $0.07 per share. As mentioned in our earnings release, our results in rent growth trajectory support an increase in core FFO in same property revenue guidance for the year, which Barb will review shortly.
Overall, rents have continued to improve, and, as of April 2022, net effective rents in the Essex markets are now 11.4% above pre-COVID rent levels and up 22% compared to one year ago. All of our markets have a positive sequential rent growth, with Northern California leading the portfolio, improving sequentially by approximately 3% in each month of the first quarter. We expect further improvement in Northern California as progress is made on return-to-office programs for the large technology companies, following several COVID-related delays.
The top tech companies also continue to hire rapidly in the Essex markets, with over 50,000 job openings posted for California and Washington, a 79% increase compared to March of 2020. Other indicators, including job growth, venture capital deployment, and office investment, continue to support our thesis that Northern California will remain the epicenter of the technology industries. A significant recent example came from Google, which announced a plan to invest more than $3.5 billion on additional office and data centers at Mountain View, Downtown San Jose and elsewhere across the Bay Area.
The easing of COVID-related regulation has been pivotal for return-to-office in our markets. Mask mandates have been significantly relaxed versus prior quarters, making it easier to bring employees back to the office. Business travel, in-person meetings, property tours and conferences have resumed, and we look forward to in-person investor meetings once again. As COVID-related regulations continued to subside on the West Coast, the deadline to apply for rental relief in California has now passed as of April 1st.
Government sponsored rental relief has been a double-edged sword for California apartment owners, as tenants were often encouraged to seek government rental relief programs rather than paying rent. Delays in government reimbursements led to the highest delinquency since the onset of the pandemic. With the rental relief program now close to new applications in California, we are now cautiously optimistic that underlying delinquency trends will improve.
California's rental assistance program remains far behind with respect to payments, providing potential upside as we continue to pursue in the approximately $76 million of rent owed to the company. Given the extraordinary government restrictions during the pandemic, it became clear that our portfolio would need to achieve two inflection points before we could be confident that a full recovery was underway. The first was the reopening of our markets which occurred in July of 2021, and the second was a return-to-office for the largest technology companies. Over the past few months, we've seen Google, Microsoft, Meta and Apple, all begin to reopen and re-staff their offices.
Our leasing specialists are reporting more applicants returning from out of state, as hybrid and similar arrangements require regular office attendance for employees. Return-to-office mandates are generating economic activities, which is apparent in the job growth reports, with San Francisco leading our portfolio with 8.9% trailing 3-month job growth. On average, the Essex markets reported job growth of 6.7% on a trailing 3-month basis versus the broader U.S. average of 4.7%, marking the second consecutive quarter that Essex markets have outpaced the nation in job growth. We expect this outperformance will continue, as FX has still only recovered 80% of the jobs compared to pre-COVID levels versus the U.S. recovery of 95%.
We expect service and hospitality-related jobs to continue a strong growth trajectory, supported by increased travel generally and demand for services from the well-paid workforce on the West Coast. The confluence of increasing job growth, a lower unemployment rate of 3.6% in the Essex markets, and expensive for-sale housing, all contribute to favorable rental housing tailwinds.
Turning to housing supply. The ability to ramp up housing production is more challenging along the West Coast, as a result of long entitlement processes, burdensome regulations, labor shortages and inflating construction cost. As a result, housing permits in Essex markets remain at levels roughly consistent with our long-term averages. Our bottoms-up supply analysis indicates that new deliveries will moderate for the rest of 2022, and we are also expecting a 15% decline in apartment supply in 2023, which includes a 54% reduction in new supply expected in Northern California. All of our markets remain on the lower end of the supply growth spectrum versus other U.S. metros.
Turning to the apartment investment markets. Geopolitical events, turbulent financial market conditions, and high levels of inflation create uncertainty, which may become a headwind for transactions. However, cap rates generally don't move quickly and are mostly a function of investor demand for property. As to the West Coast specifically, strong evidence of recovering apartment market conditions, higher inflationary growth expectations, and significant capital-pursuing apartments, appeared to have mostly offset the impact of higher interest cost, keeping cap rates unchanged at this point.
Our review of cap rates for recent apartment transactions across the Essex markets indicate most institutional quality assets trading in the mid-3% range for stabilized properties, with little deviation across markets, building class and location. We will continue to be selective with our capital allocation strategy focusing on deals that have the best growth potential and generate accretion to our financial benchmarks.
In closing, I'd like to briefly highlight the importance of ESG and its impact on the Company. As a leading provider of housing along the West Coast, we know that our Company has a responsibility to operate in an environmentally conscious way. Consistent with that thesis, we recently released our TCFD report, which is the first step toward alignment with proposed SEC reporting requirements.
Last week, we announced that Essex will co-anchor an ESG Housing Impact Fund managed by RET Ventures. Finally, we are also pleased to announce the upcoming publication of our fourth CSR report, which should be available in early May.
With that, I'll turn the call over to Angela Kleiman.
