Michael Schall
President and Chief Executive Officer at Essex Property Trust
Good morning, and welcome to our fourth quarter earnings conference call. Angela Kleiman and Barb Pak will follow me with comments, and Adam Berry is here for Q&A. Today, I will touch briefly on our full year results, expectations for 2023 and why we believe that our West Coast rental markets are positioned to outperform over the next several years. I will conclude with comments on the transaction market and the upcoming CEO transition.
Overall, 2022 was a positive year for Essex as we generated full year core FFO per share growth of 16.2%, our highest year-over-year increase in a decade and 9.3% above pre-COVID levels. We attribute these strong results to relentless execution by the Essex team, improved efficiencies from the implementation of our property collections model and the strong recovery in our West Coast markets for the better part of the year.
Our positive results were achieved despite the challenges associated with COVID-19 regulations in our markets. Our near-term results will remain impacted by elevated delinquency, which we estimate will represent a $0.60 per share drag on FFO in 2023 compared to our pre-COVID levels of delinquency.
Notwithstanding the impact of delinquency in 2023, we believe we are entering the final phase of these challenges and that our COVID-related headwinds will be behind us in 2024. For 2023, we reaffirm our 2% market rent growth expectation across the Essex markets as shown on Page S-17 of the supplemental package, which is predicated on consensus assumptions for a slowdown in the U.S. economy driven by higher interest rates.
Macroeconomic visibility is limited by a variety of factors, which translates into a wider-than-normal range of potential outcomes this year. Recent economic data highlights continued resiliency in the labor market with solid reports for job growth and unemployment claims even with elevated layoff announcements.
In Essex markets, preliminary job growth for December was 3.8%, and the recent unemployment rate was only 3.2%, both outperforming national averages. Looking ahead, layoff announcements and lower job openings among large tech companies signal a softer employment outlook for 2023, which we incorporated into our forecast assumptions shown on Page S-17.
Our primary challenge since early 2020 relates to the massive layoffs that occurred as a direct result of the government's response to the pandemic, which eliminated nearly 3 million jobs in California alone and force people out of densely populated areas in search of work. It has taken over 2 years to recover those jobs lost during the pandemic, and I'm pleased to say that the Essex markets have now fully recovered those losses. It is notable that each of the 8 major metros in the Essex portfolio have now recovered from 98.8% to 100.9% of the jobs lost in the early part of the pandemic, leading us to believe that most of the slack in the housing supply-demand relationship from the pandemic no longer exists. We believe that this is a major milestone which should lead us back to our pre-pandemic growth profile once the economy stabilizes.
As with past economic slowdowns, a frequent concern involves the tech companies that dominate Northern California and Seattle with nearly daily reminders of tech layoffs amplified in the newspapers. The tech sector is often volatile yet over longer periods, the industry has reliably generated top paying jobs and wealth creation that are at the foundation of a strong rental growth.
A core strength of the tech industries is their ability to evolve in a cyclical process of reinvention, where the groundwork for new rounds of innovation are laid while the prior cycle is slowing. I am confident that this is what is occurring today.
Going back to the 1980s, Big Tech was focused on IBM PCs and R&D efforts to improve semiconductor manufacturing, and that phase ended with the recession in the early 1990s. Growth of the Internet and e-commerce soon emerged and then later boomed and busted capping the dot-com era from which many believe tech would never recover. Instead, a wave of social and mobile products emerged 20 years ago, including Facebook, YouTube and the iPad and iPhone, setting up a much larger and more profitable era of growth. Then following the Great Recession, cloud computing and machine learning added to the next period of rapid growth, both for new start-ups and for sector leaders like Amazon, Google and Microsoft.
And now despite a very similar set of concerns, many of you will have followed the explosive recent adoption of new AI products such as ChatGPT and DALLE, consistent with the transformative technologies of the past, the innovators and investors in artificial intelligence are overwhelmingly concentrated in our markets including open AI in San Francisco and Google Brain and Mountain View.
And despite a broad BC slowdown last year, funding for AI increased 70% and is now poised to grow vastly more in 2023. In a recent search of the leaving 100 start-ups in artificial intelligence, we found that more are headquartered in the Bay Area than in the entire rest of the United States. Thus, it is a combination of entrepreneurial spirit, financial capital and technical talent down on the West Coast as well as housing supply constraints that drives our expectation for the West Coast to generate superior rent growth over the long term.
Turning to the apartment investment markets. We continue to see muted deal volume in our West Coast markets as buyers and sellers seek to compromise on their expectations for property values and yields. A relatively small number of apartment sales indicate that property values and cap rates have not changed materially since last quarter, and cap rates generally are in the mid- to high 4% range for high-quality suburban apartments. At this point, we've seen pockets of distress mostly focused on owners subject to variable rate debt and maturing short-term loans. It's possible that an extended period of elevated interest rates and slower rent growth could create new opportunities to generate FFO and NAV per share. We sold one property in the fourth quarter, and we are working on other potential sales.
In conclusion, assuming my math is correct, this is my 115th consecutive conference call on behalf of Essex, which will be my last given my pending retirement as CEO at the end of March. I am incredibly grateful for the opportunity to be part of the highly skilled, disciplined and focused leadership team for this great company. I'm taking a step back with full confidence in Angela's ability to lead the company along with her determined and like-minded team. Thank you all.
Finally, I have enjoyed working with so many of you in the investment community, and I thank you for your trust and support over many years. I remain confident that many great years for the company are on the horizon.
With that, I'll turn the call over to Angela Kleiman.
