Essex predicts return-to-work will drive Bay Area rent rebound

Apartment giant says LA eviction moratorium will hurt collections

Los Angeles /
Feb.February 03, 2022 05:24 PM
Essex Property Trust CEO Michael Schall (iStock/Illustration by Kevin Rebong for The Real Deal)
Essex Property Trust CEO Michael Schall (iStock/Illustration by Kevin Rebong for The Real Deal)

Essex Property Trust, a top West Coast apartment owner, believes Bay Area rents, which have lagged the rapidly rebounding market nationally, will jump this year. The catalyst: tech companies, which are finally poised to call workers back, the firm said.

Despite the depressed revenues Essex reported for much of Northern California in the fourth quarter, its earnings and overall rental income did improve year-over-year.

San Mateo-based Essex said funds from operations — a measure of profitability — rose to $3.25 per share in the fourth quarter, up 7.6 percent from the same period last year. Same-property revenues gained 4 percent from a year ago, hitting $330 million.

Rising rental revenues among Southern California properties almost exclusively drove that increase. North California saw revenues slip over 10 percent.

San Mateo County, which encompasses a chunk of Silicon Valley, posted the largest decline, nearly 5 percent; San Francisco was second worst, with revenue down 1.2 percent.

Essex CEO Michael Shall said the tech and service workers who skipped town during Covid have been slow to return, which has created a drag on revenue. The REIT’s markets, which encompass coastal California and Seattle, have recovered just 78 percent of jobs lost during the pandemic, below the U.S. average of 96 percent, he said.

However, the firm said tech companies are now in talks to bring employees back — at least, for part of the work week. That, along with the slew of leases companies such as Apple and Twitter have signed in the past year, are signs that the firms are not only returning to an in-office model but plan to ramp up hiring as well.

“Obviously, we are disappointed that many tech employers pushed back their office reopenings during the surge of the omicron variant,” Shall said. “However, the data indicate that most large tech employers will adopt a hybrid office environment and therefore the return to office should be a significant catalyst for housing demand in our poorest performing markets.”

Chief operating officer Angela Kleiman added that Essex has seen communications by Bay Area companies informing employees of plans to return after Covid cases subside.

“We remain encouraged by the large tech companies’ expansion plans,” Kleiman added.

In January, Twitter said it would tack on 80,000 square feet to its San Francisco headquarters, months after it leased a 66,000-square-foot office in Oakland.

And Apple recently paid $44 million for an industrial building in the Bay Area city of Sunnyvale, BisNow reported. Last May, the iPhone maker leased six buildings totaling almost 700,000 square feet there. In December, Meta took 719,000 square feet in Sunnyvale, reportedly the year’s largest private-sector lease.

Shall added that office subleases, meanwhile, have declined in the Bay Area, “which supports our belief that many companies are moving forward with return-to-office plans as expected.”

Not every tech giant is on board, though. Slack said Thursday that it would sublease over 200,000 square feet of its San Francisco office space, months after the firm’s CEO dubbed the return-to-work mandates “doomed.”

And though Essex’s Los Angeles portfolio saw rent revenue jump 9 percent in the fourth quarter from the same period in 2020, the firm cautioned that the city’s eviction moratorium and the delayed rollout of rent relief could push up delinquencies in 2022.

Barb Pack, Essex’s chief financial officer and executive vice president, said the company expects delinquencies to make up 2.4 percent of its portfolio in 2022, up from about 2.1 percent last year.

Last week, Los Angeles County voted to extend its eviction moratorium through the end of 2022, ABC reported. Essex said the protection, which insulates tenants from housing court if they’re unable to pay rent, has driven up delinquent payments.

The firm added that payouts on rent relief applications are slow, which has further pressured timely payments. Essex said it has received $29 million in rental assistance, $12 million of it in the fourth quarter.

“With our long history of high collections, we believe we can ultimately return to that level once the various restrictions are listed,” Pack said.





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