California-based REIT Essex Property Trust reported an improvement in funds from operation in the fourth quarter of 2020, but the firm still saw big losses, largely driven by rent concessions.
Funds from operation were down about 7 percent in 2020, but net income increased 30 percent, boosted by the sale of four apartment complexes for a total of $343.5 million.
The REIT, which owns 60,000 apartments, said that rent concessions accounted for a little less than half of the $313 million decline in same-property revenues for the fourth quarter, compared to the same period in 2019. For the year, same-property revenue is down nearly four percent.
Essex officials emphasized that they have prioritized keeping apartments rented rather than keeping rents at pre-Covid levels. With the peeling back of the eviction moratorium by the end of June, Essex expects that the rent concessions will also moderate.
For now, the loss to lease figure — the difference between a unit’s market-rate rent and what it’s currently renting for — in the firm’s northern California portfolio reveals how much of a hit rents have taken due to Covid. In those holdings, the Covid discount has ballooned to 8 percent. Revenues in northern California declined more than 10 percent in the fourth quarter compared to 2019.
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The portfolio benefited from a relatively low vacancy rate, with 96 percent of its apartments occupied. Much of the portfolio is concentrated in suburban areas, not the densely populated urban centers that residents fled when the pandemic hit. Vacancies in the portfolio accounted for just half a percent of the revenue losses.
The largest declines were in San Francisco, where gross revenue was down 17 percent compared to the same period in 2019. Los Angeles County also saw double-digit declines, with revenue down 13 percent year-over-year.
Ventura, San Diego and Orange counties fared better, with revenue declining 1.3 percent, 1.4 percent and 3.5 percent, respectively.
Michael Schall, the REIT’s CEO, said that in sharp contrast to other recessions, southern California’s performance has been more volatile, due to job losses in the entertainment industry and technology sector. But while San Francisco rents have dropped — thanks, in part, to the tech workers who decamped to places like Seattle, Austin and Sacramento — those who previously could not afford to live there have “backfilled” the empty, now more affordable units, Schall said.
“When rents are hammered in the cities, it changes the perspective of potential renters,” Schall said. “Longer-term, you’re going to see a significant movement back toward high-quality cities where rents are more affordable.”
Schall also explained that the change in the presidential administration, and President Joe Biden’s more lenient approach to foreign work visas, may give the technology sector a boost and help Essex recover to pre-Covid occupancy and rent levels.
“Tech CEOs have indicated they need to draw on the best and brightest around the world,” said Schall, but struggled to do so because of the previous administration’s policy to not grant work visas to spouses of foreign workers. “I expect the Biden agency will open up the immigration process, in addition to not building more walls.”