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Good day, and welcome to the Equity Residential 3Q Earnings Conference Call. At this time, I'd like to turn the conference over to Mr. Marty McKenna. Please go ahead, sir.
Thank you, Jonathan. Good morning, and thank you for joining us to discuss Equity Residential's third quarter 2018 operating results. Our featured speakers today are David Neithercut, our CEO; Michael Manelis, our Chief Operating Officer; Mark Parrell, our President; and Bob Garechana, our Chief Financial Officer.
Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.
And now, I'll turn the call over to David Neithercut.
Thank you, Marty, and good morning, everyone. Thanks for joining us for today's call. As we reported in last night’s earnings release with the primary leasing season in the rear view mirror, we’re pleased to now expect to deliver same store revenue growth for the full year of 2.3%, which is at the very top of the guidance range we provided on most recent earnings call in late July.
Achieving this level of growth is the result of a couple of primary drivers, the continued strong demand across the board for rental housing and the relentless attention to customers' service delivery each and every day by our outstanding property management teams. These two factors combined to maintain very high levels of occupancy, record setting resident retention and very strong renewal rates, all despite elevated levels of new supply across our markets. We could not be more proud of our teams across the country for the outstanding jobs they do, making living with equity a remarkable experience with each and every one of our residents.
I'll now ask our Chief Operating Officer, Michael Manelis, to go into greater detail on what we are seeing across our markets today.
Okay. Thank you, David. So let me being with a huge shout out to our onsite teams. The third quarter represents our busiest activity period with just over one third of the entire year's renewal and new leases taking place. The team's performance and relentless focus on delivering remarkable experiences to our residents delivered outstanding results for the quarter. With just over 24,000 transactions completed during the third quarter, we achieved a 5.1% increase on renewals, and a 1.2% increase on new leases signed. This, along with maintaining our occupancy at 96.2%, has delivered third quarter revenue growth of 2.3%, which as David said, now gives us the confidence that our full-year 2018 revenue growth will be 2.3%, which is the top of our previous reported range.
I would also like to highlight that the 16.4% turnover for the quarter is the lowest third quarter turnover reported in the history of our company. We renewed just over 500 more residents in the third quarter of '18 versus the third quarter of '17 with roughly the same number of explorations in each period.
During the third quarter, we also achieved our highest recorded resident satisfaction scores. Service related surveys completed in the third quarter, came in with an average rating of 4.8 out of 5, and year-to-date, we have increased our all-time high online reputation scores with both Google and Yahoo. Both of these are by far the most important customer review platforms to our prospects.
Bottom line is that service and leasing teams have been focused on delivering remarkable experiences and their efforts are paying off. Before I move to specific market commentary, I would like to start by saying that the overall trends we discussed last quarter has continued. Our average resident tenure, currently at 2.2 years, continues to grow, as a result of our exceptional renewal process rate service and the macro trends of millennial differing life change events like marriage, children, and buying homes.
For on-demand fueled by good job growth and record low levels of unemployment in our market has aided in the absorption of the elevated supply. So let's start with Boston. Full-year revenue growth expectations of 2.4% is slightly above the expectations we shared with you on our second quarter call, primarily due to strong replacement growth, which has continued into October and stronger renewal increases. This performance happened at the same time that the majority of the 2018 new supply was delivered in the urban core, and went head to head with most of our NOI. Our revised assumptions for 2018 include occupancy at 95.8%, a negative 0.8% on new lease change and achieve renewal increases of 4.9%. Deliveries will be like the urban core over the next year, which should continue to bring modest pricing power to the market.
Moving to New York, our current expectation for full year revenue growth has improved to 70 basis points. This is 50 basis points higher than the expectations we shared with you on our last call. This outperformance is a large contributor to us achieving the high end of our overall company's same store revenue guidance.
Our full year assumptions for New York include occupancy at 96.5%, a negative 2.2% new lease change, and achieved renewal increases of 3%. Concession used in our portfolio remains extremely targeted and is well below both last year and all expectations throughout the year.
During the third quarter, we had moving concessions being issued to less than10% of our total applications in New York. This resulted in only $260,000 in concessions in the quarter as compared to 830,000 in the third quarter of 2017. 2019 deliveries will be significantly lower than '18 with more than a 50% decline expected. The deliveries will continue to be concentrated in Long Island City and Brooklyn where to date we have not seen a significant impact to our operations. In fact, our base rents in New York today remains strong and sitting here in the last week of October they have not yet started their normal seasonal decline.
As we think about DC, there is not much news to report. Positive economic conditions continued to aid the absorption of new supply, but the overall market continues to demonstrate very little pricing power. We have no change to our full-year expectations of 1.2% revenue growth. Our assumptions include full year occupancy at 96.2%, our new lease change of negative 2.1, and an achieved renewal increase of 4.2%. 2019 will mark another year of elevated supply with just over 12,000 units expected.
Moving over to the West Coast, Seattle is expected to deliver 3% revenue growth for the full year, which is in line with the guidance we issued in July. Our full year assumptions for Seattle include occupancy at 95.7, a negative 1.8 new lease change, and achieved renewal increases of 5.7%. Seattle supply is expected to slightly increase next year to just over 8,000 units. As a CBD where we have approximately 40% of our NOI should experience some relief in 2019 as the concentration of the supply shift to the Bellevue Redmond submarket, where we have 24% of our NOI.
On the previous calls, I mentioned the outperformance of the San Francisco market being a contributor to the upward revision of our revenue guidance. Not much has changed. We expect full year revenue growth to be 2.9%, which is consistent with our July call. Our full year assumptions for San Francisco include 96% occupancy, a positive 0.3% new lease change, and 4.9% achieved renewal increase.
Looking at the overall market, the tech companies continued to grow, and the Bay Area is on track to surpass the 10 year high of 35 IPOs that was set back in 2014. There continues to be daily announcements highlighting the expansion of companies in this market. Office vacancies continued to move lower, and all of this should support positive fundamentals in our space. The deliveries for 2019 in San Francisco are expected to increase by about 2,500 units to 9,500 with over 40% concentrated in Oakland and East Bay submarkets. At this point, it is still unclear exactly what the impact from the Oakland delivery will be, sort of like the Long Island City situation on Manhattan, although this will have considerably fewer units coming online.
Moving down to Los Angeles, we expect full-year revenue growth to be 3.6%, which is up 20 basis points from our July guidance. Our full-year assumptions are 96.2% occupancy, 6.1% achieved renewal increase and 1.4% new lease change. Construction in the market continues to face labor shortage issues, which has pushed 2,000 units from 2018 into 2019. We now have 2018 showing just over to 9,600 units and 14,200 units being completed in 2019.
It is likely that we will see some of these expected 2019 deliveries we pushed into 2020. That being said, the combined 24,000 units over the two year period has not changed and this total has spread out over a huge geographical region. Remember, we tend to feel the impact from new supplies when it is delivered in a concentrated fashion in direct competition to our assets. For example, in 2019, our San Fernando Valley portfolio will have exposure to new supply for the first time in a while, but that new supply will have very little direct impact on our West L.A. portfolio, which is many miles away. Regardless, the overall market in L.A. continues to demonstrate strong demand, which should continue to aid the overall absorption.
Moving to Orange County, our full-year revenue expectation has modestly increased 10 basis points to 3.6%. This is tied with L.A. for our second highest revenue growth market for the year. Our full-year assumptions have occupancy at 96%, achieved renewal increases of 5.5% and 0.3% new lease change. 2019 outlook for deliveries is about 500 fewer units at just over 3,500 units expected.
And last but not least, San Diego. Our full-year revenue expectations remain unchanged at 8%. This will be our highest revenue growth market for the year. Our full-year assumptions have occupancy at 96.2%, achieved renewal increases of 5.9%, and 1.6% new lease space. 2019 outlook for deliveries is about 700 fewer units at just over 3,000 units expected.
So now, let me close with some color on 2019. While we are not issuing guidance at this point, nor will I'd be sharing any specific numbers at the market level, I do want to share some general thoughts on our guidance process and our preliminary review of the 2019 market performance.
To begin, we have two different approaches creating our guidance: one, that is bottom-up completed by the onsite and property management leaders, and the other that is a top-down approach completed by our revenue management and senior leadership teams. We are in the very early stages of both methods, and both methods consider supply, employment, and our current posture in terms of renewals, new lease rates and occupancy.
Today, we anticipate that both occupancies and achieved renewal increases will be very similar or slightly better next year. We also expect to see some improvements in our new lease change as modest pricing power continues to grow in many of our markets. To bucket our very preliminary expectations today, we would say that California market, excluding any impact from propositions, and may deliver similar results in 2019. Seattle will likely to be less. And moving to the East Coast, New York, should be better, Boston's on track to be slightly better and D.C. will most likely to be about the same.
With that, I will turn the call over to our President, Mark Parrell.
Thank you, Michael. As we expected, we had a busy third quarter on the investment side. We mentioned last quarter that we planned to reenter the Denver market, after exiting that market in early 2016. We did so this quarter by acquiring two assets at a total cost of $275 million. As you may recall, we left that market because we had a portfolio that was primarily garden, surface-parked older suburban products and with a portfolio exit, not a market call. We have kept our eye on Denver and continue to believe that in the right locations and prices this market can produce excellent long-term returns.
We see in Denver, many of the same attributes we see in our coastal markets and we think will lead to higher long-term returns such as single family home prices that are higher than absolute matter as well as on a relative basis as compared to incomes, the creation of many high-paying jobs over an extended timeframe, our history of strong rent growth and a market with a high quality of life where our target millennial demographic wants to live, work and play as evidenced by strong population growth in the 25 to 34 year-old age cohort. And all that comes along with a fiscally sound local and safe government.
So some specifics for the assets in Denver. One asset was acquired for $140 million, which is about $395,000 a unit. The property was completed in 2017, and is a high-rise in the uptown neighborhood near downtown with a 96 walk score. We expect a 4.7% cap rate in year one and believe we purchased it at a modest discount to replacement cost. The other Denver property is a mid-rise located in the same uptown neighborhood. The property was acquired for $135 million or about $364,000 a unit, was built in 2017, and has 83 walk score, we expect a 4.6% cap rate in year one and believe we also purchased it at a modest discount to replacement cost.
We also acquired a high-rise asset in Boston for $216 million or about $572,000 per unit. It's located in the south end neighborhood that was built in 2015, as 97 walk score and complements well our current Boston portfolio. We expect a 4% cap rate in year one. And while we acknowledge as a relatively low cap rate, we feel that is a good trade as it was used it was funded using proceeds from the sale of an asset on the Upper West side of New York, at a disposition yield of 3.9%.
This property sold for $416 million or about $820,000 per unit. We earned a 9.8% unlevered IRR over our five year whole period. This property is in the burn-off period for the 421-a tax abatement program.
A quick note on our strategy in New York. We had significant -- have a significant concentration on the Upper West side of Manhattan and felt it prudent to reduce our concentration in that submarket and our exposure to outsize real estate tax increases in the future. We continue to believe that the New York market is an excellent long-term IRR performer, as evidenced by the return on the asset we just sold. You can expect us to buy and build in New York as opportunities present themselves. As always, we will continue to review our portfolio both in New York and elsewhere with an eye to maximizing our long-term total return, including our cash flow growth.
Before I conclude my remarks, as you all know, our friend and leader, David Neithercut, is retiring January 1, after remarkable 25-year career at Equity Residential. On behalf of our investors, our Board and the entire Equity nation of employees, current and past, thank you, David, for your leadership and even more for being a person of great wisdom and integrity whether it was taking advantage of capital allocation opportunities like Archdome, navigating us safely through the shoals of the credit prices, or in your work every day to improve our operations and build our team, you always made the right decision in the right way. I also thank you for all the time and effort you've spent mentoring me over the years, and I look forward to have you continue to contribute to Equity Residential as a board member. You've had a great ride at Equity, and we wish you well in the next chapter of your life.
And now, I'll turn the call over to Bob Garechana, EQR's new Chief Financial Officer.
Thanks, Mark, and good morning. With Michael having covered our upward revision to same-store revenue guidance, I want to take a couple of minutes to talk about same-store expense guidance, full-year normalized FFO guidance and capital markets activity.
As is our custom with our third quarter reporting, we've raised our same-store guidance from -- we've provided, sorry, our same-store guidance from ranges to single points. For same-store expenses, we expect to produce full year 2018 growth of 3.7%, which is effectively at the midpoint of the guidance range we provided during the last call.
Before I move to specific categories, I'd like to highlight that for the first nine months of 2018, same-store expenses increased 3.4%. As a result, our guidance implies a higher expense growth rate during the fourth quarter of 2018. This is due to a low comparable period for the same quarter last year.
Now, let me provide some color on the drivers of full-year same-store expense growth. On property taxes, we've produced growth of 4.1% through the first nine months of 2018. We now expect our full-year property tax expense growth to be approximately 4% or at the low end of our prior expectations. We've continued to have success with our fuel and refund efforts this year relative to our prior estimates. As a reminder, our prior property tax expectations already contemplated the sale of the New York assets subject to 421-a in the third quarter as Mark discussed. As such, a 30 basis point reduction to property taxes was already included in our second quarter range of 4% to 4.5%.
Now moving to payroll, our second largest expense category. For the full-year, we continue to expect payroll growth around 3.5%. The job market remains highly competitive with near full employment. We, like many employers, continue to experience wage pressure in order to retain our best-in-class onsite employees and continue to provide superior residential service.
In our earnings release, we gave full-year same-store revenue guidance of 2.3%, driven by strong renewals, low turnover and high occupancy, as Michael discussed. With same-store expenses in line with prior expectations, we now expect to produce same-store NOI growth of 1.7%, which is at the higher end of our previous range. This contributes approximately one additional $0.01 per share to full-year normalized FFO.
We've also updated our guidance for normalized interest expense and corporate overhead, which we define as property management and G&A. We now anticipate a $0.01 improvement in normalized interest expense, driven by lower than expected floating rate and later timing in our expected debt rates, the normalized corporate overhead we expect to come in at the top end of our previous range resulting in a $0.01 reduction to normalized FFO due to compensation expenses at the higher end of our earlier estimates.
The net result of all of it is a $0.01 increase to our normalized FFO guidance midpoint, moving it from $3.25 per share to $3.26 per share. All-in-all, revenue expectations have improved, expenses remain in line and the midpoint of our normalized FFO guidance has modestly increased.
Quickly on the capital markets front. You saw in the release that we prepaid a $500 million secured debt pool due 2019 with our line of credit. Our guidance contemplated pre-paying is relatively expensive debt and we’re able to do so without penalty. We expect to turn out all our portion of this debt in the upcoming months. With the majority of the anticipated offering hedge a very favorable treasury rate, we would expect to issue at a rate well below the level of the debt that we prepaid.
With that, Jonathan, I'll turn it over to the Q&A session. Thank you.
[Operator Instructions] We will take our first question from Juan Sanabria with Bank of America.
I was just hoping you guys could give us a little bit of color on New York City, and how you're seeing new lease rates trending into next year. It seems like that’s a big variable. If you could just talk to the range of what's expected for New York City in particular given the meaningful drop off of it supplies, a market that is going to accelerate quickly or is that more of a 2020 story?
Yes. So this is Michael. So I think, I said that I’m going to stay away from kind of the specifics of ranges at a market level. I will just tell you though, in New York, that while we do see this marked reduction in the supply the 50 basis point, we like where the base rent growth is on a year-over-year basis today, holding strong into October. You’re going to come up against the wave of renewals for all of the deliveries that occurred this year. So it’s not that you are completely out of the wood, but you have forward momentum in New York, definitely will be better next year or should be better next year than where it is today just because of that forward momentum and what we have embedded into the rent growth.
Okay, great. And then you kind gave some parameters about supply expectations for '19. But do you have, could you provide the percent change and expect deliveries if we look at the latest action. But it seems like some of the West Coast markets are seeing an increase as a whole. But again you still generally feel confident outside of Seattle that things are going to improve. Is that correct?
Yes. But I think, I said even like in the San Francisco market, we see about 2,500 more units coming consecrated in that Oakland kind of East Bay. So I think our process that we go through and obviously we start with this kind of actual database, we look at what is competitive to us. So I think in those prepared remarks as I was going through each market, I mean, the biggest market decline is New York City right. And then I would put everything else in these buckets of relatively similar and slight increase like we just said up in the Seattle and San Francisco area.
[Indiscernible]
I’m sorry. What was that?
Anything in the San Jose area as you mentioned Oakland that would be a concern this year relative increase for your portfolio exposure?
No, I wouldn’t say that there is really a concern means that, listen, there is strong demand in that market right now and even at those submarket levels. I think what we're paying out there right now is what impacts those the Oakland deliveries have on San Francisco. Will there be drawn? I think it's too early to understand that. But there is -- there all other drivers are positive for the fundamentals of our business in that market. So I think these units will be absorbed that are coming to market. And I do want to clarify one thing that because of the shifts that we what I said in the prepared remarks in L.A., we do see a significant increase in the deliveries for L.A. in '19 as compared to '18.
Thank you. We'll take our next question from Nick Yulico from Scotiabank.
Appreciate the commentary on 2019 on some of the revenue drivers there. Any early look you can give on expense growth? Is there revenues improving? Is expense growth can aid into that at all next year?
Yes. Hi, Nick. It's Bob. I mean, as -- I'm going to do the same thing that kind of Michael was doing and avoid any specific commentary on numbers. But thinking about the big expense categories, you really have real-estate taxes, which we've seen a healthier run rate and not sure that you would expect anything kind of different going forward in terms of an aggregate growth component. And then, on the payroll side, we continue to be as full employment in the economy. And so we would expect to kind of see similar levels of employments or wage pressure as we look to retain and engage our employees.
And then on New York City, you've had 6% expense growth this year or some of that is due to, I guess, 21 tax abatements burning-off. Can you just remind us where your portfolio in New York City is today in terms of the tax resets that have happened? What still to come? And I guess whether this issue is getting sort of better or worse in terms of expense growth for the New York City portfolio?
It's Bob again. We currently have 14 properties in New York that are subject to the 421-a program. And what that means on our kind of real-estate tax run rate basis related to the abatements specifically is on a full-year basis, call it $2.5 million to $3.5 million for the next, call it 5 years. Those projects are all in different levels of abatement, and some of them don’t even start until further out for the next, call it 5 years of $2.5 million to $3.5 million on an annual basis.
Okay. And then, I just, last question. You sold the West End asset. It was a low cap rate. It sounds like, I mean, we heard that went to evaluate buyers. So I guess that's supported a lower cap rate. I think you have two other assets you are marketing for sale on New York right now. I mean, are those similar low cap rate deals? And is there also any tax abatement burn-off there to consider? Thanks.
Hey, Nick, it's Mark. Congratulations on your new role. What I would say is -- what I'm going to comment is specific marketing activities. We're always out there putting assets on the market and then doing recycling of assets through the system. But I wouldn’t expect New York to be disproportionately effectiveness as fairly by our sale activities we've done well in the market. You can see we've got a pretty good IRR in the asset we just sold. So I think, overall, as we look at New York and the tax abatement assets, if you wanted to buy relatively New York assets are built, you bought them with this abatement. Nothing really was built that didn’t have this abatement on it. So the fact that we have a significant portfolio of 421-a assets is a reflection of fact that we have a significant portfolio in Manhattan. So again, I think, we've done pretty well in these assets. Michal has mentioned some improvements in the supply picture side. And I think there's some optimism in our minds about New York performance. And whatever assets we sell, we'll sell because we get a good price, and if we don’t sell anything in that market that's okay as well.
[Operator Instructions] We'll take our next question from Nick Joseph from Citi.
You continue to drive turnover well. I know it's been a large focus. But what level of turnover do you consider frictional at which it can’t go lower and then new lease growth becomes more important?
Yes. I mean it's an interesting question. So I think, I don't know if were there yet. But I would say that we're getting close. I think with record turnover being recorded now for the last couple of quarters, I would expect that trend to continue. I think that the team has done a fantastic job as I said with our relentless focus on delivering outstanding service and focus on renewals. I don't know exactly where we’re going to land, but I'm guessing that we're getting close to kind of normalizing on a turnover percent.
Thanks. And then you did the deals in Denver this quarter. Are you considering expansion into nearby markets right now?
Hey, Nick, it's Mark. The best thing I can do to guide you on that and -- we've been very open to evolution in our strategic process is to refer you to our investor materials. There is a chart on Page 17 that is like a bit of a heat map that shows you what we think on our market attributes that contribute to success long term. And Denver was the highest rated market on there that we did now. So as we think about our markets, certainly possible that we will win our other markets. But we're thinking about it in the framework of these classic characteristics that we think are good markets, which are relatively high single family costs, places where our target demographic wants to live, work and play, high wage growth markets, those sorts of things that are driving us decision.
It's Michael filling in and speaking. David, just question for you. And congratulations on your retirement, and congratulations for the rest of the team in terms of this transition that was executed all with internal promotions demonstrating the bench and the leadership that you shown. I’m just curious about staying on the Board. We've seen companies do different things where our CEO retires, and then exits completely versus that are staying on the Board. Can you talk me through how you and the board came to decision to how do you stay on versus leaving?
Sure. We've had lots of discussions about that, Michael. And decided that really one size does not fit all, not withstand in the fact they are probably years best practices. And probably would have been impossible for me to state on the Board if someone was coming in from the outside. But I've actually hired Mark 20 years ago. He reported nearly directly to me most of that time period. And so, I think the general belief is that -- with that scenario that it would be okay for me to remain on the Board. I think, I understand my boundaries, Mark. And I've had a lot of discussions about what role I should play sort of going forward as well as what role I can play for him sort of going forward. And I think we both go into this with our eyes wide-open and with the belief that it will work very well.
Now would you add another independent to the Board to sort of balance things out a little bit because arguably you're technically an insider?
Well, I'm more than technically an insider. I am an insider. Look, we have had some Board -- quite a bit of Board refreshment over the past several years. And I expect that to continue.
Thank you. We'll take our next question from Steve Sakwa with Evercore Investments.
I wondered, I know, you guys are not going to talk specifically about next year. But, obviously, Seattle is showing a very, very large deceleration on your numbers, the same-store rental rates gone from 66 a year ago down to 14. And I appreciate your comments about maybe supply moving to some of the suburban markets next year. But, I guess, how concerned you are about further slowdown in the Seattle market in general, as you look forward?
Yes, well, I mean, I think, clearly, and you can tell us from the prepared remarks that we expect Seattle will produce lower revenue growth next year. It almost is taking what's embedded today with the rents in place and modeling your tool work. I would tell you, I feel better right now about Seattle than I did sitting here three months ago when we were talking about the market. We kind of stabilized the occupancy albeit at a lower price point. But sitting here today, our occupancy is up at 96.1%. So we have some growth in occupancy over the prior period. And I think we're going to kind of run this portfolio with a little bit of a conservative play and build-up this occupancy and let us get through kind of some of this play. I think the job growth side; it remains a diverse market for job growth. We see that Amazon's got like -- their backup to like the record number of open positions at 7700 in Seattle. So I feel like there are some good fundamental things happening. We had a work through some of this supply. We're seeing some of that release in the CBD. Now next year there will be that shift like I said into the Bellevue, Redmond, I think, we will be able to kind of work our way through that with some of the expansion and strength for Microsoft. But, this is just something we got to kind of let play out a little bit. And I think we know how to kind of navigate our way through this.
Okay. So it sounds like things are stabilizing, obviously, we just had sort of the natural maturation of the numbers. But in your perspective, it doesn’t sound like it's getting worse from here.
No. Other than like the erosion of the pricing power that I just alluded to it, feels like we've kind of stabilize, and we think we're in a place that we know how to navigate our way through this.
Okay. And then, just maybe switching gears to development, I'm not sure everyone to feel this. But just, in general, if you guys are evaluating new projects and thinking about potential land purchases this weight in the cycle. I'm just curious what are you seeing in terms of construction costs and sort of what is your experience in the market in terms of other developers, new projects the pace of new starts, again, we clearly continue to see a push out of the current pipeline. But I'm just sort of curious on your expectations maybe over the next 12 months in terms of new start to given sort of stabilizing market, but certainly rising construction cost.
Hey, Steve, it's Mark. And David may amplify my answer a little. Just to answer the question on costs. What we are seeing is generally 4% to 8% higher cost escalation with the 4% to 6% number more of the East Coast, and the numbers in the 6 to 8 range being more Seattle, San Francisco and Southern California. We do look across our markets, and we go to events that are industry events. And here developer speak to the pressures they're under -- both under in terms of hard cost escalation, the tariffs, high land costs, the slower growth we've seen in rents of late, not keeping up with those costs as well as, of course, financing costs up. We do see construction continue to go on. We think it is abating. But not in some material sense except in New York, as Michael alluded to. But we do you think these developers are under significant pressure. We do think they're building IRRs that are, from our perspective, too low. A lot of the product that was being built is good product, and maybe this product we would be interested in buying at some point in the cycle. But at this juncture, I can't tell you, I would I see some material significant decline across the Board, again accepting in terms of New York City.
We'll take our next question from John Pawlowski with Green Street Advisors.
Curious. Some of your office three tiers have been found in the table on inflection point in D.C. demand. And I know the multifamily supply is still high. Curious if you're seeing any inflection points from fiscal stimulus defense spending where big employers are starting to enter the market.
Yes. So this is Michael. All that I’m trying to see if I can get through the foot traffic count. I think, the overall market right now is showing increase in demand, and I see if I can write percent. So for the month of September, our foot traffic was up 1.4% over September of '17. So call it stable to increasing. What I would say is demand -- people willing to take the time to come in and take a tour with us. It's still not demonstrating the pricing power that we need. So I do think there is a stable improving demand component that's abating in the absorption of the new supply, but nothing that's really giving us the position for pricing power.
Okay. And D.C. is kind of New York as a magnet for capital, and cap rates are pretty low at least for the near term growth prospects. The cap rates seeing irrationally low, perhaps. Curious, how you're thinking about D.C. as a source of funds, potentially rather expansion markets? And how you kind of rank the return prospects of D.C. versus some other East Coast markets to operate in?
Hey, John, it's Mark. We’re constantly looking at all the markets, including D.C. and including the low performing assets. You can expect us to continue to do that in D.C. And we’re certainly aware acutely of the high supply and the impact that’s had on our numbers in the last few years. I do want to point out D.C. over time has been a terrific performing apartment market. And coming out of the great recession, it was -- it did very well for us. So it does have some countercyclical benefits, it does have the factors perform well over long periods of time. So there are things about D.C. that we do find appealing certainly would be great if this supply abated a bit, but at this juncture, it is like we think the D.C. And in fact, we just completed an asset of 100K that's just started with lease up that. So far is going very well in this sort of know my area so to speak of Washington. So we like the market in many regards that we do acknowledge in difficulties as late in terms of supply.
We will take our next question from Rich Hill from Morgan Stanley.
Good morning, guys. I'm sorry if you've mentioned this earlier, but I haven't having discussion on it. Do you have any updates on Costa-Hawkins? We're hearing various different things. But I was wondering if you have any updates from [Indiscernible] less than a month away, a couple of away at this point?
David Neithercut here. We really no update we would have. It would be the thing you just want hear onto on just the results of -- we see more and more newspaper editorials coming out of closing prop 10, reduced, probably, through the same totaling that you're probably seeing. So no real updates I can give you going into now just 14 or so days away from Election Day. But generally, I can tell you, we've got a -- we've assembled a really good team, very ably led by our senior most leader in the West Coast as well as Essex to the senior leader there. And those guys have really been doing a terrific job getting the message out about what a mistake this would be to address a very serious housing problem in the state. And polling is suggesting at least initially that this understanding if this is not the way that one goes about addressing a very serious housing problem. So we are going to run through the tape on this, and we feel like we've got a good message and it will be elected this year.
Got it. I want circle back to New York City for a second. Complete depreciation aligned New York City is really attractive asset class of the medium to long-term. But I'm curious, if you think about New York City and the supply coming down. Is it just a worst case scenario coming up the table? Or do you really expect growth to inflect? And I guess the question that I'm asking you is how do you as an owner of multifamily properties in New York City balance near-term, maybe growth that's not as attracting as some other markets, but recognizing that medium to long-term and IRR potentially still really attractive?
John, it's Mark. I want to repeat that the question because you broke up a little there, you were asking for some of our view short and medium-term on New York. Is that right? Yes, I'm going to go with that because I can't quite hear at all, again, we're not in a position to give you exact numbers at this juncture. But just in 2015, this market was a 4% revenue market that wasn’t that long ago. So we think there with the supply abating, the continued cycling unit of new media jobs and technology jobs into that market, as a reason this market and are now suggesting its 4% next year. But again go back to a good run rate on revenues at some point in near future. So we would like the market short-term, medium-term, long-term, all across the board.
Thank you. We'll take our next question from John Kim with BMO Capital.
The two stabilized development you have this quarter indicate of 4.3% stabilize deals. I'm wondering if that came in below your expectations. And if so, what drove this?
So I'm sorry, again, the question was relating to Helios?
Yes, Helios and [Multiple Speakers]
Yes, we see those assets stabilizing at a mid-5% yield. Again, they're still occupying, positions are burning-off. All that still goes on, on those assets. So we're happy to bring those in kind of a mid-5% yield is our expectation.
Okay. And then on your partnership with WhyHotel in D.C., can you give some kind of indication to how much that could add to your development returns or your development yield on the project?
So it's Mark. I mean, we think that could be $800,000 or something like that to normalized FFO. It's the really -- just to be clear, none of the numbers that we’re going to show you as occupancy step in the development page of anything they do with WhyHotel occupancy temporarily if units and net properties does it hotel execution. So in the long run, you will see from us of just the 100K number strictly from a residential, permanent residential perspective. But I think you should think about it not as affecting the development yield, but really just effecting FFO next year.
Okay. Great. That was my next question. Turning to your New York strategy, do you still feel like three is a need to reduce the consternation in Upper West Side and or are you encouraged somewhat given the pricing at 101 West End?
Well, we certainly thought the pricing on West End was good from our perspective. We don't feel compelled necessarily lower our exposure further there. I think, again, we will have assets in the market in all our markets to varying points in time. And but they came in we like we might take it in reinvest in Denver and elsewhere. But I don't think, we here, as a team, we don’t feel like we’re overexposed anymore to the Upper West Side. But again, we will look at each opportunity as they come.
We will take our next question from Michael Lewis from SunTrust.
You talked earlier about rising construction costs of what that maybe for supply. I wanted to ask it a little more specific to you. You haven’t had to raise the budgeted costs on your active developments. Could you talk a little about when in the process you locked in cost? How much you lock in? And if you’ve changed your process around that all given we're in a rising cost environment?
I’m going to start, and David may amplify some of this. But, for example, the West End tower deal, the so-called Garden Garage deal, we’re 90% bought out on that deal. It was a matter of great interest to both the board and to the investment committee internally that we not go forward unless we’re very certain about our construction cost and had an appropriate contingency. So I think we're very focused on these things. Not try at the level of detail you're asking for and each one of these deals. But as we approach both West End tower and 249 3rd Street, which are our two most recent starts, we've been very focused on making sure that as much as possible things have bought out. And if there are some risks that we got an appropriate contingency in them. So right now we feel comfortable very much with our budget.
That’s helpful, since West End is a biggest line and has the longest lead time. My second question is more of a bigger picture question. You know a lot has been talked about millennials finally getting to marriage age girl there right, but there get it up until their late 30s, the oldest ones. I was wondering about the following divorce rate, and if that’s in any way impactful, and if you think these things together, could become a drag on household formation as that demographic wave kind of moves through the snake?
We don’t think about -- I mean, very good question. We don’t think about our assets is only attracting millennials. I mean 20% of our residents are 50 and older. We think our kind of product in the areas we are in with the urban and then suburban amenities we have attract people of all ages. So I guess, I would answer and say that, certainly through the millennials are aging. Our average aging our units is 34%. And the biggest cohort is 26, right now of millennials. So we've still got people coming feeding demand. 40 plus percent of our units are single occupant units. So again, we see continued demand across all age groups for our product that GenZ Group that's coming up. I'm not sure why they would like an urban lifestyle any less than they are slightly older siblings. So I mean, we feel pretty good about all the demographic numbers.
Do you think the fallen diverse rate was paying attention to it? Or do you think it's mostly immaterial and …
Yes, I guess, that's kind of hard to say. I mean, I don’t know if that's a trend or if that's this year's number or I don’t mean. The birth rates went down and down and down and now sort of went up a little bit. I don’t, I said, I'm not sure to make it something when it just happens for years.
Thank you. We will take our next question from Dennis McGill from Zelman and Associates.
One question with the relation to the employment outlook, as you guys think about and plan for 2019, in general, and maybe rising uncertainty in general about the economy. How do you think about some of the key drivers whether it's employment growth, wage growth and things like that, as you build the plan? And what type of ranges would you put around that with uncertainty, maybe little bit higher deeper into the cycle etcetera?
Yes, great question. So just to be fair about our process, we don’t have an algorithm where we can put 150,000 jobs per quarter or per month, pardon me, new jobs and come up with a revenue number. It's more that onsite teams and the end market teams talking about the hiring they are seeing and hearing about, as supplemented by what our investment teams think across our markets here in Chicago. So I don’t want to get this sense, but again there is some computer that's fitting on a number for us. And again, a lot of the job growth numbers are national and our portfolio is not national, it's in certain places. So our focus is a bit more micro than maybe your question implies.
Okay. And then, but just, as you think about that micro impact, I'm sure, you've looked at it that way. Is the preliminary look, and the numbers that you laid out as far as directionally markets, is that largely assuming that the employment backdrop that was in place in 2018 holds in 2019?
Yes, it roughly is. And we feel like we have remark -- in Michael's remarks did give you a little color on that. We see hiring occurring in all our markets whether it's a new tech company in Boston or some other hiring relating to media in Los Angeles. So we see it across the platform. But yes, we are basically, in our minds, we are now assuming the things we have rising wages across our residents base combined with employment that's roughly equivalent in '19 to '18.
Okay. And then separately, can you maybe just discuss what you're hearing and seeing whether it's your own team or just out there in the market conversations around capital availability from the lending side as well as capital interest in the assets in general?
Well, I'm going to take part of this, and ask Bob to speak on the lending side. But it continues to be a strong bid across the board for our assets, and for our assets, we think in the apartment space in general. We do think that Chinese buyers have retrenched and are little less participatory in the market. There still are other significant foreign buyers, Canadian, Europeans, and like as well as lot of U.S. money still chasing the asset class. You kind of see that in development side, right. I mean you see the continued development flow as people trying to get exposure to our space. And again, we think flows continue to be very strong on the equity investment side. I’m going to turn it to Bob to talk just about the debt availability part of your question.
Yes. So breaking that up and following on Mark's comments, on the stabilized piece, we continue to see very healthy supply or multifamily kind of with the GSTs kind of lending arrangements. So overall, costs have gone up because interest rates have gone up, but that has been very healthy and no meaningful changes versus kind of prior history. On the development side, really kind of echoing Mark's comments as well. We continue to see banks lending. Construction lending is -- pricing actually has come down a little bit in terms of spread, but rates have gone up with LIBOR going up, so all-in costs are maybe a push to slightly higher. But banks are continuing to lend, and they are lending relatively conservative kind of advance rates, so loan to cost rates. What you’re seeing in the space that is probably different than maybe what we thought decade ago is alternative sources of that capital in the form of private equity debt funds etcetera that are willing to be a little bit more aggressive, and we see all of those kind of sources providing capital to the space.
As you look it on the development side, does that imply that developments going to last longer or prolong some of the -- what would otherwise be a decline in competition from this supply, deeper into the cycle?
I guess that remains to be seen, but I will say that this capital that Bob just alluded to, that’s in the middle. That's above the bank and below the equity is very expensive. This tends to be very price capital. And it's going to make the pro forma even harder to pencil. But now as that money is coming in at the same cost of the banks, I mean, it's considerably higher, double the costs or more. So with that in mind, I think, it isn’t necessarily going to extend things too much, just again, because the money is particularly expensive on a relative basis.
We will take our next question from Drew Berman from Baird.
This is Alex to check on for Drew. Hope you guys could give us some color on the recent Boston acquisition's long-term NOI growth expectations relative to the 1101 West End asset you sold.
Sure, I can give you little color on that. So the asset is fully occupied. There is fair amount of competition there. So our first year number in terms of revenue growth was relatively low around 1%. And then we saw rent growth more averaging as it often does for us, in the 3s and then a few quarters here and there with expense growth for us 2.75 to 3. We generally underwrite these deals over a 10-year hold. That gives us some color there. We can certainly comment on West End, but I would say this, I don't know what the buyers pro forma looks like. I don't know what renovations they're going to do? What things they have in mind other potential uses they have? So from our perspective, we saw relatively muted near-term rent growth, relatively high real estate tax increases in the near-term. But again, at some juncture, when this burns-off, you can reset those units to market. And there is certainly value that I'm sure the buyer underwrote in the deal.
That's really helpful. Additionally, could you give us some insight on your our long-term unlevered IRR expectations for your third quarter acquisitions, most notably the Denver assets. We were just curious how you anticipate Denver's long-term NOI growth to trend whether the relative residual value argument holds up compared to the coastal markets?
Yes, good question. I mean, we were looking at the Denver deal is mid to high 7 IRRs unlevered over 10 years with just the way we generally measure that. They did have -- we did have in our pro forma sum increase to the cap rates on exit, but with the thought that even though these are high-rise and mid-rise construction that there would be some cap rates expansion on the end of the pro forma.
Thank you. We will take our next question from Alexander Goldfarb with Sandler O’Neill and Partners.
Thank you, and good morning out there. And first, congratulations David, and Mark as well. Two questions for you guys. The first is just on retention. It was a question earlier in the queue. But if you guys are raising renewals at 5%, it doesn’t seem like you are holding back on the renewals and yet, again, you are still retaining more and more tenants if that retention is improving. So do you think there are other things at work like our people just less willing to move apartments the way they were a decade ago? Or have home move outs suddenly declined? Or what do you think is going on that's allowed you to push 5% overall on a sort of 1% to 2% market, and still have keep more of your tenants than lose?
So, this is Michael. I would say it's probably a little bit of what everything that you just kind of alluded too. I would say from a reason for move out to buy home. We've actually seeing very little change in our portfolio. I mean year-to-date basis, we're actually down a little bit to a 11.3% of those that move out sighting that reason that was compared to 11.8 last year. Put that all in is 200 fewer people this year to date moving out with that reason. I think, in the third quarter, we renewed. I think I eluded to it 500 more residents than we did in the third quarter of last year with roughly the same amount of exploration. And I think it's a little bit of everything. I think its deferring life changes. I think, honestly we see the relationship between high customer service and retention. And we saw marked improvement in our customer service. This is something we have done and we're seeing the efforts pay off. So I think all of those things put in the blender are contributing to this retention. And to elude to the 5%, part of this too is, remember when you are pricing these renewals, so we have a lot of our transactions occurring, while, pricing these renewals three months before, and where is the rents going to be and we're issuing those renewals at that point. So I think this is demonstrating the fact that in many of our markets are rents are up 3% year-over-year, and reporting these renewals and you are negotiating through this process. And a lot has to do with where these residence prior rents were in relationship to that market as well.
And then the second question is just on D.C. it's been sort of a developer's paradise the past number of years. Popular speculation is that. Amazon will go to Northern Virginia. Is your view that if that happens suddenly you and other apartment landlords will benefit because certainly there will be an increase in demand Or is that fear that the developers are already waiting for this and will just ramp-up on the development side. And therefore any pick-up in jobs is going to be more than offset by development?
Yes, it’s Mark, Alex. I'm not sure that anything happens instantaneously. I mean, I don’t think Amazon is going to open an office and immediately have 5,000 new employees, and then it get to 50,000 and whatever the number is. Again half of that obviously it's going to be more gradual. Depending where this is there is certainly the capability to developers have to build into this. But if it's near to some of our well located assets that are there already, we can certainly do this. There is no doubt.
We will take our next question from Rich Anderson with Mizuho Securities.
Costa Hawkins, I know where you stand on it. But have you guys done kind of a sensitivity such that let’s say get’s repealed and every single municipality chooses rent control and vacancy control. What the impact would be on your growth profile? Would it be 100 basis points when you look at the entirety of your portfolio? Have you done that exercise? Just to think of a worst case scenario.
It's David Neithercut here, Rich. We’ve not done all that math, because, of course, that’s the worst case scenario. We don’t know what municipalities that currently have rent control demand. We don't know what municipalities don't have rent control might and act rent control was in fact a right they've had since Costa Hopkins was first put in place and even before that. And you don't know what limitations they'll put on -- they go for properties built before 1995. There are going to be properties built between 2000 and 2005, 2010. So it's just a little bit of some game theory that I’m not quite sure as the productive use of our time. We do know how much NOI or current revenue we got in markets that currently have rent control. We know how much of that might be impacted if the certain market went from 1995 to 2005 or whatever. And so we -- it's just not productive use of time to do what we suggest. But we certainly do know where we have exposure [indiscernible] income might be at risk if certain changes are put in place. But as I said earlier, we feel like what a very good place with respect to the feeding Top 10, again, it's not the best thing for the state of California. It’s a worst thing they could possibly do. We got a good team in place. We’re running hard. We’re going to right after until the bitter end and we feel good about our chances there.
Okay. And then last, second and last question. You're talking a lot of that social changes, a lot of divorce, but, one thing, forgive me, but about 75% or 80% of your portfolio now has recreational use of marijuana legalized. And I'm curious how you feel about that probably going to 100% over time. Do you have the ability to write your own laws within your communities because perhaps there could be some mismatches within your community about people who are for and against it? Or maybe it is what they roll and let people do their thing, and perhaps they're happier, and everybody's happy because of that. What are your thoughts about that?
No client incentive there Rich.
This is Michael. I would say it’s not that we write our laws. I mean we have lease agreements in place. I would say almost our entire portfolio is smoke-free today. I think we have some outlier properties that we have not deployed that with. So to me the use of smoking marijuana is no different than cigarette. Cigarettes our legal today. Marijuana it could be recreational legalized in those markets. In our communities, we’re still smoke-free community.
Right. But they can smoke inside their apartment and run around out in the community right?
No. That would be kind of a lease violation. So just like cigarette, if somebody is smoking inside their apartment, neighbors smell it and that's a lease violation.
We will take our next question from Tycho Okusanya from Jefferies.
Again, you guys have been a dynamic dual for a very long time. But again with Mark [indiscernible] to the CEO role, I'm just curious Mike, are there any changes that you can sign up with reports and maintain to the EQR's strategy now that you are kind of in the CEO seat?
Well, I'm not quite in the seat; I'm very close to the seat. Well, thank you for those most comments. We've never got in the dynamic dual conversations before. Look, I've been with the company almost 20 years. I've been in the CFO role for 11. The strategy, I think, say it was one that, I embrace in terms of urban then suburban products and the advantageous long-term of owning it. We have all of all the kinds here. And we certainly evolve back into Denver. So I think the strategy will naturally change overtime in response to changes and conditions, and I mean, our thought process. So I wouldn’t expect it to be static. But I don’t expect dramatic changes, especially on the core investment strategies.
Thank you. At this time, we have no further questions. I would like to turn the floor back over to David Neithercut for closing remarks.
Thanks, everyone. As we are now close, what I think is my 100th and final earnings call, I want to thank everybody in the REIT community for your support, the confidence and probably most important your friendship over the last 25 years. I can tell you it's been a great pleasure and I work with all of you. For those of you, I'll see you in San Francisco in a few weeks. We look forward to thanking you in person. For those of you, I will not see, please note that I would step down at the end of the year with extra ordinary gratitude and with great confidence in Mark the leadership team here at Equity in the future of Equity Residential. So thank you very much and best regards to everybody.