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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and welcome to the Equity Residential 4Q ‘20 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Marty McKenna, Investor Relations. Please go ahead, sir.
Good morning and thank you for joining us to discuss Equity Residential’s fourth quarter and full year 2020 results and outlook for 2021. Our feature speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer.
Our earnings release as well as a management presentation regarding our results and outlook are posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. 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.
Now I will turn the call over to Mark Parrell.
Good morning and thank you all for joining us today. I want to start by thanking all 2,700 of my Equity Residential colleagues across the country for their dedication in serving our 150,000 residents during a very difficult year. Your commitment and hard work at the company through 2020 and I know you are ready to drive our recovery in 2021.
Today, I will start with some color on the current state of our business and its future prospects, then Michael Manelis, our Chief Operating Officer, will provide an operating update, and Bob Garechana, our Chief Financial Officer, will provide detail on our guidance expectations, and then we will take your questions. We also posted to our website at equityapartments.com a management presentation that provides some background on both current operations and our guidance expectations.
Turning to the business, we are encouraged by the recovery in demand in all of our markets and especially, in our urban submarkets. In real estate, demand is the unsolvable problem. Without it no other economic factor matters and in our business, both urban and suburban, we see plenty of it. As noted in the presentation and release applications, net move in activity and occupancy have all turned upward, especially over the last 2 months. This positive trend, in spite of a worsening pandemic, and renewed shutdowns in our markets gives us even more of a cause for optimism. If demand is this strong now, we think that when the vaccines are more fully distributed and cities reopened, our business will really hum. The fact that this is likely to coincide with our traditional leasing season with its higher seasonal demand positions us especially well. Admittedly, though pricing remains weak, but there are signs of the beginnings of improvement.
As we noted in the presentation, pricing trends have turned up over the past few months, led by our urban core markets of New York City, the city of San Francisco and the cities of Boston and Cambridge. We also see declining forward concessions. With occupancy firming and strong demand going into our busiest time of the year, we believe that we can recover considerable ground on the pricing side as 2021 plays out. While we see signs of recovery, our current results reflect the still challenging climate in many of our markets. You may remember that on prior calls, I made clear that the impact of lower rents and higher concessions in 2020 and currently, will take some time to fully manifest itself in our reported numbers. That impact arrived in the form of our fourth quarter 2020 same-store revenue results as we continue entering into new leases and renewing existing leases at lower rents, reflecting the post pandemic leasing climate as well as amortizing concessions from leases written in 2020.
But just as our reported results lagged our actual operating environment on the way down, they will also lag it on the way up. So you should expect relatively weak same-store revenue results in the first half of 2021, with a marked improvement in our revenue numbers in the second half of the year as we benefit from improving pricing, higher occupancy and lower concessions plus easier post pandemic comparable periods. The interplay of our expectations of increasing occupancy, pricing that is improving, but will be lower than last year’s pricing until midyear or so, and the amortization of 2020 and ‘21 concessions creates considerable modeling complexity for us and for our investors and analysts. Because of this more complex picture than usual, we thought it was particularly important that we reinstate guidance to give investors a better idea of management’s view of the year. Our guidance has a wider than usual range to account for the multitude of factors, both positive and negative, that may impact our business in 2021.
While I certainly acknowledge that the pandemic has created unique challenges, Equity Residential same-store revenue growth, coming out of recessions, is typically recovered quickly with us posting strong numbers, and I see no reason that will not occur again once the lagging impact of concessions and some of the other factors I mentioned abate. All of this is, of course, premised on the continuing progress in controlling the virus and an assumption that other general economic conditions remain supportive.
Turning to the long term, we believe that the fundamental factors that have long made Equity Residential an attractive place to invest your capital remain just as true now as before the pandemic. First, our capital is invested in markets that will continue to be the centers of the knowledge economy that drives the growth of this country, centers of innovation in technology, finance, entertainment, medicine and life sciences. Even in the pandemic, we have seen announcements of new high-quality jobs in our urban centers like Amazon’s announcement that it’s putting 3,000 new technology and software development jobs in the Seaport District of Boston. And with the recent commencement of construction on Disney’s new building in Hudson Square in New York, that will lead to a significant influx of new content creation and technology jobs. And while the remote work trend may change the number of days that we are in the office, we are, by our nature, social animals. Our need to interact with each other to create, to share ideas, to manage our businesses and to start new ones is not being met by meetings on a video screen.
Second, we believe that the entertainment, cultural and social attractions that fill the great urban centers in which we operate will soon reopen, and will again prove to be magnets for affluent renters. We believe that many renters desire both the work proximity I just mentioned as well as easy access to the amazing entertainment, cultural and social opportunities our cities will provide once they are reopened. Not to mention the ability to live in an exciting, dynamic and diverse community. Our residents that live in our more urban properties do so because they value the lifestyle of our country’s great urban centers.
Third, we have a highly skilled affluent customer base, able to afford our rent and will accept future rent increases as conditions improve. Our residents are well employed in growing industries like technology, biotech and new media. Industries that we also think are less susceptible over time, the job loss from increasing waves of automation and offshoring. In the pandemic period, overall unemployment rose to almost 15% and is now around 6%, while job losses for those with a bachelor’s degree or better, which is our target demographic, peaked at 8.4% and has now gone down to 3.8%. Our resident base proved its quality again in the fourth quarter as we collected 97% of our expected residential revenues. We think the quality of our customer base is, over the long haul, one of our greatest strengths.
Fourth, the superior location and quality of our portfolio makes our properties attractive places for our residents to live, and it also makes our properties attractive places for private investors to invest their capital. This makes our properties liquid and appreciating over the long term. Capital has long been drawn to the higher quality properties we own, and that will continue to be the case, even in markets like New York and San Francisco once the pandemic abates. We also believe that the lower long-term capital spending required to maintain our properties and income stream compares favorably with that of older, lower quality apartment buildings. But our portfolio can always be improved and you should expect this to be more active recyclers of capital over the next few years.
As I have said on prior calls, even before the pandemic, in order to create the most stable and growing cash flow stream possible for our investors, we are inclined to further diversify our portfolio in the higher end suburban locations in our current markets as well as into a few select new markets with favorable long-term supply and demand characteristics and a growing affluent renter base. These affluent renters are found in abundance in our existing markets, but there are also increasing concentrations of them in denser suburbs near city centers of our existing markets and in places like Denver, which is a market we reentered in 2016. You have seen us do this over the last few years as we have acquired properties in suburban Seattle and Washington DC, with strong resident demographics. We are looking hard at several other suburban assets as well as development and acquisition opportunities in Denver that we find appealing in long term. We will fund this by lowering our concentration of assets in city centers in our existing markets, and by exiting assets elsewhere that do not meet our return parameters.
To close, we have the best team in the business, ready to maximize results when the pandemic ends and a sturdy balance sheet that gives us ample flexibility. We are tremendously optimistic about our company’s future because we believe that the markets in which we operate will thrive when we get to the other side of this pandemic. And with the rollout of vaccines, we are on our way.
I will now turn the call over to Michael Manelis.
Thanks Mark. So 2020 has been the most challenging year that we have faced in our business, so let me start by thanking the entire Equity Residential team for their continued dedication and hard work throughout the year. Working together, we got through 2020 by serving our customers, taking care of each other and driving the best results possible given the circumstances.
Despite the challenges, we are excited that 2020 is behind us and optimistic that 2021 will be a year of recovery. As Mark mentioned, we have begun to see improvements in both physical occupancy and pricing. Notably, this is the first time this has occurred since the beginning of the pandemic. We continue to test price sensitivity in many markets by reducing both the value and quantity of concessions being granted and beginning to raise rates. In November, concessions averaged just over 6 weeks free on about 45% of our applications. In recent weeks, concessions have averaged just under 6 weeks on only about one-third of our applications. All that said, it will take some time to fully recover from the unprecedented events that have occurred, particularly in our hardest hit markets. While we are optimistic about the recovery, it is hard to handicap its pace, especially in New York and San Francisco, our hardest hit cities.
On Page 3 of the earnings release and in the accompanying management presentation, we have provided some key performance metrics broken out by our urban core, urban other and suburban portfolios. I will not walk through all the specific metrics in the presentation, but I do want to highlight some of the performance indicators we remain focused on. So first, demand, demand continues to be robust and has carried us through much of the winter season with increased move-in activity well above seasonal norms. Application counts exceeded 2019 levels by 25% in the fourth quarter, and we were able to generate sufficient front door activity to have move-ins outpace move-outs despite higher turnover compared to the 2019 record low level. We haven’t seen this net gain in move-ins since the onset of the pandemic. Applications have remained robust in January, albeit below December’s levels, but that isn’t surprising since improved occupancy has allowed us to start testing pricing, and we have fewer units available to sell.
Turning to pricing, the chart on pricing trend, which includes the impact on concessions, is a good indicator of where rents are headed, and it has been improving across both the urban and suburban markets for the last 8 weeks or so. Blended rates, which combines new lease changes and renewal rates achieved, will continue to be negative for some time as this metric compares new leases written or renewed with those that were before the pandemic began. That said, the rate of change of blended rates has flattened. And for the first time, we have seen modest sequential improvement in new lease rates, which is helpful. We continue to experience negotiation pressure on renewal rates and we are still renewing residents who signed leases pre-pandemic. We have found some stability in the percent of residents renewing, which stands at approximately 52% in January. We expect that to improve to around 54% for February and March, which is still below our usual retention rates for this time of year.
Before moving to market commentary, I want to summarize that while the operating environment remains challenging, we continue to see good demand for our product, and we are starting to see early signs of pricing improvement. We have a long way to go, but recovery is in sight. Now, let me provide some brief market commentary. Starting with Boston, strong application volume and improved retention through the fourth quarter resulted in steady gains in occupancy to position us to 95.5% today. This market has been dialing back concession use and raising rates consecutively for the past 4 weeks. At present, concessions are being used on about 25% to 30% of our applications and averaging right at 6 weeks, which is compared to 50% used back in November. Going forward, we expect modest improvement in rates, but acknowledge that a full recovery will require additional demand drivers, like the Amazon jobs Mark mentioned in his remarks, to aid in the absorption of the new supply that is being delivered currently and anticipated through the year. Long-term demand drivers remain positive, with a very bullish outlook for biotech and pharma space, fueling job creation.
At this point, it is hard to forecast exactly how some of the traditional demand drivers associated with Boston play out, notably students, both domestic and international, and the jobs that support that infrastructure. We expect to have a better view on these by late spring, early summer before the fall semester. Anecdotally, I will tell you that January did see a few applications from foreign addresses, which we haven’t seen for several months. Boston will have its challenges in ‘21, but its performance over the last 2 months has definitely improved. In 2021, we look to regain more occupancy, which will allow us to then recapture some of the rate we lost last year. New York continues to feel the outsized impact from the pandemic, but there are early signs of recovery. We recently had our best traffic week in the last 12 months and our best leasing week since August. Leasing activity is still driven by deal seekers and intracity movers, which is running about 10 points higher than normal. We still see move-outs to the suburbs in New Jersey and Connecticut, but that number is normalizing. Occupancy has improved in the market and is just above 91.5%, which is the first time we have been over 90% since September of 2020.
Some additional color on recent traffic includes that we are just now starting to have former residents reaching out to our property teams, contemplating moving back to the city. Like in Boston, we are seeing the first signs of international students and specific to New York, UN workers looking to come back. And finally, we saw a few roommate type prospects emerging from their parents’ basements. Many of these prospects are looking for late spring or early summer time frames in anticipation of their offices opening back up. We still see a good amount of deal hoppers and upgraders as well as prospects from the outer boroughs who can now afford to live in Manhattan, and many of them are telling our on-site teams, they think the market bottom is near, and they don’t want to miss out. Concessions remain prevalent in this market with 70% of the applications receiving about 2 months free. Rates are beginning to show signs of improvement, and we are just starting to gradually dial back concessions.
For 2021, our focus in New York will be recapturing as much of the occupancy rate as possible while lowering and possibly eliminating the use of concessions. While the market will still produce a negative decline for the year, New York has upside potential given the dramatic declines we saw in 2020. Recovery in this market will be fueled by a lack of competitive new supply, the return to office and the continued growth of the big tech employers in the market.
Moving to DC, which has been our most resilient market on the East Coast, occupancy remained solid at 95.5%, but the market continues to feel the impact from the delivery of Class A multifamily product, which is not being absorbed as efficiently in previous years. Federal government employment has grown, but the overall job growth has declined. Concession use was up in the quarter with the largest amount focused in the district. The good news, however, is that as fast as concessions came into the market during the fourth quarter, they have now been greatly reduced. Since mid-December, we are only using concessions on 15% of the applications, and they’ve been averaging just below 1 month. 2021 will be focused on balancing occupancy and rate as we face supply pressure from yet another 12,000 units being delivered into the market. Recent signs of improvement provide us more confidence in the market’s ability to absorb the new units and allow for continued rate recovery, which could make DC one of our better performing markets in 2021.
Heading West, Denver, albeit a small portfolio for us, is holding up well. For 2021, all 5 of our Denver communities will be included in the same-store results. Occupancy is sitting around 96%, and both new lease change and renewal rates are improving. Renewals are showing positive growth rates in December and January and concession use is trending down. In Seattle, we are seeing early indications that the bottom may be behind us. Occupancy continues to improve as traffic is up over January 2020 by about 6%, and we are seeing weekly application numbers that are closer to peak leasing season levels. Concessions remained common in the market, especially in the urban submarkets. During the fourth quarter, concessions averaged about 6 weeks free on about 55% of our applications. Strength in occupancy, both at our properties and more generally, in the overall market, are allowing for a gradual reduction in concessions. We have heard from our Seattle teams that many prospects seem less concerned about the monthly rate right now as they are about getting a deal. While current rent freeze restrictions may limit renewal performance in the first half of the year, overall fundamentals for this market support a recovery. Recent home price appreciation and the increase in this quarter’s job postings from the technology companies should continue to drive strong demand for our product. The focus in Seattle in 2021 is maintaining the strong occupancy we currently have while pushing rate.
San Francisco remains our most challenged market. But even here, there are some very early signs of recovery. Occupancy is just below 94% and has improved 150 basis points since the beginning of November. The downtown portfolio remains pressured on rate with concessions that averaged 6 weeks in the quarter on about two-thirds of our applications. January concessions improved to a 1-month average on less than half the applications. Anecdotally, stories from our teams across the bay are reporting that people who left to go to other areas like Denver and Sacramento, are now looking to move back to be near their office or in desirable school districts. The extent of the Bay Area recovery will improve as we get even more clarity on tech company’s plans regarding return to office. We acknowledge that work from home will play a role, but we believe that in-person collaboration and much lower rent levels should make San Francisco attractive again. There have been headlines about corporate relocations out of state and clearly that is not a positive for the market, but it is important to keep reading. The Bay Area continues to attract venture capital and is yet to be replaced as the epicenter of the tech economy. Bay Area tech companies are also feeling a bit more optimistic and their ability to receive H1B visas under the new administration, which could increase demand in this market.
Supply in ‘21 will continue to be concentrated in Oakland and in the South Bay. Feedback from our local team was that the recent lifting of the stay in home order can definitely be felt in the downtown market with much more active streets and outdoor restaurant seating filled to the new lower allowed capacity levels. These are the first signs of bringing life back to the city. Our focus in San Francisco in ‘21 is to build back our occupancy, particularly in the downtown submarket, get rid of concessions and then push rate. While San Francisco will produce a revenue decline in ‘21, it, like New York, has a lot of upside potential due to the steep decline in 2020.
Finally, moving to Southern California, which continues to hold up much better than the Bay Area, despite some pretty difficult pandemic-related headlines in the LA area our Los Angeles portfolio maintained occupancy above 95% through the quarter. Concession use was modest and averaged just under 1 month on about 20% of our applications. Operationally, the story is similar to the third quarter with continued pressure from new supply in the Downtown Korea Mid Wilshire corridor. West LA continues to feel the pressure from the slow restart of online content creation, but new lease and renewal rates have shown some stability through the fourth quarter and into January. The suburban portfolio has very strong occupancy at or near 97%, and the submarkets of Inland Empire, Santa Clarita Valley and Ventura County continued to experience modest year-over-year gains in rental income. For ‘21, L.A. should be one of our better markets. We have recaptured our occupancy. Concession use has already been dialed back and now, our opportunity is on increasing rate and managing delinquency.
I will finish with Orange County in San Diego, which are primarily suburban markets for us and have averaged around 97% occupancy through the quarter. These markets continue to demonstrate resilience and produced higher resident retention than in any of our other markets. Both of these markets are presenting opportunities to increase rates and are expected to continue to perform well through 2021.
In closing, we remain optimistic that the early signs of recovery that we now see will continue and that through ‘21, we will build occupancy on the back of strong demand, leading to improved pricing power. Our efforts over the next several months will be focused on seeking out opportunities to maximize the trade-off between rate and occupancy, while ensuring the well-being of our employees and residents.
Thank you. I will now turn the call over to Bob Garechana.
Thanks, Michael. This morning, I will focus on our 2021 guidance for same-store revenue and expenses, along with normalized FFO and conclude with a couple of highlights on our balance sheet before turning it over to Q&A.
As part of the release and management presentation published last night, we introduced 2021 guidance after having withdrawn guidance in March 2020 due to significant uncertainties arising from the pandemic. In doing so, we acknowledge how far we progress toward the end of this pandemic, but also recognize that a significant amount of uncertainty remains. As a result, our same-store revenue, NOI and normalized FFO ranges are wider than normal.
Let’s start with our full year 2021 total same-store revenue guidance range, which is between negative 9% and negative 7%. Note that this guidance is on a GAAP basis since we report same-store revenues in the same manner and include the straight-lining of concessions as required. In our management presentation, we laid out a variety of scenarios under which we could achieve the top, bottom or points in between. That said, let me take a moment and highlight the main drivers that will shape revenue performance for the year, along with our thoughts on how 2021 might play out.
First, physical occupancy, you heard both Mark and Michael talk about the improvements we are already seeing. We would expect this to continue and that as we get into the second quarter, occupancy should become a tailwind that begins to contribute to year-over-year improvement. Next, pricing, much like occupancy, the middle and higher ends of our guidance anticipate the pricing improvements discussed to continue both in improved leasing rates and reduced concessions. This positive trend, however, will take a little longer to manifest itself in our reported numbers. For leasing rates, it will take some time, not only to start writing new leases and renewing existing ones at levels above the prior year, but also to reset a meaningful part of the leasing book. The good news is that not only are we starting to see improving trends, these improvements may gain even more traction in time to coincide with our prime leasing season and resulting in positive year-over-year rates by midyear.
The other element of pricing that is worth touching base upon is concessions. As I mentioned earlier, we recognized concessions on a straight-line basis as required by GAAP. That means as disclosed on Page 12 of the release, of the $31 million in cash residential concessions granted in 2020, we still have approximately $19 million of unamortized concessions that will reduce revenue in 2021, which is about 75 basis points of same-store revenue. Any new concessions granted in 2021 will also be straight lined. So the earlier in the year that the concession is granted, the more of it that will be recognized in the 2021 financial statements. We expect concessions granted will taper off during the first half of the year. But because of the combination that I just described, 2020 unamortized residuals and the timing of new 2021 concessions, this improvement won’t fully manifest itself in 2021 reported GAAP results.
And finally, some thoughts on bad debt, as Mark mentioned, our collections have remained both strong and consistent at approximately 97%. We incurred an approximately $13 million reduction in revenues for the fourth quarter 2020 due to uncollected rent. The middle range of our 2021 guidance assumes that this continues with only slight improvement very late in the year. We hope that we can do better than that. But given the regulatory environment, we remain cautious in our assumptions.
In summary, our same-store revenue guidance incorporates recovery and operating fundamentals, but acknowledges both difficult comparable periods for the first half of 2020 and the reality that it will take time for improvements in the business to show up in our reported results. Specifically, same-store revenue performance will be sequentially negative from Q4 2020 to Q1 2021 and likely not improve until the second half of the year. As fundamentals improve, consistent with our expectations, reported results will catch-up from this improvement and benefit both sequentially and from a year-over-year comparison basis. We expect same-store revenue results in the second half of the year to be better than the first half results and to position us very well for continued growth and recovery.
Now some color on same-store expenses. Our full year guidance range for same-store expenses is 3% to 4%. The drivers of same-store expenses remain largely unchanged. The 4 largest expense categories continue to be real estate taxes, on-site payroll, utilities and repairs and maintenance. Before I provide you a bit of color on each, I’d like to remind you that 2020 will present a tough comparison period on expenses, given growth was only 2.1%. As you think about how this plays out quarterly, this comparison issue will especially be pronounced in the second quarter since many activities and corresponding expenses were halted in the first few months of the pandemic.
Now, a little color on the major categories, real estate taxes are expected to grow in the mid-3% range, which is slightly lower than prior years. While municipalities continue to be stretched, we are seeing some jurisdictions provide relief on assessed values, and that, coupled with aggressive appeals activity, should help control growth. Perhaps even more pronounced this year than usual will be the timing and success of this appeals activity, which may present an outsized impact on where the number ultimately settles out.
Payroll ended 2020 flat to 2019. This is the second year in a row that payroll growth has been less than 1%. And while many of our efficiency initiatives were delayed because of the pandemic, our hard-working on-site colleagues have continued to gain inefficiencies. As a result, 2020 makes for yet another difficult comparison for 2021. By continuing our efficiency initiatives and keeping our eye on the ball, we should still be able to limit payroll growth for the full year to around 2%. That leaves us with the final two categories of utilities and repairs and maintenance. Both are estimated to have more meaningful growth in the 4% to 5% range. In previous years, utilities benefited from modest or declining commodity price growth. In 2021, we are expecting higher natural gas prices which is driving our forecasted growth. For repairs and maintenance, a good amount of the growth encompasses catching up on activities that were delayed as a result of the pandemic, keeping in mind that this expense declined in 2020.
Our guidance range for normalized FFO in 2021 is $2.60 per share to $2.80 per share. Major drivers for the change between our 2020 normalized FFO of $3.26 per share and the midpoint of $2.70 from our 2021 guidance include: a $0.60 decline in same-store NOI based on the revenue and expense assumptions outlined. Keep in mind that nearly 1/3 of that decline stems from the difficult comparable period in the first quarter of 2020; a $0.07 decline primarily due to disposition activity that occurred in 2020, which is more than offset by a positive $0.14 contribution from lower anticipated interest expense, predominantly due to taking those disposition proceeds and paying down nearly $1 billion in debt in 2020; and finally, a negative $0.03 in other items. The back-loaded nature of the recovery in our NOI will also, of course, impact our NFFO numbers, which should improve on the back half of 2021.
A final note on the balance sheet, our financial position remains extremely strong despite the impact of the pandemic. As I just mentioned, in 2020, we paid down nearly $1 billion of debt using disposition proceeds, extended our already long weighted average maturities to 9 years and continued to reduce our weighted average rate. This activity has positioned us extremely well, ending the year with net debt to normalized EBITDA of 5.0x, nearly $2 billion in available liquidity and very limited maturities until 2023. Our access to debt capital remains excellent positioning us well for opportunities should they present themselves.
With that, I will turn it over to the operator for the Q&A.
Thank you. [Operator Instructions] And we will go first to John Pawlowski of Green Street.
Great. Thanks. Maybe to start with you, Bob your opening comments there, did I hear it right that you’re assuming positive year-over-year blended rates by midyear?
Yes. So our guidance assumption at the midpoint is that as you approach the middle part of the year that we will start to see positive year-over-year lease rates.
And presumably, you are still decidedly negative on renewals. So that would assume decidedly positive on new lease, right, am I interpreting that correctly?
So when I guess I am talking about leasing rates in the guidance, I am thinking that we likely will be positive on blended which encompasses both by middle part of the year, encompasses both new lease and renewal rates.
John, just to add some color, it’s Mark. Yes, just to add some color that will get your clarification in. That is partly because things are recovering and getting better, that’s partly because the 2020 comp periods are declining, right. Rates declined and they declined particularly hard late in the second quarter and through the third. So, we look at this line as kind of crossing these two lines in the middle of the year. And I am sorry you were asking a clarification there?
Yes. No, sorry to cut you off. But renewal rates through the year, beginning midyear, are they – are renewal rates positive still?
Yes. Hey, John, this is Michael. So I think the way to think about renewals is, first and foremost, we have a pretty difficult comp period in front of us with Q1 and Q2. And then as you turn that corner, you would expect performance and renewals to start turning positive.
Okay, thank you. And final one for me, Mark, your opening comments about just the liquidity of the assets and a more active capital recycler. Just curious your updated thoughts on urban Class A product along the coasts, if you are starting to test the market, how is pricing shaking out versus pre-COVID levels in some hard hit markets?
Yes. Thanks, John. So, in terms of values and let’s focus for just a moment on the hardest hit markets of New York and San Francisco. I start by saying there has just been very little – and you know there is very little volume, much, much less. In fact, we can sort of name the deals, the Chief Investment Officer and I that have closed. The ones that have closed, and there’s one in Union Square in New York that closed right about what pre-pandemic values would have been. So that’s an asset that I think was about $1,200 a foot, $900,000 a unit, at like a 3.6% tax cap rate – excuse me, very much value would have traded at before the pandemic, but it’s just one deal. And I don’t have a lot of others. In San Francisco, there is certainly been some stuff traded, smaller deals. I would say we’re probably down 10% or so on value in San Francisco and New York. We are starting to hear from people who want to acquire assets from us in those markets. The thought being, they will ride the recovery up. We get that, and we probably – our sellers, as I implied in my remarks in those markets to some extent. Remember, we still have those 421a assets in New York that have the big tax increases. We have a big concentration in the city of San Francisco. But for us to sell much below the pre-pandemic value, it doesn’t make a lot of sense because we believe in the recovery in those markets. So we think revenues are going up pretty sharply, especially in the second half of this year and into ‘22. And the idea that we would sell at a big discount doesn’t make sense to me, but I think you will see us start to be more active sellers in those two places. Other places like Seattle, particularly has had a spade of sales, including a pretty large one in Bellevue, at very good pricing at pre-pandemic value or maybe even better, obviously, lower cap rates because NOI is down. So Seattle has had some strong numbers. DC too, a lot of suburban stuffs traded or a fair number of suburban things have traded. So we see that as market is holding up. I haven’t seen a lot of urban stuff traded. There is some rules in DC that have come in the force that make it hard in a district to sell assets right now. So I will pause there and I hope that’s responsive.
It is. Well, thanks for the time.
Thank you.
And we will go to our next question from Nick Joseph of Citi.
Thanks. Mark, maybe just following up on that, as you look to the active recyclers over the next few years and think about these potential expansion markets, what sort of IRR differential are you underwriting between some of these assets that you maybe thinking of selling? Because as you mentioned, the values maybe down, but the growth maybe on a forward basis versus any assets that you are starting to look at or markets that you are starting to look at?
Well, we all are able to boil it down to the math, but there is a lot more to it than that. I – again, we have seen deals we have underwritten, for example in Denver lately that are 7 un-levered IRR deals, maybe even some high 6s. A lot of stuff we are selling might be 1% lower than that. But of course, the assumptions matter a lot and how do you think about your recovery in rents, which is so hard to peg as you know. So, we do think that what matters in moving our capital around is ending up in the place that risk-adjusted is best. And in some cases, some of the markets also have more political risk, other markets have more supply risk, and we just got to balance that out. So there we do see, obviously, a higher IRR in the stuff we are buying than the stuff we are selling. But a lot of stuff we are selling is interesting to the buyers because they are levering it up or they have got a renovation play or some other way they are juicing their IRR that we either don’t believe in or can’t underwrite. So, I guess that’s how I would answer. It’s kind of not as mathematical as just maybe it’s 1% better.
No, that’s very helpful. And then I appreciate all the commentary upfront and the presentation. And so as we look at the applications in the move-ins, particularly over the last 2 months, is there anything that you are seeing trends in terms of either the age or credit quality or rent to income levels relative to where you were a year ago at pre-pandemic?
Yes. So Nick, this is Michael. So really, we are not seeing any kind of material shifts when we look at those applications. So we’ve looked at kind of rent as a percent of income. The portfolio has always averaged somewhere right around 19% for those move-ins in the fourth quarter, we were also right at 19%. What we did see a little bit happen is the range that we used to see as rent as a percent of income, used to be from 17% to 23%, with Seattle being the low at 17% and San Diego being the high at 23%. That range has expanded a little bit to 16% and 24%, but it’s really a marginal shift in this stuff. So, from the demographic side no change in the average age of applicants coming in. The income, I guess, I would tell you, when you look at New York, you have got some affordability opportunities right now. So you’re seeing average incomes coming down for applications in New York, but it’s still well over $220,000 a year, and the ratio is still at like 18.5%. So actually, everything we have looked at right now would suggest that all of our new applicants and all of our new residents coming in, from an affordability, from a demographic standpoint, really kind of demonstrate their ability to pay as the markets start to reaccelerate and stay with us.
Thank you.
And we will go to our next question from Rich Hightower of Evercore.
Yes, hey, good morning guys. Thanks for all the valuable color. You actually have answered most of my questions. But I just want to get a sense, maybe in a market like New York, is there anything embedded within the forecast that’s related to sort of the spring home buying season just given, for the first time in a long time, the strength in sort of the Tri-State area housing market? And do you make any assumptions around some of those related move-outs or anything along traffic or demand that might be impacted by that?
So Rich, this is Michael. I will just start off and say, just overall, when we have looked at the percent of residents moving to buy homes, again, this is one of those sets we really have not seen a difference. At a portfolio level, we’re running just over 12.5% of residents moving out. When you go specific to New York, we really haven’t seen any material change on that front at all. It’s actually declined a little bit in the fourth quarter. So I think relative to our assumptions as we move forward, I think you heard in my prepared remarks, we’re starting to see some improvement in the percent of residents renewing. So for the portfolio, we are expecting to be up at 54%. New York is still one of those markets that we are off – we are off what is normal for that market. So we’re still sitting below 50%, and we should be up above 60%. And so I think our modeling and our assumptions going forward is that we start to see a little bit of improvement in our ability to retain those residents, but nothing specific to them, more of them moving out to go buy homes.
And Rich, it’s Mark. Just to support Michael’s comment. There isn’t anything expressly in our guidance about increasing home purchases. Home portfolio was kind of designed not to have a lot of concerns about people moving out to buy homes. And as far as we can tell, that continues to be the case historically. Going forward, a lot of the renewals that Michael is thinking about now and a lot of these people that could elect to buy a home, these were people that renewed with us or least initially with us in the pandemic, I mean we are rolling into a period where everyone would have leased with us knowing what the situation was in New York and especially in March, April and May when it was particularly dire. So I would have thought that if they really were thinking home buying was absolutely at the top of their list, or disproportionately our population of renters thought that they already would have been in the suburbs. They already would have rented there in the hopes of buying. So I’m guessing the homebuilding, home buying boom in the Tri-State area is not actually going to matter very much to us.
Got it. Thanks for the comments.
Thank you, Rich.
And we will move to our next question from Alua Askarbek of Bank of America.
Good morning, everyone. Thank you for taking the questions today. I appreciate all the commentary this morning. It was really helpful. But I was wondering if you guys can talk a little bit more about the suburban submarkets. It looks like the renewals are still high, but they are trending behind 2019, early 2020 and the occupancy has diverged again. So I was just wondering where are those renters headed to, the ones that aren’t renewing and does it kind of tie into your commentary that the renters are looking to come back to urban? Just trying to think about if there is a shift back to urban to suburban that we have been talking about for the past year?
Yes. So, I think it’s a great question. And I think as we think about the forwarding address for residents that are leaving us, we still see a little bit of an elevated number in those that are leaving urban submarkets to go to suburban submarkets. When we think about our own suburban portfolio, I think a lot of what you’re seeing right now, in the management presentation, a lot of that is just normal seasonality as to how the markets actually would react. And I think what we’re seeing is we had strong demand, we maintained good occupancy throughout the year, and I think we’re going to continue to do that with stability and start pushing rate and try to recover as much of the rate as we can in the suburban submarkets.
Okay, got it. Makes sense. And then I just have a question on lease breaks and just transfers in general. I know last quarter, you said that everything was still elevated, and that also came about from companies pushing back their start dates. But how did that trend in 4Q?
Yes. So in the fourth quarter, the lease breaks is still elevated kind of on a year-over-year basis. But we are starting to see kind of that percent and the numbers start coming back into norms. I think we peaked up in September at like 36%, and the fourth quarter is now kind of gradually coming back down. We’d expect this number. I think we’re at like 25%, we’d expect this to be coming at somewhere around 20%.
Okay, great. Thank you.
And we will move to our next question from Amanda Sweitzer of Baird.
Great. Thanks for taking my question. I thought your comment on some San Francisco residents looking to move back from Sacramento and Denver were interesting, can you quantify the magnitude of that reverse migration either on an absolute basis or relative to how many residents left?
So I think, first of all, those – like that’s just the anecdotal statements that’s coming to us. So the quantity is small, right? But every week, we’re on the phone with our on-site teams, and we’re just trying to get some color around the applications and where they were coming from. When we see the inflows, which is new applicants for San Francisco, 87% of all of our applications are coming to us from within the state of California, and 70% are coming from within that MSA. Both of these numbers are up about 10 points each. So you’re still seeing that elevated kind of activity, which to us, is still that deal seeker, right? They’re coming in, they’re taking advantage of that price. So from the out migration in, those states, where people have left and are coming back, it’s just starting to trickle in. It hasn’t really manifested itself into a large enough percentage change. But I think the positive is, is that we haven’t heard any of that for months. And now we’re just now starting to hear that.
Yes, that’s helpful color. And then following-up on some of your demographics comments, I know the percentage of your residents with children is still kind of a small piece of your overall portfolio. But have you seen a change in that percentage, either among your existing base or the applications you’re seeing come in?
Yes, so about 10% of our residents have children living with them. We haven’t seen a change in that trend. And part of that is, I mean, our portfolio hasn’t changed. It still has a limited number of 3-bedroom units. It’s – there’s a fair number of one-bedrooms and studios. So I wouldn’t expect that, Amanda, to change very much just because again, our portfolio is more suited to couples and a few roommate situations and some families, certainly, but it’s just – it is like we added 3-bedroom units to the portfolio to make it more family-friendly in the last couple of quarters.
That makes sense. Thanks for the time.
Thank you.
And we’ll go to our next question from John Kim of BMO Capital Markets.
Thanks. Good morning. Mark, you mentioned in your prepared remarks that you are optimistic on a recovery in urban markets, just given the social and cultural aspects. But at the same time, you’re looking to reduce your urban exposure. So can you just marry those two comments together? And also maybe quantify where you’re looking to get your urban exposure to over time?
Great. Thanks for those questions, John. So there is a surface inconsistency there. I mean what our overall strategic goal is, as I said, is to just have a growing and steadily growing dividend and cash flow of the business. And to do that, the management team, even before the pandemic and the Board, had decided that we were going to spread our capital again, into these dense suburban areas around our urban centers, while still maintaining a significant urban center presence and into a few new markets or renewed markets in the case of Denver. So that was the plan. We do think there’s going to be a pretty good recovery in these urban centers, and we think 1 of 2 things is going to happen. We’re either going to be able to sell those assets now with the buyer understanding that they’re going to need to pay close to – close or at pre-pandemic value because they’re almost certain, in our opinion, at least to obtain a pretty good increase in revenue over the next couple of years, or we are going to wait and our shareholders who have suffered with the downside of the reduction in the urban centers will get that benefit. And then we’ll sell a few of those assets later. So it’s not that we don’t believe in the urban centers, we’ll stay over-weighted to them, but not this over-weighted. And in terms of exact numbers, we have 9 significant buildings in the city of San Francisco. That’s probably more than we need to have, but exactly how many should leave or go, I’m not sure. On the other hand, we did buy assets in the Bay Area. And we’re thinking about developing a couple of deals. They’re just more Peninsula or East Bay or just sort of spreading the capital out. You saw our development deal, John, that’s sitting on the island just outside of Oakland. So we – you should just sort of expect a decline in the city of San Francisco and overall, California, just again, because of the concentrated political risk there. I don’t have an order of magnitude to give you, but that’s a source. And New York composed predominantly at Brooklyn and Manhattan. Again, we have significant number, approaching 30 buildings in that area and to get rid of a few of those buildings at the right price. We are looking at a development deal in the tri-state area, we’ve acquired in Jersey City over the last year or two. So it’s not like we are not interested in staying invested in the area. It’s just spreading the money out a little bit. So I guess I’d have you stay tuned for the exact numbers, but you should expect a lessening in California, specifically the city of San Francisco and a lessening in New York provided pricing makes sense and an increase in a place like Denver and in some of these suburban places as well as maybe another couple of markets.
It sounds like you think the urbanization trends that has occurred in the last decade have peaked. Is that a fair characterization?
No. I think they’re spreading out more. I think new places are urbanizing. I think New York will continue to be a great urban center and San Francisco will eventually recover. But I think places like Denver now have an urban center. It’s not as dense as it needs to be, but it’s attractive, and we have 3 buildings in Downtown Denver, and those are well occupied. So I guess I’d say, I think the trend towards urbanization, I think, is inexorable over the whole world and in the United States. I think it gets thrown off kilter for temporary periods of time like the pandemic. I think what’s going on in the United States is other places. And again, Denver is an example, Austin, Texas, start to become more dense and become more attractive for a variety of reasons. So there’s just going to be more cities. I mean Seattle joined the party 15 years ago in regards to having a really significant downtown. So I just think some of these other cities are also densifying, but I don’t believe that urbanization is going to end in the United States. I think it’s just merely been interrupted.
Okay. I appreciate the insight. Thank you. I just had a follow-up question on your urban core operating metrics and the improvement in pricing that we’ve seen, which is on Page 6 of your presentation. But I just wanted to clarify, the pricing trend that you’re showing, this is base rents and not affected rents. Is that correct?
This is base rent, but it includes – it’s a net effective. So it includes the impact of the concession. So basically, if you scraped our website and you looked at every single one of our units, what we’d be charging, it’s the rent, the amenity, rent – amenitized rent and the impact of that concession.
Okay, thank you.
Thanks, John.
And we’ll go to our next question from Haendel St. Juste of Mizuho.
Hey, good morning out there.
Good morning.
I appreciate the color on asset pricing and your thoughts on your portfolio exposures. I was hoping you could talk a bit more about how new ground-up development fits in your thinking here with asset pricing very full in your footprint as you outlined and noticeably more optimistic today versus prior quarters? What’s the current thinking here in development? Your peers, certainly, a number of the Sunbelt peers have been adding projects to their development pipeline in the quarter. You still have 3, 1 of which is in a JV. So curious if you’re – sounds like you are more inclined based on your answer to a prior question. Are you just not finding the opportunities? The returns are not attractive enough yet. And maybe how much you would like to expand that pipeline, too?
Yes. Thanks, Haendel. I appreciate that question. So I think all three of our development deals that you now see in the supplementary disclosure are going to deliver this year will certainly be in lease-up for some time. We’ve been looking at a couple of deals. We started nothing in 2020. That just didn’t seem prudent to us given the circumstances. There are at least two deals we like that we would consider starting this deal – this year, pardon me. One is in the District of Columbia proper. It’s in an emerging neighborhood. We really like some of the highest per foot rents in the city, an area that, though it suffered in the pandemic, not as much as a lot of other neighborhoods. So really like the location. And because of TOPA, and I know you’ve been around a lot, so you know what TOPA is, but the quick brief there as it’s a law that gives residents the right to purchase their building if it’s being sold in the District of Columbia. And it makes it quite difficult to sell or to acquire properties that are newly built and have a resident base, so, building like we have done before, near Union station in that NoMa area, you should expect us to do that occasionally. And to fund this by selling some of the older product we own on Wisconsin Avenue and Connecticut Avenue. So I would expect that, that deal would likely start this year.
Another one is in suburban California in a location with some really powerful employer drivers nearby that we really like. The very unique thing about the deal and – is that’s a density play. It’s us knocking down 60 units of an existing property and putting 220 or 230 units back. So it’s very efficient from a capital and return point of view. Again, it’s a place we really like. It’s a hard, hard place to build. So we like that. The team is very busy. We’re looking at a whole bunch of stuff. As I implied in my remarks, there is a couple of things in Denver, we’re thinking about as development opportunities, again. We’d like to get a bigger presence there. The deals we’re looking at are either path of growth, I’d say, between urban and suburban or suburban development. So I’d expect us to start those two deals I just mentioned, maybe one or two other things, we’ll see. We think development is part of the mix here at the company, and we’ll continue to do them as they sort of pencil out.
Any preliminary color on potentially what yield of spread versus cap rates of IRRs could look like?
Yes, that’s a terrific question because of how hard that is. You’ve hit on the nub of the hardest underwriting part is what are – first of all, what are spot rents? When spot rents are going down in a lot of these places. So what does spot rent mean? And then you come back and unfortunately, 3 months later, spot rent has changed. And how do you think about rent growth? So you’re going to be building these buildings for 3 years. I mean they’re going to deliver in 2022 – excuse me, 2023, early 2024. You may be delivering into – you will be delivering into certainly, a very different climate and maybe a much more advantageous one. So we spend a lot of time thinking about just that. So I can’t really give you a yield if we start the deals, I will talk about that. But it is – just as important as your starting rate is your rent growth assumption, when do you get back to where you were? Do you get back to where you were? How does that work? And that’s the art of this process.
Got it, got it. Thanks for the color.
Thank you.
We’ll go to our next question from Brent Dilts of UBS.
Hey, guys. Thanks. You’ve answered most of my questions, but just one last one here for me is how is demand trending by unit size? And how is that differing by urban or suburban or even MSA, if you have that data?
Yes. So I don’t have the actual demand in totality. I will tell you that studios continue to be our most challenged unit type. So I think our overall occupancy in studios is like 93% compared to – they used to be the highest, just over 96%. And if you drill into those studios and you look at like New York and San Francisco, the occupancies of studios are down at like 85%, 86%. So I think you could say that the demand that’s coming into us is still seeking kind of that one-bedroom, the larger units, even the 2-bedrooms because that is where that occupancy improvement has come from. And I think right now, we’re just kind of in the wait-and-see mode to understand at what price can we clear these studios out. And when does that demand really start to return to these markets.
Okay, thanks. Appreciate it.
[Operator Instructions] We’ll go next to Alexander Goldfarb of Piper Sandler.
Hey, good morning. So two questions. First, as you guys look over your expirations in the next few months, to call it, March into June, do you have a sense for how many of those residents are planning to move out? Or are people not sort of indicating yet their intentions of whether or not they plan to renew or move out? And I am really focused on obviously, the major hard hit markets like New York, San Francisco, Austin.
Yes. Alex, this is Michael. So right now, we’ve just started issuing April renewal offers out there. So it’s hard to get kind of that indicator from residents. I will tell you, in the prepared remarks, you could see, I think we’re going to be moving from the 52% that we were in January, up to 54%, maybe even 55%, as you work your way through February and March. At this time, I don’t expect like the April and Mays to do anything materially different. I’m optimistic that we’re going to get back into the 60% retention rate, but you got to remember, at the onset of the pandemic, we had a lot of residents choose to renew with us that drove that kind of number up. So I think we should expect this kind of gradual improvement in retention. And I think the improvement that you’re seeing is really systemic across all the markets. But again, I have the most improvement to gain or the most area to make up in San Francisco and New York. And I think at this point, it’s too early to understand May, June and July kind of timeframes.
Okay. And then, Mark, on the portfolio, it’s great to hear that you guys are considering some new markets in addition to expanding in Denver. As you guys look back over the history of the company, though, EQR has more from the El Paso or the sort of Midwest low-rise to sort of urban culminating with Archstone and now you’re sort of going back. But in that process, there was dilution and that investors took as far as earnings. As you envision the next markets that you’re going to enter and the transitioning to decrease your exposure in some of the majors like New York or San Francisco, do you envision like that same sort of dilution or the way you guys see it, you can see it sort of in a modest pace that earnings can still grow and so that we don’t go through that same dilution that we experienced previously?
Thanks, Alex. It’s Mark. So I would have told you before the pandemic that, that effort would have been accretive slightly, that we’d be selling New York at 4% or slightly sub-4% cap rate and we’d be buying Denver and a 4.75%, and it will all be happy and easy. Now I think those two cap rates are close to each other. Part of that is a product of what’s going on in New York and San Francisco. But I don’t envision this to be a dilutive exercise. I think it isn’t going to be an accretive one. I think it’s going to be about even now. And I think what we’re buying in some of these new markets is probably better political risk, a little bit better cash flow in these assets over the long haul. And maintaining exposure, though, to these big urban centers where you have a lot of affluent renters and for New York, a really good supply picture. That’s good. And I think what we’ll have then is just more opportunities to invest and develop across a larger number of markets and the steadier platform win inevitable issues come up in the future. So I don’t expect dilution from the process. Again, I would have told you in early ‘19, I was hoping there’d be accretion in the process, but I don’t think that’s realistic right now.
Okay. But it is market as a positive. I mean, you guys certainly are good on the deal side and obviously there is markets with more growth. So it’s good to see you guys pursuing this. Thank you.
Thank you.
We’ll go to our next question from Nick Yulico of Scotiabank.
Thanks. Just a couple of questions. I guess, first, in terms of the improvement that you’ve seen in January in terms of occupancy and also pricing. I guess, I’m just wondering what we should really be reading into that? Because I think, typically, you do, like most of multifamily, gain some occupancy to start the year versus the fourth quarter. And yet both periods are very slow leasing period. So I’m just kind of wondering what we should really be taking out of this about your confidence level of getting some improvement in these two quarters, which are, again, not really where you make your year, which is second quarter, third quarter in terms of occupancy and rent? What is really giving you guys confidence about your ability to do better in the spring? Is it actually something you’re seeing in the data right now? Or is it more of your view about just people returning to cities and that could create leasing demand?
Yes. Thanks Nick. It’s Mark. I’m going to start, and I think Michael is going to supplement. But the fact that we’re seeing – we agree with you, there is a seasonal improvement in occupancy that starts to incur now, and there’s certainly an improvement in rate that starts to occur now. The fact that our numbers are obeying the normal seasonal norms of our business is a very positive thing because they didn’t in 2020. Occupancy rate, all those things declined when they usually went up. So the fact that our markets, and I remind everyone on the call, I mean, December and January and November, especially the end of November were horrible for the pandemic, particularly in California, which is almost half our NOI, and it got tough again in New York. So we would say, Nick, under difficult circumstances, our properties, our portfolio started to perform like it normally does. And if it performs like it normally does, that means rate and occupancy are going to keep going up every week through the end of the third quarter, and that to us is very encouraging. I’d also add it’s the setup. At 95% occupied, Michael and his pricing team and our colleagues in the field feel much more comfortable reducing concessions and starting to push rate when they’re this well occupied. When you’re on your back heels, it’s harder to do. So I would say we’re positioned well going in the leasing season. And just being normal is an advantage from what went on in the third and fourth quarter. I don’t know, Michael, if you have something you’d add?
Yes. I think I would just give a little bit of context. So normally, you’re right, we run about 20% of the volume in Q1, 30% in Q2, 30% in Q3, and then it falls back to about 20% in Q4. The actual, the velocity and the strength of the leasing season that we had in Q3 and Q4 of 2020 has actually shifted this profile a little bit, and put us now for 35% of our leases expiring in the third quarter of 21% and 22% in the fourth quarter. So I actually view this as a little bit of a positive that we shifted some of these expirations to be back-half loaded, which gives us more time to even recover some of this rate and then get through those leases.
Okay. That’s helpful. Appreciate that. I guess just one last question is, could you give a sense for where you think in-place rents are for your portfolio versus the market? Just trying to kind of gauge the level of above-market leases you still have to deal with in the portfolio that could be expiring in coming quarters?
Yes. So I think you are referring to gain in loss to lease. So basically, just snapshotting kind of our rents in place and comparing it to the existing rent rule. Sitting here, and I did this basically at the end of January. Our gain-to-lease was 6.5%, not including concessions, 9.5% when you fold it in concessions, and that is clearly front-loaded. So the numbers are – we have much higher gains in that Q1, and then it starts to kind of gradually down. We actually flip to kind of the loss to lease model back in that fourth quarter. But I think at this point, you’re looking at this at the lowest point in the rent seasonality, rents are the lowest, and you’re comparing this still against people that were pre-pandemic and then new people. So I don’t really – I mean, I think it’s a good snapshot to understand what could be. But I think really over the next couple of months, this number is going to move around a little bit.
And the other thing, the number is useful for, Nick, is you’ve got checking and the investors now got checking our guidance. So when people try and understand that, to understand where they gain the leases, gives you some idea of where our starting point is and what we need to make up during the course of the year.
Okay. Thank you, Mark and Michael. Appreciate it.
Thanks Nick.
And we’ll go at Alex Kalmus of Zelman & Associates.
Hi, thanks for taking my questions. Looking at the projects in the pipeline and expected lease-ups over the next year, it seems like there’s a lot more projects in the urban markets. Granted there’s some supply chain and construction delays in typical in those markets. But what are your expectations for the coming year in the urban core?
So I just want to make sure I understand your question, Alex. So you ask us what we see for supply in, call it, New York, Central New York and San Francisco kind of in ‘21?
Correct. Thank you.
Yes. So I’ll just start at the top and just say, so right now, when you think about the natural shifts that happened between the fourth quarter into the first quarter. When we look at supply for ‘20 and ‘21, we think the overall numbers is going to be relatively the same. I think you picked up in my prepared remarks, San Francisco is elevated, and a lot of that is the concentration sitting in South Bay. When you look at markets like New York, it’s really nonexistent in Manhattan from a competitive landscape against us. And we have a little bit in the Hudson Waterfront. So, when we think about supply, we are looking at these numbers in totality, but we really go granular. We go down to an individual asset, and we’re looking at what new deliveries are coming at us or what existing deliveries are still kind of working their way through their lease-up process. And what pressure do we think that, that’s going to have on us in terms of performance as we work our way through the year. So it’s a very granular process. And I think when we roll it all up, right now, you’ve got – you still have a lot of supply coming at you in D.C., so another 12,000 units being delivered. The question there is really just the ability for the market to absorb that supply. From a competitive standpoint, I really stand back and just say the South Bay and San Francisco and a little bit in the Peninsula is going to have a little bit more pressure on us than we have felt in the past.
And Alex, it’s Mark. If I can just add something on some sort of new research we’ve done to try and think about just new starts, so not completions, as Michael was referring, but starts as we look at – just – it’s tough to make these deals pencil in the urban centers. So we’re trying to determine what does it look like in ‘23. And a couple of our guys, it’s really good work, and the work was focused on, what do we see starting within, call it, 2 miles of our properties, remembering that all supply in a market is competitive with us. But Michael would tell you and our operators would tell you that the supply that’s very close is what is most damaging to our rent roll. So looking at what’s relatively close to us, looking at what starts were from 2016 to 2019 by market, getting an average and comparing that to what we saw in ‘20 and ‘21. What we see that’s being generated in ‘21, will lead us to believe that starts are likely to be down 30%, and thus deliveries are down 30% in, say, 2023, especially in our urban markets. Now in Washington, DC that number seems completely unaffected. I mean starts seem relatively constant. But we are seeing that, and we hope that, that’s an additional tailwind. But again, this is relatively new research that our folks have done that we think is informing us to our optimism about supply close in urban center coming forward.
Really appreciate the color. Thank you. And…
Thank you.
Moving to the bad debt assumptions in the revenue guidance you gave. Is a lot of that predicated on California’s decision to extend AB-3088 into June? And is that the most sensitive aspect to that bad debt assumption or are there other regulatory or macroeconomic factors that would cause up or down based on that?
I think our somewhat increased pessimism about bad debt over the last 2 months was based on both the new administration, doing its extension under its CDC Authority, California doing an extension, New York, all these markets sort of chiming in, given that the pandemic got challenging again in the fourth quarter and in January that all this got extended, which meant that we wouldn’t get resolution. But I will say that we didn’t – and this is why our guidance, as Bob acknowledged, was a little conservative remains in our minds, maybe a little conservative on bad debt, is that we didn’t take into account either the $25 billion that was passed in the old administration’s bill in December for rental relief. New York put rules out last – yesterday on that. California put those out a week ago. We’re still analyzing all of that. So we’re not sure. We certainly intend to get involved there and make sure our residents, who are in a delinquency situation, are aware of that and can take advantage of it. So we may get some benefit there from taking advantage of some of those programs. The Biden administration $1.9 trillion program has another $25 billion in it for rent for helping folks that are behind in their rents, so rental assistance. Again, who knows if that passes, but that’s very helpful. Along with in the $1.9 trillion bill is $350 million of aid to cities. And that is tremendously helpful to places like New York, we’re thinking about tax increases or service cuts. And so I’ve taken your question a little longer, but I think it’s important that some of these government restrictions are problematic, but they come with some good things as well, especially for owners like us of apartments that are in more urban settings.
Appreciate it. Thank you very much.
Thanks, Alex.
And with no further questions in the queue, Mr. McKenna, I’d like to turn the conference back to you for any additional or closing remarks.
Yes. It’s Mark Parrell. Well, thank you all for your interest in Equity Residential and have a good day. Take care.
That does conclude the call. I would like to thank you for your participation. You may now disconnect.