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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 Essex Property Trust Second Quarter 2021 Earnings Conference Call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC.
It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall. You may begin.
Thank you for joining us today, and welcome to our second quarter earnings conference call. Angela Kleiman and Barbara Pak will follow me with prepared remarks and Adam Berry is here for Q&A.
On today’s call, I will start with our second quarter results which were driven by a strengthening economy and positive [indiscernible] underly a robust recovery on the West Coast. I will also discuss the status of reopening the West Coast economies and related factors, concluding with an overview of the West Coast Department Transaction Markets and Investments.
Our second quarter results were ahead of our initial expectations entering the year as the economic recovery from the pandemic occurred faster than we expected. With a strong economy and high vaccination rates, we are now confident that the worst of the pandemic related impacts are behind us.
As noted on previous calls, our strategy during the pandemic was to maintain high occupancy and scheduled rent, both necessary for rapid recovery. To that end, net effective rents surged during the second quarter, along with year-over-year improvement in occupancy, other income and delinquency.
The recovery in net effective rents continued unabated in July and we are now pleased to announce the July net effective rents for the Essex portfolio have now surpassed pre-pandemic levels, with our suburban markets leading the way while the downtowns are improving, but still generally below pre-pandemic levels. Obviously, these higher rents will be converted into revenue as leases turned and Angela will provide additional details in a moment.
Having passed the midpoint of 2021 and looking forward, we made a second set of positive revisions to our West Coast market forecast which can be found on Page S 17 of the supplemental. Driving the changes is an increase in 2021 GDP and job growth estimates to 7% and 5%, up from 4.3% and 3.2% respectively from our initial forecast. As a result, we now expect our average 2021 net effective rent growth to improve to minus 0.9% from minus 1.9% from the beginning of the year. To put this into perspective, consider that our net effective rents were down about 9% year-over-year in Q1 2021, given our current expectation of minus 0.9% rent growth for the year, year-over-year net effective market rents are now forecasted to increase about 6% in the fourth quarter of 2021.
Cash delinquencies were up modestly on a sequential basis at 2.6% of scheduled rent for the quarter and well above our 30-year average delinquency rate of 30 to 40 basis points. The American rescue plan of 2021 provides funding for emergency rental assistance, which was allocated to the states for distribution to renters for pandemic related delinquencies. Through the second quarter collections of delinquent rents from the American rescue plan were negligible, as the pace of processing reimbursements has been slow since the program launched in March. We expect that to improve in the coming months. We expect delinquency rates to return to normal levels over time, as more workers enter the workforce and eviction protections lapse on September 30 in both California and Washington.
At this point, only about 7 million of the 55 million in delinquent rent shown on Page S 16 of the supplemental has been recorded as revenue. Given uncertainty about the timing of collections, no additional revenues are contemplated in our financial guidance. Even with the approved job and economic outlook, the reopening process was gradual through the second quarter, with full reopening declared in mid and late June for California and Washington respectively. The unemployment rate was still 6.5% in the Essex markets as of May 2021. underperforming the nation. Through Q2, we have regained about half of the jobs lost in the early months of the pandemic.
Employment in the Essex markets dropped over 15% in April 2020 and while job growth in our markets outpaced the nation in the second quarter, we're still 7.9% below pre-pandemic employment compared to 4.4% for the U.S. overall. We see the gap is an opportunity for growth to continue in the coming months as we benefit from the full reopening of the West Coast economies. We believe that many workers that exited the primary employment centers during pandemic related shutdowns and work from home programs will return as businesses reopen and resume expansion that was placed on hold during the pandemic.
As we proceed through the summer months, we edge closer to the targeted office reopening date set by most large tech employers in early September. As recent reports about Apple and Google suggest the COVID-19 Delta variant could lead to temporary delays in this reopening process, our survey of job openings in the Essex markets for the largest tech companies continues to be very strong as we report 33,000 job openings as of July, a 99% increase over last year's [indiscernible].
New venture capital investment has set a record pace this year with Essex markets once again leading with respect to funds invested providing growth capital that supports future jobs. Generally, economic sectors that fell the furthest during the pandemic are now positioned for the strongest recovery in the reopening process led by restaurants, hotels, entertainment venues travel and so many. Returned to office plans which remain focused on hybrid approaches will continue to draw employees closer to corporate offices. Given that many workers won't be required to be in the office on a full time basis, we expect average commute distances to increase.
As we highlight on Page S 17.1 of our supplemental, this transition has already started in recent months, as our hardest hit markets in the Bay Area once again experienced net positive migration from beyond the NorCal region. In particular, since the end of Q1, the sub markets surrounding San Francisco Bay have seen positive net migration that represents 18% of total move outs over the trailing three months compared to minus 8% a year ago. These inflows are led by residents returning from adjacent metros such as Sacramento and the Monterey Peninsula, as well as renewed flow of recent graduates arriving from college towns across the country, a notable positive turnaround from last year.
In Seattle CBD, we've seen similar or even stronger recent inflows and were likewise experiencing a strong market rent recovery. On the supply outlet, we provided our semi-annual update to our 2021 forecasts on S 17 of the supplemental, with slight increases to 2021 supply as COVID related construction delays shifted incremental units from late 2020 into 2021. We expect modestly fewer apartment deliveries in the second half of 2021, with more significant declines in Los Angeles and Oakland. While it is still too early to quantify recent volatility in lumber prices and shortages for building materials may impact construction starts and the timing of deliveries in subsequent years, multifamily permitting activity in Essex markets also continues to trend favorably declining 200 basis points on a trailing 12-month basis as of May 2021, compared to the national average, which grew 230 basis points.
Median single family home prices in Essex markets continued upward in California and Seattle grew 18% and 21% respectively on a trailing three-month basis. The escalating cost of homeownership combined with greater rental affordability from the pandemic have increased the financial incentive to rent. We suspect these trends will continue given muted single-family supply and limited permitting activity and believe these factors will be a key differentiator for our markets in the coming years compared to many U.S. markets with greater housing supply.
Turning to apartment transactions. activity has steadily accelerated since the start of the year, with the majority of apartment trades occurring in the low to mid 3% cap rate range based on current rents. Generally, investors anticipate a robust rent recovery, especially in markets where current rents are substantially below pre-pandemic levels. With the recent improvement in our cost of capital, we have turned our focus once again to acquisitions and development while remaining disciplined with respect to FFO accretion targets.
With respect to our preferred equity program, we continue to see new deals although the market is becoming more competitive. Lower cap rates from pre-pandemic levels have produced higher than anticipated market valuations which in turn has resulted in higher levels of early redemption. That concludes my comments. It's now my pleasure to turn the call over to our COO, Angela Kleiman.
Thanks, Mike. My comments today will focus on our second quarter results and current market dynamics. With the reopening of the West Coast economy the recovery has generated improvements in demand and thus pricing power. Our operating strategy during COVID to favor occupancy while adjusting concessions to maintain schedule rents enabled us to optimize rent growth concurrent with the increase in demand, resulting in same-store net effective rent growth of 8.3% since January 1, and most of this growth occurred in the second quarter.
A key contributor of this accomplishment is the fantastic job by our operations team and responding quickly to this dynamic market environment. While market conditions have improved rapidly during our second quarter -- driving our second quarter results to exceed expectations. I would like to provide some context for why sequential same property revenues declined by 90 basis points compared to the first quarter.
The two major factors that drove this decline were 50 basis points in delinquency and 50 basis points in concessions. Delinquency in the first quarter was temporarily lifted by the one-time unemployment disbursements from the stimulus funds, as expected in the second quarter, delinquency reverted back to 2.6% of schedule rents versus the 2.1% in the first quarter.
On concessions, the nominal amount increased from higher volume of leases in the second quarter relative to the first quarter of this year. To be clear concessions in our markets have declined substantially and are virtually non-existent except for select CBD markets. Our average concession for the stabilized portfolio is under one week in the second quarter compared to over a week in the first quarter and over two weeks in the fourth quarter. Although concessions have generally improved in the second quarter, they remain elevated ranging from two and a half to three weeks in certain CBD, such as CBD LA, San Jose and Oakland.
Given the extraordinary pandemic related volatility in rents and concessions over the past year and a half, I thought it would be insightful to provide an overview of the change in net effective rent compared to pre-COVID levels. As of this June, our same-store average net effective rent compared to March of last year was down by 3.1%. Since then, we have seen continued strength and based on preliminary July results, our average net effects are now 1.5% above pre-COVID levels. It is notable that this 1.5% portfolio average diverged regionally, with both Seattle and Southern California up 5.8%, 9.3%, respectively, while Northern California has yet to fully recover, with net effective rents currently at 8% below pre-COVID levels.
On a sequential basis, net effective rents or new leases has improved rapidly throughout the second quarter and preliminary July rent increased 4.7% compared to the month of June, led by CBD San Francisco and CBD Seattle both up about 11%. Not surprisingly, these two markets were hit hardest during the pandemic and are now experiencing the most rapid growth.
Moving on to office development activities, which we view as an indicator of future job growth and according the housing demand. In general, the areas along the West Coast was the greatest amount of office developments have been San Jose and Seattle. Currently San Jose has 8.1% of total office dock under construction and similarly Seattle has 7% of office stock under construction.
Notable activities include Apple leasing an additional 700,000 square feet and LinkedIn announced recent plans to upgrade their existing office in Sunnyvale. In the Seattle region, Facebook expanded their Bellevue footprint by 330,000 square feet, and Amazon announced 1400 new web service jobs in Redlands. We expect in the long-term areas with higher office deliveries, such as San Jose and Seattle will have capacity for greater apartment supply without impacting rental rates. While these normal relationships were disrupted during the pandemic, we anticipate conditions to normalize in the coming quarters.
Lastly, as the economic recovery continues to gain momentum, we have restarted both our apartment renovation programs and technology initiatives including actively enhancing the functionality of our mobile leasing platform and smart rent home automation.
Thank you and I will now turn the call over the Barbara Pak.
Thanks, Angela. I'll start with a few comments on our second quarter results, discuss changes to our full year guidance, followed by an update on our investments and the balance sheet. I'm pleased to report core FFO for the second quarter exceeded the midpoint of the revised range we provided during the NAREIT conference by $0.08 per share. The favorable results are primarily attributable to stronger same property revenues, higher commercial income and lower operating expenses. Of the $0.08, $0.03 relates to the timing of operating expenses and G&A spend, which is now forecasted to occur in the second half of the year.
As Angela discussed, we are seeing stronger rent growth in our markets than we expected just a few months ago. As such, we are raising the full year midpoint of our same property revenue growth by 50 basis points to minus 1.4%. It should be noted this was the high-end of the revised range route provided in June.
In addition, we have lowered our operating expense growth by 25 basis points at the midpoint due to lower taxes in the Seattle portfolio. All of this results in an improvement in same property NOI growth by 80 basis points at the midpoint to minus 3%. Year-to-date, we have revived the same property revenue growth at the midpoint up 110 basis points and NOI by 160 basis points. As it relates to full year core FFO, we are raising our midpoint by $0.09 per share to $12.33. This reflects the stronger operating results partially offset by the impact of the early redemptions of preferred equity investments, which I will discuss in a minute. Year-to-date, we have raised core FFO by $0.17 or 1.4%.
Turning to the investment market, as we discussed on previous calls, strong demand for West Coast apartments and inexpensive debt financing has led to sales and recapitalization of several properties underlying our preferred equity and subordinated loan investments, resulting in several early redemptions.
During the quarter, we received 36 million from an early redemption of a subordinated loan, which included 4.7 million in prepayment fees, which have been excluded from core FFO. Year-to-date, we have been redeemed on approximately 150 million of investment and expect that number could grow to approximately 250 million by year end. This is significantly above the high end of the range provided at the start of the year. However, this speaks to the high valuation apartment properties are commanding today, which is good for Essex and the net asset value of the company.
As for new preferred equity investments, we have a healthy pipeline of accretive deals, and we are still on track to achieve our original guidance of 100 million to 150 million in the second half of the year. As a reminder, our original guidance assume new investments would match redemptions during the year. However, the timing mismatch between the higher level of early reductions, coupled with funding of new investments expected later this year has led to an approximate $0.10 per share drag on our FFO for the year.
Moving to the balance sheet, we remain in a strong financial position due to refinancing over 1/3 of our debt over the past year and a half taking advantage of the low interest rate environment to reduce our weighted average rate by 70 basis points to 3.1% and lengthening our maturity profile by an additional two years. We currently have only 7% of our debt maturing through the end of 2023.
Given our [indiscernible] maturity schedule, limited near term funding needs and ample liquidity, we are in a strong position to take advantage of opportunities as they arise. This concludes my prepared remarks. I will now turn the call back to the operator for questions.
Thank you. Ladies and gentlemen at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Nic Joseph with Citi.
Maybe you started Barbara on the comments you just made on the preferred equity in the mez loan. In terms of the pipeline today, are you seeing any compression on yields or expected returns, already changes to the competition there?
Hey, Nic. This is Adam. To answer your question, yes. We're seeing compression on cap rates. We're seeing -- it's a much more competitive market now with proceeds going well above where we're typically comfortable and rates going significantly below where we've been in the market. So to sum, yes, we are seeing the absolute compression on valuations.
Thanks. So then in terms of the early redemption that you've seen? I mean, is there a risk of further early redemptions that could at least create an air pocket on the earning side?
Hi, Nic. This is Barbara. At this point, I think we factored that all in and based on what we know today. And already -- almost in August. So I think we factor that into the current guidance. So I'm not expecting any more redemptions at this point for the rest of the year.
Our next question comes from the line of Rich Hill with Morgan Stanley.
I wanted to just come back to sort of trends that you're seeing in your markets. And I appreciate all the color and commentary you gave us. But I'm hoping you can compare and contrast what you're seeing in your market specifically, versus maybe what someone typically thinks about in San Francisco, Los Angeles, the broader West Coast urban markets. So specifically, are you seeing people still continue to migrate in? Are you seeing people migrate out? One of those trends in your markets that give you confidence relative to maybe some of the urban markets are at trends?
Hi, Rich. It’s Michael. I think I'll handle that one. And others may want to comment as well. But I think we feel really very good about what's happening here. Noted in my comments that we’re fully recovered with respect to market rents, versus pre-pandemic levels, while only recovered about half the job so far, so that I think -- that's a powerful place to start. And if we look around the West Coast, we feel great about what's happening. And we expect good times to continue that, consumer is super optimistic. They've saved money via COVID versus COVID, by not traveling and a variety of other things. So millennials are forming households. And there's a lot of hiring here on the West Coast. So that's why we talk about the top 10 tech companies and how many open positions they have, they've come a long way in the past year, after what we perceived as them pulling back amid COVID, on their expansion plans, I think that they're now turning that corner, or have turned that corner hiring more people pursuing things that they put on hold a year ago. And so everything feels like it's in good order at this point in time.
As you go to the cities, the main driver of job growth at this point in time has been the recovery of all the industries that have been so dramatically affected a year ago, including the leisure, hospitality, restaurants, filming in Southern California, et cetera. And as we look at the world, we're looking at, whether we believe these industries are poised for future growth and we think absolutely they are we think that, we're in a fluid areas, a fluid areas demand services, you're starting to see those services come back in terms of restaurants and a variety of other areas. And so we see this turning around nicely. And again, I wouldn't have expected to be fully back with respective rents at a time when we've only recovered about half the jobs that we lost. Make sense?
Yes. It makes perfect sense. I was just waiting to see if anyone else was going to follow up. That's perfect, Mike. As we look forward, and at the risk of asking you to guide, which I'm not, we have this obviously a pretty significant trough that that came late last year and early this year. Is it sort of reasonable to think that 2022 will be the mirror image of that? And then maybe we can -- if we maybe even continue to push rents above a normal trend over the medium term?
It's a good question. And Barbara -- look at me very strangely, if we start talking about 22 at this point in time. So and how we are, we tend to be pretty careful in terms of guidance. And so we don't want to go too far out there. But I would say that, I would expect, certainly the return to office to be a good thing for the downtown locations, because most of the top 10 tech companies or most of tech companies in general have announced a hybrid type of approach, which means that people are going to have to be closer to the offices to show up let's say plus or minus three times per week. As a result of that, the people that move to the Hinterlands, the most suburban parts of our portfolio probably are going to need to come back. And I think about Ventura don't want to pick on Ventura, because it's done great. But, it's a long way on a commute pattern from Ventura into the where the jobs are in LA. And I don't think people are even going to want to do that three times a week. So I think that kind of frames the dynamics, those that had a year, given the pandemic to make a different choice about where to live, I think will likely make a different choice going forward, now that there's more clarity about what the company is going to do with respect to their work from home or return to office programs.
The only other thing I would add is, Lisa's resigning today, we'll have half an impact to the rent this year to our rent roll, and that will carry forward into next year, too. I mean, look at Angela mentioned, we had a strong July, and so that is going to only affect part of this year's numbers.
I got it. Thank you, guys. I'm not sure that's entirely what I wanted. But I appreciate the response. Thank you.
Next question comes from the line of Joshua Dennerlein with Bank of America.
Hey, guys, hope you're all doing well. I'm just kind of curious what your mark-to-market is in your portfolio? And maybe if you have it by region, like Seattle, Northern California, Southern California.
Are we talking about lost lease?
Yeah, lost least.
That's all right. All right. Well, in terms of the loss lease, we actually are in a much better position at a level even better than pre-COVID. So if we look at July lost lease for the Essex portfolio, it's now at 7.4%. And so and that, of course, varies, Seattle at the highest at about 12. Southern California, in the middle of the pack at about eight, and Northern California at the lowest as well, three and a half.
Okay, awesome. And in your guidance range, what are you assuming as far as like a recovery for the rest of the year and rate for the Northern California market?
I'll start. The second half of the year, as each -- we have to turn leases in order to impact our same-store or our revenue. And so if you get toward the end of the year, it becomes less relevant and more relevant, obviously, next year. So, take a transaction in October, you only have three months of that new lease in 2021. The rest of this is going to be in 2022. So there's an inherent lagging, concept with respect to what's going on with marker rents with Angela just talked about versus how it shows up on the on the income statement.
So I think that's important, in terms of just looking at market rents. We tried to provide a little bit of color on that. And with respect to S 17, is what we're trying to get out that, overall, our economic rent growth on S 17 is at minus 0.9%. And that's a 1/12 of every month throughout the year. So January 2021, versus January 2020, plus February through the year divided by 12, is what that number represents. So we started the year at a rate, in the minus nine to minus 10% range. And that implies to get minus 0.9%, on S 17, that the fourth quarter would be plus 6%. And that does not anticipate a lot of rent growth between now and then, which is pretty typical, we typically hit the peak of market rents in July, at the end of the peak lease season, and then flattens out for the rest of the year. So that's what's assumed in those numbers.
Our next question comes from the line of Austin Wurschmidt with KeyBanc.
Great, thanks, guys. It seems possible that your markets could experience an extended leasing season, it certainly come up on other calls, and some seem pretty optimistic about the prospects. But clearly, as you identify, there are some risks to take into consideration. So just wondering, kind of how you went about your back half guidance? And did you assume typical seasonality or sort of that another leg up in demand in the late summer, early fall timeframe?
Yes. This is Mike. And I agree with you, we did not -- we assume more or less the typical, trend with respect to market rents. So kind of peaking in July and not a lot of growth for the rest of the year. As we think about it, however, there are some things that are different, for example, will the tech companies continue hiring normally, what happens is hiring tails off at the end of the year, companies get business plans at the -- toward the third, fourth quarter, and then they start implementing them in the first quarter. That's what really drives the peak leasing season. So the question here is, will companies continue hiring at a higher level given COVID than they have in the past. I think there's a very good chance that could happen. I also, this work from home and returned to office concept could have an impact on that as well, if you have more people are moving back into the more urban areas from -- people that were displaced, as California and Washington were shutting down a year ago. If those people continue to come back, later this year that could possibly push rents higher in the second part of the year.
So we've, again assumed based on our experience, and what typically happens to normal curve with respect to rents, but there are some things that are different here. And so we could end up with being surprised to the positive side.
Great. That's very helpful. And then, Angela, I think you mentioned that you're restarting the redevelopment program? Could you give us kind of the scale of that, or the annual run rate, and then maybe offer up some additional details on sort of the economics, that'd be really helpful.
Sure thing. Normally pre-COVID, our run rate was about in terms of units, about 4000 units a year. And what we did was scale back significantly last year. So second half of last year, we only renovated about 600 -- over 600 units, 650 units, so the target during the restart for the second half of this year is to double that. So say close to 1300 units this year. We are looking at a couple of large developments for the future -- for next year that will have no greater opportunities. But in terms of -- just the return on investments, we're actually looking at ranges pretty darn consistent with pre-COVID levels. And so while cost has gone up, but rents have gone up as well concurrently. So we think we're in a pretty good spot.
And what are those numbers on the economics?
They tend to range depending on the asset and the scope and the market but I'll give you a range that might be a little bit better than a hard number, they tend to range stay in the high single digits to the high double digits. So it's a pretty wide range.
Our next question comes from the line of Amanda Sweitzer with Robert W. Baird.
I know line up on some of your comments on ramping up your development spending. Can you provide an update on areas you're targeting for those potential projects, as well as underwritten yields you think you could achieve?
Hey, Amanda. This is Adam. Were you referring to redevelopment or development?
I had thought you mentioned ramping up development along with acquisitions earlier in the call, but I could be mistaken?
Okay, yes. I'm happy to take that one. So on development, yes, given where our stock is trading, and given some opportunities that we're seeing out there now where we can make sense of accretive transactions. We are definitely looking at ramping up the development pipeline. I’d say our main areas of focus would be primarily Northern California, Seattle. Those I see is probably the two best markets in that respect. But we're looking throughout our portfolio and throughout our footprint for deals.
And then, any change in terms of underwritten yield, do you think you could achieve on most projects versus pre-COVID levels?
So yes, good question. So what we're saying, we've underwritten several dozen deals over the last few months. The deals that we see going down primarily, cap rates have definitely compressed. So on the development side, we're seeing on unthreaded rents, return on cost at about 4 to 4.25 basically. So still a gap between where existing deals are trading, which are on the call, 3.25 to 3.5. We're going to look at numbers higher than that. We've not -- we wouldn't transact at a call to four development yield. But we're going to -- we would be looking at those 4.5 to high 4s.
Our next question comes from the line of Rich Anderson with SMBC.
So I'm interested in this 17 supplemental or S 17(1) I should say, the migration trends that you referenced in your prepared remarks. Is that everything? Or is it predominantly, kind of close in like Monterey, Sacramento type of net migration or in migration? And does it net out people that are leaving California entirely this? Is this the full number, number one? And number two, what do you think about this 18%? Is this like a sort of a knee jerk response to working remotely but closer to the office? And that probably this is peeking out at that this time? And it starts to come back down? What's the ceiling on this graph do you think?
Hi, Rich. This is Barbara. Yes, S 17.1, the 18% is a net number. So if you look back a year ago, we did have out migration, and that's what's showing in the negative 8%. And now we have people moving back and they're really coming from Sacramento and some of the outer line areas within California. But we're also noticing people moving in from college towns. So people, recent college grads are coming here for jobs, and it's really geographically dispersed. I mean, there's no discernible pattern from where they're coming from. It's kind of all over. And we do think that it does speak to the strength of our markets and people coming back and returning after the services have reopened. And the economy has reopened, now we're seeing the people return. And so we think it's a good sign and a good leading indicator. You should note that this Seattle in our portfolio looks similar as well. We're seeing a big in migration in Seattle as well. So we didn't show it here, but it's Bay Area and Seattle both have a similar chart, where there's a big influx. And I think you're seeing it in the rent growth that Angela spoke to and San Fran being up 11% in the CBD and NorCal and some of the other suburban markets in NorCal having bigger sequential rent growth more recently is partly due to this in migration.
Rich, can I add -- make a broader comment and I would say the broader comment is that the migration out of the West Coast, our view was largely driven by businesses being shut down, and putting people in the position of not having a paycheck, and effectively forcing them to move to somewhere else. And I know that that sort of -- it doesn't fit the narrative, the narrative is that oh, all these people wanted to leave California. I think that reality is completely different from that. And therefore, I go back to my basic comment, which is do we feel comfortable with the businesses that are here and with job growth going forward? And when you look at the components of that, okay, the hotels are now mostly open here on the West Coast, the restaurants are opening, and but we were still at 50% of capacity, a month or two ago. So, we opened completely on June 15. But that process has been relatively slow. And I think that's why job growth has lagged the U.S. as we've come out of the pandemic.
But I guess the key point here is, most of the migration that occurred was not voluntary migration, it was caused by shutting down businesses. And then if you look at the flip side of that, are those businesses likely to reopen given, COVID is mostly behind us. And we feel 100% absolutely convinced that that will occur. And so, when we look -- we have some more broader information on migration in general, and a lot of the same things that we talked about a year or two ago, are still in place, the inflows into our markets tend to be the high cost, East Coast, metros, and the outflows tend to be into lower cost Western areas. So those trends really haven't changed all that much. But Barbara, this S 17.1 is trying to address specifically, the cadence of what's coming in and what's going out. And to your point, yes, of course, everything's in there, right here to try to push a narrative that is not reality, because if we do that, we're just going to shoot ourselves in the foot. So there's no evidence I think of Essex trying to be overly optimistic. And so we're trying to communicate what's really happening out there and what we're really seeing. So I guess I would --
Wasn't implying that I just, you mentioned sort of nearing areas, just want to make sure I was looking at the same thing. So the second question, 15, 20 years ago, Mike Schall and Keith Guericke were the heroes with 10% plus growth. And California was the place to be now, if you would, at that point, make some investments in this sunbelt? You'd be a hero, so the torch has passed, at least for now. But I assume your reversion of the mean, is your mind that certainly sounds like what you're saying, and do you see now is a particularly interesting time to be investing in your markets, for all the reasons you just described, but also, it's particularly special because of what's happened outside of California and Washington and what you think might come back? And that will be sort of a narrowing of the performance gap over the next several years.
Yes, I know it's great question Rich. And our boards pretty focused on this geographic diversity issue, and some of the challenges that we've had more recently, with respect to regulation and other things. But we don't want to get too far away from sort of this longer term pattern, because, it isn't like, we're going to grow, every year the same, conditions change, but we remain focused in our analysis on which areas have the highest CAGRs or rent growth over time. And it may surprise you, because, you can say the West Coast has dropped off of that. More recently, yes, but if you look back 15 years, because I have these numbers right out of our strategic plan in front of us, Seattle, lead, all the major markets, with a 5.6%, 15-year rent growth CAGR, from 2004 to 2019. So, to the pre-COVID level. And Northern California was pretty close to that. And we start going down the list, and certainly Boston and Miami are pretty attractive in that respect, as is northern New Jersey.
But then there are a lot of markets that really have fallen well below that. And so, our whole thesis here has been, let's try to identify the things that promote long-term rent growth and let's invest in those markets. And we can as you know, we've looked at some things on the East Coast before and we'll continue doing that.
But I guess, as we think about thing, let me just make a simple comparison, let's compare San Jose with Austin. And, their cities have about the same size, same population. Austin has about 20,000 multifamily units in construction, whereas San Jose has about 8000. We also don't produce very much housing are for sale housing in San Jose, and the median price is well over a million dollars. So as an apartment owner, we look at that and say, are we better off being in San Jose, or in Austin, and we conclude that it's better to be in San Jose. I mean, Austin has to get extraordinary amounts of growth over and above San Jose, which, of course, is driven by the tech companies, which are doing really well, and they hire a lot of people. So I guess I would say the bloom is not off the West Coast. Yes, we grew really fast from 2011 through 2016. When, by the way, we had job growth in the 4% to 5% range on the West Coast, and then it slowed down because of affordability issues, because you can't have rents grow twice as fast as incomes over long periods of time without creating an affordability issue. So there is a long-term, approach to the business. And I think that making vast portfolio decisions based on -- with all the unique circumstances and COVID would be misguided.
Our next question comes from the line of Neil Malkin with Capital One Securities.
First, Mike, seems like in a lot of your prepared comments, the risks of COVID or the Delta variant, throwing a wrench into the recovery seemed like, maybe I'm understanding wrong, like, lower or something that you're really not maybe waiting a lot. And I guess my question on that part is, are you -- have you thought about, the Delta variants, how -- it's spreading a lot quicker. I think I've just seen some studies that say, like, vaccinated people can also read it as well, like, as easily as unvaccinated. And the markets that you're in are most likely to re-shutdown or re-implement restrictions. If cases rise, hospitalizations rise, et cetera. So, given, that's likely to happen as the fall comes, what kind of waiting do you kind of give to that notion of potential hiccup from reimposed restrictions?
Yes, it is a good question. And an important question. And I guess I would say, unfortunately, we have no way to really figure out what COVID might do going forward. And but we were definitely aware of the risks. One thing that I think is a little bit different in California, clearly we've got population densities that are pretty high. And so the risk of COVID is perhaps greater given that, and I think the government actually has done a very good job here of trying to promote vaccination rates in the Essex markets. And I think our vaccination rates are pretty high relative to the rest of the world. So the information I have is that the people with at least one shot and are 12 years and older, were in California, Washington about 82% vaccinated versus 67% for the U.S.
So, I think that what happened here is, we tried to -- the government has tried to react to that risk by really pushing the vaccination rate, and they've done a very good job of that. So I think that lowers our exposure to some extent, but no doubt, areas with high population density, have different COVID risk than some of the other areas. And in this case, I think it's been dealt with effectively.
Okay. That's a really helpful stat. Thank you for that. Other ones for me is, your previous comment talked about, not making, I guess rash decisions or thinking about things on a historic level? And I guess if you look at to large peers, people don't like to say names, but coastal players have recently announced pretty significant capital plans in Raleigh, Charlotte, Atlanta, Dallas, Austin. And I would imagine they have boards and a lot of stakeholders that they probably consulted with before they allocate a lot of capital. So, kind of with that being said, does I mean, do you give credence to that at all? I mean, does that -- does it make you think, maybe a little bit more about that? I mean, you referenced that permitting is down in your markets? And maybe that isn't, like, a good thing? Maybe that's like, a bad thing of people are focusing their growth prospects and capital elsewhere?
Yes, it's a good question and very valid. And this is why we spend so much time in our prepared remarks talking about on with the top 10 tech companies we created that index, so that we could keep our eye on, where are the open positions for the top 10 tech companies? Are they moving more to some of these other locations? And if so, what do we do about it? So, I didn't mean to imply actually that, we're so focused on, 15 years CAGRs of rent growth? So definitely, the historical information is important. But we're trying to supplement that in 100 different ways, with a ton of data sources that, that are either confirming or raising questions about what the future looks like. That's why Angela is talking about how much office construction, if you're going to build office buildings, presumably they're going to be employees in there. And we're going to need to build apartments to house those employees. I mean, these are all indicators of what's happening in the future.
Keep an eye on the top 10 tech companies and their hiring trends. Again, both within California and outside of California. Super important in in that regard. Again, I go back to the industries, what are the driving industries? And what are the industries and sort of drive the entire machine? We can -- it's certainly not the hospitality and the restaurant workers that are driving it, they are really the result of a fluent wealthy areas, demanding services. And guess what they pay a lot more than in other places of the country because of that. And so I think what's happening here is, we're growing the process of all those people that were just displaced, from shutting down restaurants and other services. We're going to need to draw them back into the area. But I think that given the demand for those services and given the wealth that is been created here, by the tech community, by motion pictures, in Southern California, and other people that want to live near a beach, let's say, those services are in demand and they're going to come back at some -- it'll take a little bit of time, perhaps to do that.
But again, we're trying to say, okay, let's stay focused on what are the drivers of the economy here. And again, as I look at it, and hopefully everyone will agree, tech is not going away or hasn't gone away. Certainly all the information that we've given out with respect to the tech companies over time, confirms the thesis that they're here, they're not going away, they continue to invest in our markets. Motion Pictures in Southern California, you can't shoot films where you require 50 to 100 people on a set during COVID, completely shut down demand for content not going away anytime soon. Therefore, there's a very good chance that that is going to resume and I can go try to go on beyond that. But I think that sets the point. If the drivers are intact, the things that follow, the demand for services, restaurants, et cetera will follow. And the thesis of the company in terms of job growth remains intact, and then if don't produce enough housing supply, I would view that as a good day.
Thank you. Our next question comes from Alexander Goldfarb with Piper Sandler.
So, Mike, two questions. First, the data on S 17, that is super. So if we were out in the Bay Area, like a month ago and saw San Francisco sort of empty. Are you seeing that with this 18% increase that now like San Francisco would be active and all of the apartment REITs that have reported this quarter, who have all shown the San Francisco to be the weak link that will -- you're saying that we will see that changed substantially over the next few quarters?
Alex, so you're referring to be this -- move it back to the inner Bay Area portfolio on 17.1?
Yes.
Well, I would say that the trend has reversed and move it back to the Bay Area has begun. I would – yes, I caveat that, I think most of that is the service businesses, restaurants and leisure hospitality is the leader in terms of jobs coming back that was the area that was most severely disconnected during the pandemic. But and then we have coming out us in the not too distant future the tech companies and the return to office program. So I think if that continues that trend, and again, there are a lot of restaurants that converted to take-out-only mode. I think we'll go back to a more normal type of situation where those restaurant workers continue to come back as well. So yeah, I think it's mending not as fast as we want to, again I go back to the initial premise, which is we've gotten all the rents back to where they were pre-COVID with half the employment. I think that's a pretty powerful statement.
Okay. If I'm just trying, I guess, Mike, if you look at like Manhattan, I know you guys are not in New York City. But the city came back a lot quicker than many expected even though work from home, only whatever 20% of buildings have people in them. But city rents and the occupancy rates have rebounded strongly, whereas San Francisco and Seattle Downtown respectively, we're still lagging. So I guess I'm curious if your view is that within a few quarters, we will see the downtown of San Francisco and downtown of Seattle rebound strongly like we've seen in New York based on what you guys are showing in this attachment S 17.
Yes, it's a good question, Alex. So, New York, if you look at trailing three month of job growth. In New York, it was 10.2%, San Francisco was 5.2% and San Jose was 5.2%. So you have a pretty dramatic underperformance with respect to overall job growth. So I attribute that to again the West Coast needing to open up yet. We were still well into June at like 50% of capacity in restaurants and that type of thing. Whereas I'm assuming that New York. I don't know exactly what they did, but it is something to cause a fairly dramatic difference in terms of their resurgence and employment that hasn't happened yet on the West Coast, I think it's coming, but we're just a little bit slower than some of the other metros, including New York.
Okay. And then, the second question, Barb, on the guidance, you said that because of the mismatch in terms of accelerated debt and preferred equity, redemptions versus what you guys can put out. There is about a $0.10 drag. So is that $0.10 only in NAREIT FFO, but not in company FFO or is it in both?
It’s in both. Could the prepayment penalties or fees that we receive this year about $7.5 million. Those are only internal FFO not in core FFO. But what I'm referring to is just a timing issue. We've been redeemed gotten money back early. So we don't have any of the interest income from those investments. And we haven't put any money back to work and so that's the $0.10 that I'm referring to.
We're looking at -- since that prepayment penalty is just really compensated us for having our money outstanding for a certain period of time, I'm advocating with Barb to change out so that it's not a non-core item because it's really -- we have a minimum earned preferred return and unfortunately, it's showing up in the non-core category rather than core.
Yes, that, Mike -- that was going to be my point. You guys are very productive on this and whether you get paid out over time or you get it redeemed early, but they pay up and pay a penalty for that that is core part of your business. So that was my question is why you would exclude the positives that come from this platform and I mean it sounds like you guys are having that internal debate. But I mean you're successful at it and no point in not really showcasing the earnings potential there.
Yes. We have looked at it. We have a sense of follow GAAP accounting rules and so it's more complicated than it appears on the surface. But yes, there is an internal debate internally. But what we booked year-to-date has all been non-core for the prepayment fee.
Our next question comes from the line of John Kim with BMO Capital Markets.
Thank you. Regarding Northern California and the recovery. I think, Angela mentioned in the prepared remarks that July effective rents are still 8% below pre-COVID levels and I'm not sure if that was a market rent concept or for Essex. But I was wondering if you're going against easier comps given you were more aggressive on concessions beginning in the third quarter last year. And if the recovery could be faster than we think.
Yes, I'll let Angela to comment on the number for San Jose. But I would say what's happened here is, and we had colors on previous calls that have said hey, with negative job growth, how are you able to maintain high levels of occupancy in the cities. And obviously, a great question and the answer is that was of course that we drew people because the price point was lower, we drew people from other places into some of the better locations. So they improved their location given lower rents and so now you look at this equation, 96% occupied people starting to come back and there is no availability and therefore market rents are doing what they're doing.
So I think a lot of this is really driven by our strategy during the pandemic and now it will be interesting to see what happens over the next couple of years because with market rents now back to where they were pre-pandemic level, what is the movement within the portfolio yield, both in and out of those locations that have much higher rents.
So in the case of San Jose. San Francisco and Oakland, there is still substantially below the prior rent. So there's still reason to believe that those people that moved in given lower rents will stay, but that may uncouple over the next several years.
And so, was that 8% figure that Angela quoted was that for Essex or the market overall?
But that was for Essex.
Okay. Mike, you mentioned cap rates in your markets are low to mid 3%, which sounds like it's compressed about 50 basis points at least from last quarter. Can you comment on the assumptions that you think the market is placing now that's changed whether it's rental growth or exit cap rate and whether or not you agree with those assumptions or I believe the rationale?
I'll start with the comment and the comparison in the last quarter and then flip to Adam to talk about cap rates more generally, but I think last quarter what we said was in some of the hard-hit areas that buyers will performing some rent recovery. So it probably wasn't a whole 50 basis point reduction. It was really that they were using really the current net effective rents. They were assuming a bit higher rent level. So that reconciles part of that. But Adam, you want to talk about cap rates in general?
Yes, sure. So I think the general assumption that buyers are making is that there will be a full recovery. And by that, I mean with rents greater than pre-pandemic levels. And we're already seeing those rents that we've already talked about during the call. So it's in the low threes, I think pretty robust rent growth over the next few years. And then probably knowing out is what I -- is the various people, I've talked to that with our modeling and then non-exit caps. I think this is as aggressive as ever. So I don't think there's much assumption that there is a big expansion on the exit side. So underwriting has definitely gotten more aggressive.
Is there a big difference between your markets or urban versus suburban?
Yes, good question. So going kind of north to south, Seattle, we've actually seen a pretty big pickup in transactional volume and that's probably among the most aggressive markets that we're seeing in the CBDs on kind of current net effective rents, we're seeing high-twos to low-threes and in the markets that really just too much of a hit on rents, we're seeing those like maybe in the 3.25 to 3.5 range and that is much more suburban outer markets. And then going down very little in Northern California is traded. So that the hard to really opine there, but it's in that probably low threes range and then down to San Diego, Orange County, those markets performed better from a rental aspects. So, those cap rates on current net effective aren't quite as low as what we've seen in those harder hit markets. So it's probably closer to that 3-4, 3-5 kind of range and very little in LA traded as well. So it's down in the kind of low threes but there is very few data points.
Our next question comes from the line of Brad Heffern with RBC Capital Markets.
On the federal funds, I think you mentioned in the prepared comments that there was a negligible amount received to-date and that there really isn't much in the guide either. I was curious if you had any figures around maybe what you have applications out for some sort of risk assessment of what you might receive on that?
Yes. Hi. Its Angela here. So out of, I think we reported that we have about $55 million of delinquencies out there and we've applied for about $18 million and to-date, we've received $4 million of it. So about 20 some percent recovery rate.
As far as we could tell, it's really more of a slow going because California just has a more complicated and slower reimbursement process. So in our view, the $18 million. We don't view that $18 million as having significant risk from that perspective. The reason we didn't bake it into our guidance for this year is really the timing is the question and just given that the rate of the reimbursement has just been much slower. So that's really the key driver of why it's now in this year's guidance.
Okay, got it. And that $4 million, I assume that's largely been this month just given you said there wasn't in the sort of negligible in the first half, is that right?
Yes. For the most part of this month.
Okay, got it. And then just one administrative sort of one if I could, in the press release, there was a 6.3% blended rate number for July. But then in the commentary, I heard a 4.7 number, I just wanted to verify what those two things, we're talking about?
Sure. So the 4.7% is a sequential month-to-month. So what I was trying to do is provide a real time picture of what's happening in our markets. So comparing July to June of this month, it's already up sequentially 4.7% on a net effective basis. And so what's in our supplement, they blended lease rate is a year-over-year so that compares July of this year to July of last year.
Our next question comes from the line of Alex Kalmus with Zelman & Associates.
Looking at your Southern California occupancy is quite high and we've heard a lot this quarter from others that the delinquencies are in their portfolios or sort of concentrated in this part of the country. So I'm just curious, what would happen if -- once the moratoriums are up. Does that affect the occupancy levels on a physical basis in your mind, or how do you see that playing out there.?
Yes, this is Mike. It's a good question. Yes, we agree with the others that Southern California and really specifically Los Angeles is a big part of the delinquency, the largest part of the delinquency and therefore there is some question about what might happen, but it's not a huge percentage, and we expect to work with our residents to the extent we can. And so I don't think it will have a huge impact on occupancy overall. So, but it remains to be seen, because we can't envision exactly what that scenario is going to look like. And but it's just not enough, I think to really severely impact us.
Got it. Thank you very much. And just thinking about the regulations on your rent increases that are in place when you're sort of internally discussing the difference between holding occupancy or pushing rate. Is there any momentum to say you'd rather keep the base rates pretty high to then expand a little more there and maybe lose a little occupancy as a sacrifice or is still hold occupancy as a primary driver?
It's different by in each region and so there is a 1000 different pieces of that equation because there's been so much movement in rent. And so the answer is going to very varied by region, and so it's difficult to generalize throughout the portfolio. But we think that we will be able to work with residents. We've tried to do that in the past that will continue going on in the future and certainly with respect to any of the delinquency that's not covered by some of these programs to make good on the COVID-related delinquencies. We will try to work with our residents that as we have in the past. Again, it's a little bit difficult to try to figure out exactly what that means from different areas because sets of regulations and a variety of different places from emergency orders to state rent control and the like. And so it's sort of a case-by-case basis. It's difficult to generalize.
Our next question comes from the line of John Pawlowski with Green Street Advisors.
Adam, I appreciate on the cap rate commentary. I'm trying to square there is really low cap rates to the commentary about ramping or being more positive on external growth because from the cap rates quoted feels like you guys are trading at NAV discount. So can you maybe just help square the external growth appetite and the prevailing private market pricing.
Sure. Yes, I mean you hit the nail on the head. It's the reason why we haven't been super active on the external growth side, but most of the transactions that have gone down and have not been accretive and to your point from an NAV standpoint not accretive as well. We're seeing a few more opportunities out there that will fit and our stock is reasonably up although still I'd say when you're looking at the low threes that's still that puts us in the trading below NAV range. So we are underwriting everything being more aggressive, where we feel like we can make a difference on growth accretion as well as FFO. But I guess you that. that's why we haven't done much so far.
John, I would add to that. This is Mike. Obviously, I would add that we're closer now than we were 30 year or 45 days ago somewhere. We're getting close. I mean debt rates have come down quite substantially as you know, and so there at least is a hope that we will be more active, we are looking at a lot of deals, Adam’s looking at a lot of deals. And so we're pricing things out and trying to make the numbers work and again we're going to remain disciplined to NAV of the company versus what we're seeing out there in the transaction area. We picked up the fundamental behind the success of the company over long periods of time.
Okay. Now understood things are moving quickly. Maybe just Adam or Mike, pace of prevailing private market pricing today, if you had to double down on the market., you had to exit the market, what are the kind of the top and bottom fix.
Yes, I'll let Adam deal with that one.
Good question. Yes. Thanks, John. So double down. I'm a big fan of Seattle in general. I mean I would say East side especially given the jobs picture there. Even though supply is slightly elevated, I think the jobs picture there is significant and it's a lot of tailwinds. To exit a market, you have all of our markets, but maybe [indiscernible].
So we're definitely interested in actually to have -- that's one property.
I joke. Yes. Ventura has had a pretty good run here as of late and it continues to do fine but again if we had to pick a market. But like I said, we are focused on our entire footprint and so we'll go in where we see opportunities.
There are no other questions in the queue. I'd like to hand the call back to management for closing remarks.
Okay, very good. Thank you, Doug. Appreciate that. And I want to thank everyone for joining us on the call today. I appreciate your time and we know we covered a lot of ground. If there are any follow-up questions, don't hesitate to reach out to us and we thought it was a great dialog and we look forward to seeing many of you hopefully at a conference and in-person in the near future. Thanks for joining the call.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.