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Like its Chicago-based REIT peer Equity Residential, Essex Property Trust reported solid fourth-quarter 2024 results this month, but its funds from operations guidance came in below Wall Street’s expectations for 2025.
However, Haendel St. Juste, managing director of REITs for investment bank Mizuho Securities, wrote in a research report last week that the Palo Alto, California-based REIT is “notoriously conservative” and 200 basis points of “headwinds” from redemptions of mezzanine redemptions and debt refinancings are partially responsible for that guidance.
“We also believe that Essex’s near-sector-leading same-store [revenue], with upside from a nascent recovery in Seattle and San Francisco, is far more meaningful to its story and near-term growth prospects,” St. Juste wrote in a report shared with Multifamily Dive. “Other upside drivers include potential LA demand boost (not included) in the guidance and Essex’s fairly tepid economic/job growth outlook for its markets.”
St. Juste believes the recovery in San Francisco and Seattle will be an “impactful tailwind” that will set the West Coast REIT up for improved earnings in the second half of 2025 and into 2026.
“The West Coast is well-positioned with improving economic fundamentals as job growth is forecasted to outperform the U.S. after lagging in 2024,” CEO Angela Kleiman said on the earnings call last week.
Tech markets rebound
Seattle and San Jose, California, are expected to lead Essex’s portfolio with approximately 4% rent growth as tech employers hire workers and bring them back to the office in those areas.
“It is notable that recent office expansion announcements demonstrate the intention that the majority of new hirings will be focused in headquarter locations, which favors the West Coast economy, particularly the northern regions,” Kleiman said
However, Seattle and San Jose were still dealing with concessions in December, though they had abated in San Jose. “[In] Seattle, the supply delivery is comparable to last year,” Kleiman said. “And so, we don't expect a meaningful change in terms of the concession environment.”
Essex sees investments in the technology sector continuing to drive gains in Northern California. “When we look at all the leases that have been signed, it's not dominated by AI,” Kleiman said. “It’s companies like Snowflake. That is a data company. We have some fintech; we have some software companies. So it's pretty well diverse.”