ESS - NYSE

Good day, and welcome to Essex Property Trust Third Quarter 2025 Earnings 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, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you. Ms. Kleiman, you may begin.

Welcome to Essex's third quarter earnings call. Barb Pak will follow with prepared remarks and Rylan Burns is here for Q&A. We are pleased to report solid results for the third quarter, highlighted by a $0.03 FFO performance and an increase to our Core FFO full year guidance. Today, I will cover key takeaways from the quarter, a high-level outlook for 2026 and provide an update on the transaction market. Starting with operations. Our portfolio performed well amid a backdrop of muted job growth across the U.S. and heightened policy uncertainty. Year-to-date, through the third quarter, we generated a blended lease rate growth of 3% on all leases and 2.7% on like-term leases. This is a proven example of the competitive advantage of our low supply markets. As expected, Northern California is our best-performing region and the fundamental backdrop remains favorable with forward-looking supply continuing to decline comparable to a level in the years following the great financial crisis. Within the Bay Area, San Francisco and Santa Clara counties are generating the highest rent growth year-to-date, reflecting attractive rent to income ratios, demand benefiting from AI-related start-ups and above historical average migration trends. Our Seattle region remains healthy, but is trending at the low-end of our full year expectations, driven by a combination of challenging year-over-year comparison, soft demand and pockets of supply temporarily limiting pricing power in certain submarkets. Finally, on Southern California. This region is generally performing in line with our expectations. As we have discussed Los Angeles has lagged primarily attributed to delinquency recovery, muted job conditions similar to the U.S. and pockets of supply on the West Side and Downtown L.A. With supply expected to drop in 2026, the infrastructure spending earmarked for Los Angeles and market occupancy improving, we see a path to pricing power. Given the soft economic environment and policy uncertainty, we are not surprised the hiring and investment decisions have been delayed across the U.S. But we are pleased to see the West Coast once again outperforming the U.S. average, a trend we anticipate continuing. Looking to 2026, our portfolio is well positioned relative to other U.S. markets, supported by lower levels of housing supply, attractive affordability and demand catalysts from the technology sector. Directionally, we assume Northern California to continue outperforming and to rank among the top U.S. markets as job growth in Northern California gradually gains momentum, which is supported by announcements of significant office expansions. Next in the ranking would be the Seattle region. With total housing supply deliveries declining by almost 40% next year, we are optimistic about the market's outlook. For Southern California, we expect stable economic conditions with Los Angeles fundamentals to improve. Moving on to early building blocks. We forecast our blended lease rates for the second half of the year to land at a similar level to last year. As such, we anticipate another year of stable growth with 2026 earn-in between 80 to 100 basis points. Lastly, on our investment activity in the transaction market. Page S-16.1 of the supplemental demonstrates the value created from our capital allocation strategy since 2024. We have focused our investments in the highest growth submarkets in Northern California, acquiring almost $1 billion of assets in this region while achieving accretion relative to dispositions and improving overall age of the portfolio. As for the transaction in that market, year-to-date volume on the West Coast is slightly above 2024, but remain below average historical levels. We continue to see a competitive bidding environment for high-quality properties in our markets, and cap rates are generally in the mid-4% range, with most of the Bay Area transactions in the low 4%. Although cap rates have compressed in Northern California, we will continue to enhance value from our operating platform and drive FFO and NAV per share growth for our shareholders. With that, I'll turn the call over to Barb.

Thanks, Angela. I'll begin with a recap of our third quarter results, followed by comments on investments and the balance sheet. Beginning with our third quarter results. We achieved a solid quarter with Core FFO per share exceeding the midpoint of our guidance range by $0.03, attributed to lower G&A and interest expense. As a result of the third quarter beat, we are pleased to raise the midpoint for Core FFO per share to $15.94. As for operations, we remain on plan and are reaffirming the full year midpoint for same-property revenue, expense and NOI growth. Turning to the structured finance portfolio. Year-to-date, we have received $118 million in redemptions and anticipate $200 million in total proceeds for the full year. As you may recall, over the past 2 years, we have made the strategic decision to redeploy the redemption proceeds into acquisitions at better-than-market rate yields and in markets with the highest near-term rent growth potential. This strategy has resulted in better NAV growth, improved cash flow for reinvestment and higher quality of FFO earnings. Looking ahead to 2026, we are pleased that we are in the final year of the redemption-related headwinds and the realignment of this business will be behind us. Overall, we expect roughly $175 million in additional redemptions next year. Given heavy redemptions in 2025 and expected in 2026, we anticipate this will reduce our 2026 Core FFO growth, net of reinvestment by approximately 150 basis points depending on timing of redemptions. As we look further out to 2027 and beyond, we expect that FFO volatility from this business will abate as the size of our structured finance book will have decreased from the peak of $700 million in 2021 to around $250 million in total investments. Lastly, a few comments on capital markets and the balance sheet. Throughout 2025, we executed several financings to further strengthen our balance sheet, increase our liquidity, diversify our capital sources and proactively address near-term maturities at attractive rates in the current market environment. With manageable maturities over the next 12 months, healthy net debt to EBITDA of 5.5x and over $1.5 billion in available liquidity, our balance sheet is strong heading into 2026. I will now turn the call back to the operator for questions.

[Operator Instructions] Our first question come from the line of Nick Yulico with Scotiabank.

I wanted to see if there was any way you could break out the blended rate growth a bit in the third quarter, just for some perspective on how much L.A. and Orange County might have been a drag on those numbers?

Nick, it's Angela here, thanks for your question. As expected, you called it. L.A. has been a drag, but that's not a surprise to anybody. In terms of our blended for the third quarter, Southern California came in at around 1.2% and Northern California close to 4% and Seattle right in the middle at about 2%. And to call out L.A., specifically, LA is below the 1.2% average for Southern California. L.A. is really 1%. So that gives you the range and the magnitude, but on the high end, when we're looking at Northern California, San Francisco and San Mateo, they're in kind of that 6%, 5% range, in terms of the blended. So hopefully, that kind of gives you the bookends of the -- of our portfolio. It's a pretty wide range.

Okay. Great. And then I guess my follow-up question is just in terms of in Northern California, whether you've seen any like real pickup in demand from -- I mean, if we see again from some of the job announcements of new company formations or some of the activity on the office side in San Francisco or the broader Bay Area, just anything more you can share on how that's actually translating into demand on the ground?

Yes, that's a good question. We certainly are seeing a steady strength in the Northern region. And when we look at the top 20 tech postings, the postings have remained steady with September a slight uptick in California, mostly benefiting from the Northern region, the San Francisco, San Mateo and, of course, the Santa Clara counties. It's tough to get exact numbers because they don't show up, the BLS numbers, as we talked about, has been challenging. What we are seeing is that, we're seeing more start-ups than we've ever seen in the past. And you could -- anecdotally, what we're seeing is that office space less than 10,000 square feet are in hot demand. And that is a new phenomenon that we've not seen in the past.

Our next question comes from the line of Eric Wolfe with Citi.

It's Nick Joseph here with Eric. You mentioned the '26 earn-in of estimated to be 80 to 100 basis points. I was hoping you could break that down between Northern California, Southern California and Seattle?

Nick, I don't have the exact breakdown in front of me. I will just point to you that we, of course, we're assuming that Northern California will lead and Southern California will rank third in terms of the major 3 regions with Seattle in the middle. But I think a helpful data point could be that if you look at our blended lease rates in the third quarter, it's comparable to the same -- to what we achieved last year -- a little bit lower than what we achieved last year. However, what we're seeing in the fourth quarter is we're on track for fourth quarter to do better than last year. So year-over-year for the second half, we're assuming that we're going to land in the same zone, somewhere in the low 2%, and that gives us the 80 to 100 basis points earn-in.

Appreciate that. And then just on the preferred book, I think you said 150 basis points headwind. What's the sensitivity around the timing of the potential redemptions for next year?

Nick, it's Barb. I mean there's a couple that are maturing in the first quarter. And if they may need an extension for 1 month or 2, that's really the sensitivity that I'm talking about. But the maturities are very much in the first half of the year. And so, what we've guided to and what I provided was assuming that they're fully redeemed at maturity. If they get extended, it might be a little bit lower.

Our next question comes from the line of Jeff Spector with Bank of America.

Great. Just a follow-up on the first question or Nick had asked, I think, is a follow-up question on jobs. I mean, it does seem like we're seeing mixed signals between AI hiring, tech layoffs. I mean, how are you thinking about this into next year, maybe even medium-term? What are you hearing from, let's say, your -- any peers, any executives that you talk to in terms of the job outlook in your region?

Yes. Jeff, that is a great question because it really goes to the heart of where is AI taking us, right, on more of a broad conversation from that perspective. So a lot of things are happening right now, which is noisy, and we are seeing recent layoff announcements, but keep in mind that large tech companies, they get most of the headlines. Broadly across the U.S. layoffs -- layoffs are occurring. So for example, UPS in Atlanta is cutting 48,000 jobs. From what we're seeing on the ground here is that this is a normal part of the business cycle. In an environment where the macro environment is soft, business are and they should be focusing on efficiency. And so I don't think, from what we're seeing that they are AI-driven job losses. But in terms of what we think is going to happen with the conversation about AI displacing jobs and being -- becoming -- or is viewed to be a disruptor, we do think that's going to happen at some point. AI capabilities, it's growing rapidly, and we're seeing research suggesting that most companies are experimenting with AI. So that experimentation level is very high. But the adoption, the level is low because the return on investment is still unclear. So for example, Essex where we see AI benefiting data analytics and certain repetitive tasks, but it is still in early developmental stages, and we need additional technology to interface with AI applications for utilization. Essex have not had significant workforce reduction using AI. And so what we do expect is that the pace of disruption or job displacement will be more gradual because on the flip side, what we're seeing is, as I mentioned earlier, an unprecedented number of start-ups, small companies that because of AI, can form businesses. And that is not being picked up by BLS. But certainly, it's being picked up by the demand that we're seeing in Northern California. Does that make sense?

Yes. That's helpful. And maybe could you talk a little bit more about San Francisco specifically, let's say, downtown and we're seeing all these great articles on downtown, the city versus your suburbs. How is your portfolio benefiting from all of this? .

Well, I think interestingly, downtown, we view Northern California generally is still in a recovery phase and giving more rents are relative to pre-COVID levels. And the suburban started recovering last year. Downtown is recovering starting this year. But when we look at relative blended rates for our markets, if I break out San Francisco, for example, year-to-date blended rate growth is 5.2%, where San Mateo is 6% and San Jose in that 4% range. And so the relativity isn't -- the dispersion isn't huge, and they're all quite strong. And when we look at announcements of new office space, it's just as concentrated in the suburban area as it is in downtown.

Our next question comes from the line of Steve Sakwa with Evercore ISI.

This is Sanket on for Steve. Switching a bit. You guys have been very active on transaction front this year, and we just wanted to understand what are the cap rates are used on acquisitions and exclusions for those assets? And how deep is the investor pool within that market?

This is Rylan here. I'd point you to S-16.1 where we've tried to break out specifically the cap rates that we've been targeting and been successful at acquiring over the past 1.5 years, and also point you to the Essex yield, which is 40 basis points higher, which is as a result in something we've talked about, our operating platform, given our asset collection models in these markets, we're able to pull out a significant amount of controllable expense by putting them onto our platform. So that's been one of the driving factors in our acquisition strategy. So, as Angela mentioned, cap rates have compressed. There's been a significant sentiment change as it relates to Northern California over the last year. I'd say we've been relatively early and been able to acquire significant, almost $1 billion of assets in these submarkets at that 4.8% market rate and a 5.2% yield to Essex. So we're pleased with what we've accomplished, and we're hoping to continue.

And as a follow-up to that, like are you guys evaluating share repurchases? Given where the stock price has been like -- it's been a common theme across your peers.

Sanket, that's a good question. And I think you've seen that we have a very solid track history of buying back stocks and assessing all the relative value leading to that decision. And if you look at where we are today, where we're trading today, it's much more compelling from a stock buyback perspective than it was in the third quarter. But I do want to highlight that our transaction in the third quarter was around a 5% cap rate, and you add growth to that. It's quite compelling because stock back then was trading in kind of that low- to mid-5% range. So once again, you will see us being very disciplined in making sure that we're going to maximize the yield depending on our cost of capital and investment instrument available to us.

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

So going back to the lease rate growth during the quarter versus the back half projections, I think, was around 2.7% as of last quarter. Was Southern California lower than projected? Or was it Seattle? I think as you mentioned in the prepared remarks that drove maybe pricing being a little bit softer than you had -- had you thought last quarter? And then just wondering if you think the Seattle softness, is it kind of a temporary phenomenon or could persist into 2026?

Austin, I think you make -- it's really driven by Seattle. And what we're seeing in Seattle is that the demand has coming softer. And we had expected that demand to moderate throughout the year, on a national level. And keep in mind, Seattle does not have the benefit of the AI start-ups that Northern California does. Northern California has 80% of the AI business. So Seattle is going to be more in line with the U.S. average at the current cycle. But I do want to know that the -- some of the headline news like Amazon laying off corporate employees, they have multiple locations. So it's not a Seattle-specific issue. And when our team dug into the WARN notices, it's less than 10% of the layoffs is Seattle-specific. So this leads us to believe that this is not a market that we're seeing red flags. It's a market that's stable. It's still performing well. Certainly, it's not reaching above average CAGR growth that we had hoped, but it's still a good market. And with next year, supply going down by almost 40%, it's going to do just fine.

Appreciate the thoughts. And then just the 4% growth in blended lease rates in Northern California coupled with some of the office leasing you've referenced across the Bay Area, do you think that the region can sustain that level of growth in 2026? Or was there any specific phenomenon like back to office, that may provide a little bit of an incremental lift that maybe is less sustainable to the extent job growth remains more muted, more of a broader comment than specific to the area.

Yes. Austin, I think there are different -- in every cycle, there are different influences that drive job growth. And currently, what will happen -- what we're seeing in the Bay Area is really more of a recovery story. We're not -- we have not begun the growth story yet. And because if you look at the top 20 tech hiring companies, the postings, is still going to add and slightly below the long-term average. And so what we're seeing, that 4% forecasted is a catch-up, if you will. And this market still has a lot of legs.

Our next question comes from the line of Jamie Feldman with Wells Fargo.

This is Connor on with Jamie. Can we talk about your fourth quarter leasing strategy. Where are you seeing renewals go out for the quarter? And if you have any insight on new lease growth quarter-to-date?

Connor, yes. Our general strategy for the third quarter at the beginning, as we approach the seasonal peak is to push rents and in the Northern California and Seattle region. And then in Southern California, we toggle between rents and occupancy, subject to market conditions. And as we wrap up the third quarter we pivot to more of an occupancy or more defensive focus, especially as we saw strength early on, which, of course, taper off. And that's a normal seasonal cycle. In terms of the renewal growth, what we're seeing is that it's been quite sticky. So in the third quarter, we sent renewals out around mid-4s, say, around 4.6% and we landed for the quarter around 4.3%. So only 30 basis points of negotiations, which is quite good. Currently, for November, December, we're sending renewals out around mid-5%. And so with negotiation, we probably will land at maybe high 4s. So this is another reason that gives us conviction that fourth quarter blended rates will be better this year than last year. And in terms of the -- what was the third question? New lease rates? Connor, what was your third question?

Yes, it is on the new lease rates.

So new lease rates for October for the same-store, it's pretty much flat, and that's expected. Especially for this time of the season. I think a good data point I'll point you to is loss to lease because we talked about that in the past is a good gauge of the portfolio. And where we're sitting today in October, we have a gain to lease of 1.6%. So that's not exciting. But having said that, it's also nothing alarming. So just to give you some context, pre-COVID 2019, so it gives you a sense, more of a historical range, our gain to lease was worse, it was at 2.3%. So this is so far playing out to be a normal seasonal cycle in a soft macro economy. So we're quite pleased with how the portfolio is performing.

That's super helpful. And then maybe on the preferred book. It looks like there was a $21 million commitment this quarter. Is there anything we should read into that as a way to maybe selectively offset some of the redemptions going forward? Just trying to kind of think about use of proceeds here beyond acquisitions?

Connor, Rylan here. As we've said, we are not getting out of this business. This is a good business, and there are interesting opportunities where we believe we'll get a premium yield to what we can buy in the fee simple side. In general, the strategy is just to make this a more manageable size relative to our total business. But if we see good opportunities, in this case, with partners that we know very well, and we're really comfortable with our position in the stack, we will continue to make investments in this book. So we're not getting out of it. It's really just trying to control the size of it and just pick the best opportunities for our shareholders.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

I just want to circle back to the debt preferred equity book. I know, Barb, you've articulated this for a while to trim the book given it has gotten too big as a percent of FFO. But in the current environment where acquisition yields are in the 4s, which is well inside of where your stock is trading and the DPE, you guys have a long successful track record with and provides better returns, and you've been good at that, would you guys consider reassessing the decision to dramatically shrink it? Maybe 10% of FFO was too much, but it just seems like it's a good tool that you guys have to be competitive in a low cap rate world. And unfortunately, it seems to be relegated back to the -- almost up to the attic, if you will.

Alex, it's Barb. Rylan just made a good point that we're not getting out of the business. We're just being more selective. And given the redemptions are very heavy, it is shrinking. There's been a lot of capital raise that's chasing this business. And so yields have compressed. It's not risk-adjusted like we would like, and we're not going to go and do all the deals out there just to backfill this book. And so this business will ebb and flow. And right now, based off of what we know and where the environment is, it is shrinking. But it could change over time, and we -- it has evolved over time. So this is just where we are in the cycle today.

Okay. And then Angela, the New York Mayor election certainly has gotten a lot of buzz, but Seattle has got an interesting election coming up next week, with the Mayor and City Attorney that are both being challenged from the progressive side. So can you just give some thoughts on how the apartments are looking and what the consequences of both the progressives win? What that means for apartments in Seattle? And then if you think that as a result, that means divesting more Seattle, buying more on the East side? Just want to understand better the ramifications of what folks can expect from next week.

Alex, that's a good question. And we've been -- as you know, following the legislative environment as closely as possible. It is hard to predict what will happen. But this is what we know. Washington did enact rent control early this year. It was effective around May. And what was enacted was very similar to California. It was CPI plus 7%, max of 10%. So in this environment, that signals to us that this is a -- the legislators understand the need to protect tenants from price gouging, but at the same time, they also understand that regulation -- heavy regulation is going to be counterproductive. It's going to reduce housing production and community investment, which ultimately results in higher costs all around. So given that they recently enacted rent control, we would expect naturally that this will play out for some period of time before any further changes are made.

Okay. But what about on the Mayor -- like if the Mayor of the City, Attorney changes? Do you see any negative consequence to apartments or not really?

Hard to say, we haven't heard anything that's being proposed that would give us great concern and from the ultra progressive side. And once again, my example to you is, we've got enacted, had a lot of input from all parties. So it's hard to predict, but so far, I don't -- we don't see a meaningful change right away.

Our next question comes from the line of Adam Kramer with Morgan Stanley.

This is Derrick Metzler on for Adam Kramer. I was wondering if you could share your thoughts on SB 79. And does this impact your South San Francisco development at all? Or any other potential developments that you might have in the pipeline? And just kind of generally, do you see an impact on future development opportunities from this and kind of in combination with the recent changes to [ Sica ]?

Derrick, Rylan here. It's a good question. At a high level, we view this in several of the recent legislative changes that have occurred at the state level is good for California. We need more housing. The SB 79 specifically says that if you're within a half-mile radius of a transit stop in markets where there's greater than 15 rail stations, you can establish the ability to get higher density. So as an illustrative example, if you go to a city and get entitlements that allow, say, 80 units to an acre, now you'd be able to get 120 units to the acre. So this should be beneficial. It's not going to benefit ourselves San Francisco deal as we're already through the entitlement period and under construction there. When we think bigger picture of what this could do to the supply landscape in California, it should help on the margin, create some more opportunities. But some mitigating factors to keep in mind. Transit-orient development has been a focus of the state and cities for the past 20 years. The majority of our city's arena plans are concentrated along transit sites. So in other words, zoning has already become more favorable in these locations. Secondly, I think the real gating issue today on increased development are just for the returns. The majority of deals that we've underwritten last year have in-place yields around 5%, many of them sub that. So in summary, it's a long-term beneficial to California, but I don't see it taking a dramatic change in the supply outlook for our markets.

Our next question comes from the line of Haendel St. Juste with Mizuho Securities.

A couple of quick ones for me. First, I was hoping you could comment on the use of concessions across the portfolio where it is today versus maybe a year ago and how it compares across the key regions, SoCal, NorCal, Seattle? And are you offering concessions on renewals?

Haendel, from concession perspective, let's see. Right now, our concession levels are comparable to the same period last year, about 1 week. And that's pretty typical for this time of the year. In terms of the breakdown across the region, Northern California is right at a week -- actually, everybody is right around a week and not a whole lot different. But keep in mind, concession is also more driven by competitive supply nearby. And so that's going to probably be more of an influence than what's happening with the macro economy. As far as -- we'll see concessions. On renewals, no, we don't -- it's de minimis, negligible on renewals. It's mostly on new leases.

Got you. Got you. Appreciate the color. And then my second question, I guess, it's on L.A. and the new versus renewal spreads you're seeing there. I think you mentioned the blends in L.A. were around 1%. So assuming renewals are low single-digit positive, that would imply new leases are negative and a pretty decent spread there. So again, I'm curious on if you could set some color on what that spread is on the new versus renewals in L.A.? And if that's a sustainable spread and if you think that maybe perhaps renewals could come under pressure?

Yes. So renewals are negative. Once again, but that's not unusual for this time of the year. So they say -- we're about, say, 100 basis points in the negative for Southern California. I'm sorry, I said -- I mean new leases. New leases are negative. Yes. And L.A. is much wider in that. L.A. is closer to 1.8%, so closer to say, negative 2% on new leases. Renewal, they're sitting around mid-3% in September for Southern California and L.A. is in the low-3% range. So not too different. Renewals are pretty consistent across the board, generally speaking. New lease, it's hard to say whether it's going to come under pressure. I mean it's, of course, going to follow our market rents ultimately end of next year. And that has a lot of factors. It's job growth, that's where supply is going to be. And what we're seeing right now with supply decreasing and occupancy stabilizing in L.A., we wouldn't expect more pressure on new leases next year versus this year. And so just to give you an example, occupancy, net of delinquency right now sitting at above 94%, which is great. In September, it was still below 94%. It was 93.9%. So it's been steadily increasing. So that tells us that this market is stable. And there is underlying fundamentals to support the stability and potentially growth.

Our next question comes from the line of Julien Blouin with Goldman Sachs.

In Seattle, you talked about the fact that Seattle doesn't really benefit from the AI tailwinds the way SF does. But I was wondering, do you think it could actually end up being a relative loser within the tech markets if investment in talent within tech sort of continues to flow towards AI. Do you see any impact from that?

Well, I think the Seattle economy has a good stable group of industries anchoring it. And so I don't see that AI being ultimately a negative to not just Seattle, but any other economy, because you can make the same argument for parts of Southern California or other areas outside of California where there's AI presence. We do view that AI will be net additive and the economy in Seattle will continue to grow. You've got Amazon there, which is huge. Microsoft is very solid and quite a few other ones. So we don't see AI as a net negative for Seattle.

Got it. And then maybe just a quick one on Contra Costa where occupancy fell about 60 bps sequentially in the third quarter. Can you just give us a sense of what you're seeing in that market?

Yes. Contra Costa, I mean, that market is going to ebb and flow, and it's been digesting a huge amount of supply over the past 2 years. And so we've -- we pushed rents because we saw some strength there. And then, of course, ultimately, sometimes that comes in at the expense of occupancy, but we did see sequential revenue growth there, which was a good indicator that the market is doing fine.

Our next question comes from the line of Robin Hanlin with BMO Capital Markets.

[ You leaned into ] Santa Clara acquisitions as of late. Can you elaborate on the long-term potential in these markets versus buying back your stock today? And also curious is rebalancing your exposure to the city of San Francisco is on the horizon?

Robin, Rylan here. I mean if you look at that 16.1% and where we've been able to source deals in that initial yield layered in with what we think the micro market supply outlook and the potential for rent growth there. As Angela mentioned earlier this year, we think that was definitely the highest risk-adjusted return opportunity available to us. As we've said in recent days with the stock falling off, that math is being reevaluated. But we feel really confident and excited about the acquisitions that we have been able to acquire in there. And again, the micro market fundamentals in terms of the supply outlook for the foreseeable future. I think your second part of your question was San Francisco. We have underwritten every institutional deal that's come to market in San Francisco. There have not been a lot of them. And what we generally found is that the cap rates there have been even more aggressive, the competitive bidding has been made the relative value opportunity for us to create value on the buy in San Francisco is really not emerged relative to what we -- where we were able to purchase along the Peninsula with similar fundamental outlook. So we will continue to underwrite everything in Northern California and step in if we see a unique opportunity.

And then we noticed that San Diego and Oakland, seeing decelerating same-store revenue. Can you maybe supplement us with new lease rates in the markets? And then color on how demand is trending in those two?

Yes. So San Diego, we've had supply concentration in pockets of North City and North Coast submarkets that directly competes with our portfolio, although that is starting to abate. So that's good. And of course, it's San Diego is influenced by a general soft demand in Southern California and the U.S., and that's -- those are the key drivers of the weakness. Similarly, on Contra Costa as well, we've had much heavier supply in Contra Costa for several years. But that market has been recovering. Although we don't have -- we actually have sequential improvements in revenues for Contra Costa. So it's just San Diego where we don't have sequential growth in gross revenues.

Our next question comes from the line of Rich Anderson with Cantor Fitzgerald.

So Jeff Spector asked a question about jobs and he said he understood the answer, and I didn't. So let me see if I can sort of ask it a different way. What is your view when you think of West Coast jobs in 2026 versus national jobs in 2026? When you keep in mind perhaps a blessing and curse impact on jobs from AI, entertainment in L.A., Seattle kind of being somewhere in the middle with Amazon. Do you think that your markets from a job growth perspective alone will outperform the nation, in line with the nation, maybe below the nation? What is your view on jobs going into 2026, if you have one right now?

Rich, our view with respect to jobs is that we should outperform the U.S. average. The question here is magnitude. And that as we would all expect, is going to be influenced by the macro economy. But what we're seeing is Northern California has of course the AI benefit that is a catalyst, it's also in a recovery phase. And so we are seeing positive immigration, which is not the historical norm. So that's going to benefit Northern California. Seattle is anchored by the broad tech economy and which has gone through its massive pivoting and lay off about 1.5 years ago. So it's stable with upside. And in Southern California is going to perform similar to the U.S., albeit with more professional services, it should do better. But more importantly, fundamentals in L.A., we see has troughed or near the bottom. And so while we don't know how long it's going to take to recover, we do see that there should be more upside than downside in that market. So hopefully, that gives you a better breakdown that you're looking for.

That's great. I appreciate that. Second question, thinking about perhaps moving some of your investment incrementally more from Southern California to Northern California. Obviously, much talked about with the Olympics coming to L.A. perhaps housing for athletes. I wonder if there'll be an opportunity to sell in front of the Olympics now? I'm thinking -- I'm thinking in 1996 in Atlanta when there was sort of this wave of housing and then there was a hangover effect after the Olympics. That was a little disruptive. Atlanta obviously became a great market eventually. But do you want to be there for a year after the Olympics in bulk? I'm wondering if you're thinking about your business as an option for the Olympic Committee, as a mechanism to move more product, maybe a little bit quicker out of that area and into other areas of your portfolio?

Rich, Rylan here. Interesting question. As we mentioned, we are fundamentally a little bit more positive on the L.A. market going into next year as the supply is coming down. And we do see some near-term catalysts as it relates to the Olympics. We do not plan to convert any of our existing leases into short-term rentals to take advantage to the extent that, that was your question, that's pretty difficult to do with existing tenants hoping to stay in and be able to enjoy the Olympics and the World Cup in our units. Just speaking broadly on the transaction market, outside of downtown L.A. and the West side, the tri-cities to the north, these are still well bid markets with lots of transactions occurring in that 4.5% or 4.75% type range. We saw a deal closed last quarter, Marina del Rey, that was a sub-4.5% cap rate. So there is still a lot of capital interest in the broader L.A. market, with downtown being a notable exception, as it's still challenged with the operating performance. I think we'll see more transaction opportunities in downtown L.A in the next year. And as we do with all of our markets, we're underwriting everything and looking to take advantage of any mispriced opportunities.

[Operator Instructions] Our next question comes from the line of Linda Tsai with Jefferies.

It hasn't really come up on the call, but are you hearing of any impact on employment outlook as it relates to the higher cost of HB1 (sic) [ H-1B ] visas going forward?

Linda, we actually -- what we're hearing is that it potentially could be a net positive because the intention of this legislation is really to minimize the middleman, some of these H-1B, consulting firms like Deloitte for example. And what this will allow the large companies that can actually pay the fee, to just go direct instead of having to pay a consulting fee and then still having -- incurring other costs. And potentially, what we're hearing is that they can actually get a better or increased allocation, which would ultimately be good. So we don't expect a meaningful impact to Essex and it may actually become a net benefit.

Our next question comes from the line of Alex Kim with

Just a quick one for me. Could you walk through the decline in year-over-year repair and maintenance costs and -- can that be attributed to the continued decrease of same-store turnover? And is it sustainable into Q4 and 2026 and beyond?

Yes. This is Barb. Repair and maintenance is lumpy and it does vary from quarter-to-quarter and even from year-to-year. I think we have done a good job on trying to control our costs via our procurement programs. We are seeing a little bit lower turnover and the delinquency turnover that we had incurred the last few years has been much more stable this year. So it's a combination of a variety of things. Too early to talk about 2026. We're still in the midst of our budget process, so more to follow. What I would say, though, overall controllable expenses. We've done a good job keeping those around 3% for many years. And I don't see anything on the horizon that's going to change that heading into 2026.