Essex Property Trust Inc (ESS) — Q4 2025 Earnings Call Transcript

Good morning. Welcome to Essex's fourth quarter earnings call. Barb Pak will follow with prepared remarks, and Roland Burns is here for Q&A. Today, I will cover highlights of our fourth quarter and full-year performance for 2025, provide our outlook for 2026 and conclude with an update on the transaction market. '25 played out generally in line with our initial macro forecast for the U.S. with job growth moderating throughout the year. Within this environment, we achieved full year same-store revenue growth at the high end and FFO per share growth above the midpoint of our guidance range. I'm particularly pleased with the well-coordinated efforts between our property operations and corporate teams to drive results, especially in other income growth and improving delinquency recovery to near pre-COVID levels. From a market perspective, two key factors contributed to our performance in 2025. First, Northern California outperformed expectations as a result of expansion in the technology sector, favorable migration trends and limited housing supply. Second, rent growth across most Essex markets outperformed the U.S. average, demonstrating the significant advantage of limited housing supply even in a soft employment environment. Turning to the fourth quarter property operations. The results were generally consistent with our expectations with 1.9% blended lease rate growth in the fourth quarter. Occupancy increased by 20 basis points sequentially to 96.3% and concessions averaged approximately one week, which is typical for this period. Within the portfolio, Los Angeles delivered the best occupancy improvement, increasing 70 basis points sequentially, a good indication that this market continues to progress towards stabilization. As for regional performance, Northern California was our best region followed by Seattle then Southern California. Moving on to our 2026 outlook. Consensus expectations for the broader U.S. point to slow but stable economic growth. Further, employment trends are expected to remain consistent with what we have seen recently with major employers maintaining a cautious approach to hiring. Against this backdrop, our base case assumes the current level of demand continues in 2026. On the supply side, we forecast total new housing supply to decline by approximately 20% year-over-year. Accordingly, we anticipate steady West Coast fundamentals to deliver solid blended rent growth above the U.S. average and at a level comparable to 2025, with the Essex markets to be led by Northern California, followed by Seattle and lastly, Southern California. In terms of scenarios, local uncertainty continues to weigh on the economy and job growth and represents the primary driver of low end of our guidance range. This uncertainty has contributed to a measured hiring environment, which has tempered near-term acceleration in demand. On the other hand, we see a path to the high end of our guidance range if hiring trends improve modestly. Given historically low levels of new housing supply across our markets, even a small inflection in demand could have an outsized impact on fundamentals. While broader expectations call for muted hiring internationally, we believe Northern regions are better positioned. Activities in the technology sector remain constructive with companies expanding office footprints and investments in artificial intelligence continuing. In addition, these markets should continue to benefit from ongoing return to office enforcements. In summary, the favorable supply backdrop across West Coast multifamily markets combined with the continued recovery in Northern California reinforces our outlook for our markets to outperform over the long term. Turning to the investment market. Activities in our market remain healthy with $12.6 billion of non-portfolio institutional multifamily transactions in 2025, a substantial increase of 43% compared to 2024. Improving operating fundamentals and minimal forward-looking supply deliveries led to a significant sentiment shift to the West Coast, resulting in deeper bidder pools and cap rate compression, especially in Northern California and Seattle. Generally, cap rates for the highly sought-after submarkets, which represent approximately one-third of the total deal volume occurred in the low 4% range and cap rates for the remaining two-thirds occurred in the mid-4% range. Lastly, Essex has been the largest investor in Northern California over the past two years. With the majority of our acquisitions transacted ahead of the cap rate compression, resulting in significant NAV appreciation. Looking forward to 2026, we will continue to evaluate all opportunities and allocate capital with a disciplined focus on creating shareholder value. With that, I'll turn the call over to Barb.

Thanks, Angela. Today, I will briefly discuss 2025 results, the key components to our 2026 guidance, followed by comments on funding needs and the balance sheet. We are pleased with our fourth quarter and full-year results as we were able to achieve same property revenue growth of 3.3%, which was at the high end of our most recent guidance range and 30 basis points ahead of our original projections for the year. The outperformance in the fourth quarter was driven by lower concessions, higher occupancy and other income. Turning to the key drivers of our 2026 outlook. The components of our full year same property revenue midpoint of 2.4% is outlined on the chart on Page S-16.1 of the supplemental. There are three key drivers of revenue growth this year. First, as anticipated, our earn-in based on our 2025 results will contribute 85 basis points to growth. Second, our guidance assumes a blended lease rate growth of 2.5% at the midpoint. As Angela noted, our outlook for market rent growth is based on tempered job growth, which is partially offset by a meaningful reduction in new supply. As such, this should allow us to achieve similar blended net effective rent growth as last year. And third, we expect a 30 basis points contribution from other income. Moving to operating expenses. We forecast 3% same property expense growth at the midpoint, which is the lowest rate of expense growth we have seen in several years. There are a couple of factors contributing to this outcome. First, we expect controllable expenses to increase around 2%, which reflects the continued benefits of our operating model. Second, we expect insurance costs to be down around 5% on a year-over-year basis as the property insurance market has continued to improve over the past year. These benefits will be partially offset by increases in utilities and property taxes. As a result, same-property NOI growth is forecasted to increase 2.1% at the midpoint. As for 2026 core FFO per share, we expect growth to be flat on a year-over-year basis. The drivers of our forecasts are illustrated on S-16.2 of the supplemental. While we expect solid top line performance and growth in net operating income, it is being offset by recent and expected redemptions within our structured finance portfolio, which are contributing to a 1.8% headwind to growth. This reduction to FFO reflects a conservative modeling approach, which excludes any redemption proceeds and minimal income from the 2026 maturities. We expect 2026 to be the final year of structured finance-related headwinds due to the substantial reduction in the size of this book over the past several years. We are pleased to have strategically reallocated redemption proceeds into higher growth fee simple acquisitions in Northern California, which provides better risk-adjusted returns. Lastly, a few comments on the balance sheet. We are well positioned from a funding perspective as our free cash flow covers our dividend and all planned capital expenditures and development plans for the year. In addition, our finance team has done a great job proactively reducing our near-term maturity risk, with a portion of our 2026 maturities accounted for via the bond offering we did in December with strong credit metrics over $1.7 billion in liquidity and ample sources of capital available, the company is well positioned. I will now turn the call back to the operator for questions.

Great. There's been a lot of movement in the tech market recently. As you consider the demand for your assets, particularly in Northern California, what are your latest insights on potential risks and growth opportunities? What changes are you observing on the ground? We could also explore the same question regarding Seattle.

Thank you for your question. Northern California is currently in a fascinating position as we've discussed the potential recovery, which is beginning to take shape. This is an exciting time for us. We're monitoring a few trends. It's important to note that the overall jobs landscape in the U.S. has been weak, which ties into my comments about Seattle shortly. However, Northern California has performed well. We've observed job openings among the top 20 tech companies, which have surpassed pre-COVID levels since the second quarter of 2025. Although in the fourth quarter, the situation is consistent with seasonal patterns, it suggests that while the job market isn't thriving, it's stable and doing well. Looking ahead, we're seeing signs that offer encouragement for continued improvement in this area. For instance, VC funding in the fourth quarter reached its highest level in over four years, with a 91% increase quarter-over-quarter, and over 65% of that investment is in the Bay Area. While this doesn't guarantee immediate job growth, it points to future expansion. In addition, we're witnessing positive office absorption for the first time in the three major markets of our northern region: San Francisco, San Jose, and Seattle. Regarding Seattle, I must point out that the fourth quarter was soft, with performance falling short of our expectations for rent growth and lease numbers, partly due to corporate layoffs. Nevertheless, we remain optimistic about Seattle's fundamentals, with supply down by 30%. Alongside positive office absorption, we've also noted increased leasing activity from OpenAI, which has significantly expanded its space in Seattle. Furthermore, we expect support for returning to the office, as Amazon will enforce a return to office policy in January and Microsoft in the first quarter. This creates a pathway to reaching the upper end of our expectations. However, it's important to acknowledge that the employment landscape carries an element of unpredictability, influenced by public policy, which has thus far slowed job growth. We must remain attuned to this environment.

Okay. And then can you talk about what you're thinking on new and renewal blends for the year?

Yes, we're expecting our blends to be similar to 2025 at about 2.5%. This expectation is based on the assumption that demand will remain generally flat moving forward. For new leases, we're anticipating an increase in the range of flat to 2%, while renewals are projected to be around 3% to 4% for the year, which is not significantly different from last year.

I guess, first off, I just wanted to ask about Los Angeles. You talked about occupancy picking up there in the fourth quarter. Where is that market now in terms of where you're hoping it to be on occupancy and to be able to drive rental pricing a little bit better this year? Maybe you can just talk a little bit more about how you're expecting L.A. to perform this year.

In Los Angeles, we've observed a steady improvement in occupancy, which is encouraging, especially given the current softness in the job market. Currently, the economic occupancy stands at 94.7%, just shy of our target of 95% stabilization. This marks an increase from 94% in the previous quarter and 93.8% in the second quarter. Moving forward into 2026, we anticipate a 20% reduction in supply within this market, which gives us hope for achieving this 95% stabilization sooner rather than later. However, the timing is largely influenced by the eviction processing timeline, which affects our ability to address delinquency. We are taking a cautious approach, but the trend is positive.

Okay. My second question is about San Francisco and the Bay Area overall. I've noticed that some of the strong rent growth indicated by market data seems to be influenced by the removal of concessions in that market. Therefore, there might be a comparison issue affecting the numbers. Could this become a challenge for us this year as we consider how San Francisco's rent growth will compare to last year?

Yes. Nick, I think on the concession, the margin, it could be a result of hangover from previous supply pressures. But what we're seeing concession levels in this market is not too different from historical averages, and it's not a factor when it comes to the uplift in San Francisco. It's really been more of a recovery story. We are finally at a point where San Francisco as a market is somewhere around 9% above pre-COVID levels. And if you look at where it should be, it should be somewhere around 20% above pre-COVID levels. So it's still in the recovery phase. And so it's less of a concessionary story hiccup.

It's Nick Joseph here with Eric. There were reports, I guess, last week about a large Southern California portfolio coming onto the market. So curious where you see buyer cap rates today and, I guess, across your markets, but maybe specific to Southern California if there's any differences between the regions? And then just broader your thoughts on kind of external growth and capital allocation coming into this year.

Rylan here. I'll comment on the portfolio in Southern California. Generally, I don't want to go into details or comment on an ongoing transaction. For context, there have been about $11 billion in transactions in Southern California over the past two years. Most of last year's transactions were in the 4.5% to 4.75% cap rate range. This indicates a strong environment with significant capital influx, which should lead to good results. We review all opportunities in our markets and will assess any potential to create value. You would expect us to engage if the right chance arises. In terms of the broader picture, please go ahead, Nick. Yes.

No. Go ahead.

Yes. Capital allocation, just a reminder of our broader philosophy, right? So for investment criteria, we have three things that we're looking to solve for: one, FFO per share accretion; two, per share accretion; and looking for opportunities that are better growth profile than the rest of our portfolio. And our strategy, which is unchanged, is to allocate capital to those investments that offer the highest potential accretion relative to the cost of capital. So we're going to continue, as we've done for this team been here in the past five years and over the past 30 years to look for those opportunities where we can drive the highest potential accretion.

And so for that 4.5% to 4.7% you quoted, is that buyer or seller? And how wide is that spread typically?

That's buyer cap rates. Those are economic cap rates on in-place rents. Obviously, seller, it really depends on when the asset was purchased and what the tax base is involved. That's where you'll see some difference between buyer and seller cap rates in Southern California.

Got it. And then just in terms of the capital allocation, just given where the stock is trading today, how do buybacks play into the stack of opportunity just given where you're seeing cap rates versus where the implied cap rate for the stock is?

Nick, that's a great question. It's something we evaluate regularly. I want to emphasize that all options are under consideration: buybacks, preferred equity, development, and acquisitions. When we think about buybacks, we also consider the potential yields from straight acquisitions or development and their growth. There's an IR aspect to this. Currently, with the stock around $255, the options are fairly closely matched. We need to focus on how to create value for the company. Over the past 1.5 years, our capital deployment in fee simple properties in Northern California has performed well, even with the stock trading in this range, as those assets generated leading rent growth and experienced cap rate compression, resulting in significant appreciation and increased shareholder value. It's important to take that into account. Additionally, if we had executed a buyback six months ago, the stock would have been cheaper, making it less appealing. We carefully weigh many factors, and I hope you see that we approach this thoughtfully. You’ve observed us repurchasing stock in substantial amounts when it is warranted.

I think, Angela, you had mentioned that renewals would be in the 3% to 4% range for the year. I'm just curious, what have you experienced thus far kind of in the January, February and presumably March time frame?

Steve, right now, our renewal is looking at around 4-ish to mid-4% for February, March. And so we're pretty much on track.

And are you doing a lot of discounting? Are you pretty much getting what you're asking for? Or is there a gap between kind of what you ask and what you achieved?

So far, the negotiation is somewhere between 30 to 50 basis points. To us, that indicates just a normal stabilized environment.

Great. And then, I guess, following up on the capital allocation discussion, you talked about sort of acquisitions and buybacks. But I think in the release, you explicitly said you would not have any development starts. So I'm just curious where would development pencil, if you were to start one? And I guess, what does that mean about costs having to come down or rents having to grow in order to get to a yield that makes sense to you?

Currently in our development pipeline, we have two land sites that we are progressing with, but they are not expected to start in 2026. Last year, our team evaluated around 100 land sites, and none of them truly made economic sense. To make the numbers work today, land sellers need to adjust their expectations on land prices or we need to see rent growth of over 10% for some of these deals to be viable. We are moving closer and have our own pipeline to continue developing. If we can identify something at a considerable premium to the current transaction rates that aligns with the risks involved in development, we would be willing to proceed. We believe there will be some opportunities in development, and we are focused on ensuring we achieve the best risk-adjusted returns.

And sorry, just what would you need on that? Is that a 6%? Is that 6.5%? Is that 5.5% in your markets?

Yes. As I said, depending on the submarket in Northern California, where the transaction market feels like it's shaking in that 4.25% type range. Something close to 6%, I think would definitely be worth the risk. If we have clear visibility on entitlements, we know exactly what we're going to build. We felt good about the land basis. Those are the types of opportunities that we would jump at.

Another question on L.A. Obviously, you're seeing some improvements there. Can you talk about if the guidance assumes a significant improvement in performance year-over-year? And if not, when do you expect L.A. to become more of a positive contributor?

We expect L.A. to continue improving gradually. By the end of next year, we hope to return to a normal delinquency rate, which may be slightly higher than our typical portfolio average, but we anticipated this. We have factored this into our expectations. The potential for growth is largely influenced by the overall jobs market, especially given the decrease in supply, which presents opportunities in L.A.

Okay. Got it. And then on the immigration front, has there been any sort of noticeable impact on demand or anything that you can see on your dashboards just from the lack of immigration?

We have not observed any direct effects from immigration. I'm assuming you are referring to international migration. What we've noticed is that it has generally returned to pre-COVID historical levels, and activities are at a normalized state. Regarding legislation and its impact, such as with the H-1B visa, we certainly haven't experienced any negative effects from that. In fact, it is still viewed positively. There are specific exemptions for students and others that should not adversely affect our business.

This year, there's a mayoral election in L.A. and an election for Governor in California as well as a number of proposals that could impact real estate. I'm curious if you can kind of let us know what you're watching from a policy front that could potentially be beneficial for rental housing.

Jana, thanks for your question. It's an interesting situation here in that we've seen California slowly migrate away from these extreme liberal policies, which has been actually good for the overall economy and the voter population as well. So there's been a couple of proposals that were more under extreme end, and we were pleased to see that those proposals actually were not successful. So that's a good indication. What we're watching on the margin, of course, is the outcome, and we don't have any more insight to the election than what's publicly available. But what we can tell is that from the sentiment is that the general view is people want to have a normal function and economy. And these extreme measures have not been well received.

And then on the structured finance book, now that it's kind of rightsized or will be at the end of '26. Just going forward, how should we think about modeling the growth here?

Yes, it's Barb. That's a good question. So how you should think about it is at the end of the year, our book value is $330 million, but what is in our guidance for '26 is $175 million that we are having income on that's hitting our numbers. And that is a 3-year maturity. So there will be future redemptions, but it will be much more manageable over the next three years. And we are looking for new opportunities to backfill. We obviously want to make sure there are appropriate risk-adjusted returns, but it is a much more stable book than what we've had two to three years ago. So I think if you take the $175 million, that will get you a stable number going forward.

Just going back to L.A. for a minute. Are you guys seeing conditions, I guess, broadly in your submarkets stabilize and rent growth may be approaching an inflection? Or was this more of a strategic approach on your part to build occupancy back to a stabilized level and everything you're seeing is kind of specific to your portfolio?

Austin, that's a good question. Our operational strategy in L.A. is primarily driven by Essex's approach. Ultimately, our goal is to maximize revenues. In an environment with unstable occupancy, we lack pricing power. Therefore, it's crucial to concentrate on reducing delinquency, which I believe our team has handled remarkably well, and on increasing occupancy. Once we achieve a stabilized economic occupancy of 95% for our portfolio, we will gain some pricing power.

Got it. And then just going back, I mean, does that speak a little bit to the negative 2.4% new lease rate growth in the fourth quarter and maybe what was the driver of that? Because it did seem that was a little lower than it's been in many years outside the COVID period? And have you started to see that reaccelerate into the new year given that occupancy is now in a better position even than it was a year ago at this time?

Yes, that's a good question. The new lease rate is influenced by the market weaknesses in Seattle and San Diego, primarily due to supply. Los Angeles is not performing as well and remains in a negative territory. However, looking ahead, there are a few positive developments: supply is decreasing, and the situation in Los Angeles is stabilizing, indicating that we are beginning to see an upward trend.

On the new lease growth rate expectations of flat to 2%. I'm wondering what your thoughts were on cadence? Last year, it peaked in the first quarter at 1%, and I'm wondering if you expect a similar dynamic this year? And as part of that, I was wondering if you could share your new lease rate growth in January.

That's a good question. We anticipate that 2026 will be fairly moderate, with no significant differences expected between the first and second halves. This outlook is influenced by our perspective on the current job market, which we believe will remain steady due to political uncertainties. Additionally, with a midterm election taking place in the second half, there are unknowns regarding how public policy might evolve. Regarding January figures, I don't think it's very useful to focus on them because December and January are consistently challenging months for our business due to seasonality, and they won't provide meaningful insights into the rest of the year.

Okay. And Angela, in the past, meaning last year, you talked about happily trading out of Southern California or would you sell Southern California and buying in Northern California based on Rylan's commentary about being perhaps a little bit more opportunistic and the occupancy improvement you saw in L.A. this quarter, is that trade still the case? Or are you more agnostic on markets?

At this point, let me start by saying that our perspective has always been that everything has a price. In a situation where cap rates are generally consistent across our markets, we would certainly prefer to invest in regions where we expect significant rent growth, such as Northern California. Considering the current environment, if all cap rates remain largely aligned, Northern California remains a more attractive option for investment because it is recovering. However, if we begin to see discrepancies among cap rates in different submarkets, that will require a different evaluation. Therefore, we will need to consider the overall situation rather than focusing solely on specific numbers. And how much should that gap be in your mind? Well, it depends on the growth. And it really is more submarket driven. So for example, when I say Northern California, we certainly wouldn't invest in Mountainview at the same cap rate as we would invest in Oakland. And so I wish I could give you a finite number because that would make everyone's life so much easier. But it really depends on the growth rate of that specific asset, which has a lot to do with how it's managed and what's going in the submarket. And it's just not as simple as a one data set that fits all situation.

A couple of follow-ups for me. First, I guess I want to go back to the blends. I know you talked quite a bit about it, but I just wanted to clarify a few things. I guess by our math, it looks like your outlook for blended rents for the year implies a slight deceleration in the back half of the year, which seems pretty unlike your peers who are embedding an acceleration in the second half. So first, is that fair? And then second, can you comment on what your expectations are for market rate growth by key regions for this year?

Haendel, sure thing, and thanks for your question. I'm not sure where you're seeing a decelerating in the second half, maybe we can sync up after the call because we're modeling pretty much a consistent rate and what we typically assume is that first quarter and fourth quarter blends are at the lowest level and then second and third quarter blends are higher. And so they kind of offset each other as far as the market rents by market. It's actually in an environment of low growth, it's not all that different from our blend. So last year, our market rents landed in the mid-2s and we're assuming that in 2026, market rents will be very similar. And we're assuming Northern California to be on the higher end, say, in the mid-3s to 4 range and Seattle in the mid-2s and Southern California in the mid-1s.

Got it. That's helpful. And I guess to your point on the blend, maybe it's not deceleration, but certainly, there's not an acceleration required in the back half of the year like your peers. Second question, I wanted to talk a little bit about Southern California, but ex L.A. Obviously, you know L.A. is going to be a bit challenged near term, but curious how you're thinking about the prospects for Orange County and San Diego near term? And then maybe sprinkling a question on L.A., how you would think of L.A. growth over the next few years? You mentioned cap rates generally being kind of in that sub 5-ish range. But curious how you think an IRR for an L.A. portfolio would look like.

Good questions. Ryland will discuss the cap rates. Regarding Southern California, we're assuming that San Diego and Orange County will perform similarly to this year. This outlook is largely based on our belief that job growth will remain steady, and the supply in San Diego seems to be at a similar level with Orange County showing a slight increase, but not significantly enough to cause any major changes. Overall, the situation is stable, not overly exciting, but more of the same for both Orange County and San Diego.

Haendel, I'll jump in on the IRR expectations. I think where we've seen a lot of transactions in Southern California with our growth expectations in these markets. We've seen market clearing trades, I would say, in the low 7 IRR type range. Again, a wide variety depending on the asset and the business plan for some of these assets. But we think we've been able to achieve much better returns in our submarket selection in Northern California. So that's where we've really been focused. Now if any of those assumptions were to change as it relates to the going-in cap rate the business plan on a specific asset and/or the growth rates, then you would see us change our capital allocation priorities. But that's where it's been trending in 2025, I'd say.

I have two questions. First, Angela, you outlined your expectations for advocacy costs in your guidance. Although this isn’t part of core FFO and only relates to NAREIT FFO, I’m wondering if these expenses could be considered a regular part of doing business, especially in California's real estate market. Would they be viewed as standard operating expenses, similar to insurance or weather-related costs? I think this is an important aspect for investors, particularly when they are considering their portfolio in Southern California, as regulatory costs will influence their decision-making.

Alex, it's Barb. So in terms of the advocacy costs or the political costs that we had, we had $2 million in 2025. We have not specifically outlined what the cost will be in '26. We've provided a number, but it does include other legal fees that are outside of our normal core operations. So we don't expect there to be significant advocacy costs in 2026. There will be a small amount, but we don't see them as necessarily reoccurring. They can be lumpy from year-to-year when we have a big ballot measure, we're not expecting a lot on the advocacy front in 2026.

Okay. And then Ryland, just in looking at deal flow, it seems like 2021 was a banner year for ultra-low rate deals that may not have hit their pro forma and maybe have it coming back for debt maturities or restructuring in the next year or two. Do you see a lot of these deals coming to the market to trade? Or as you guys take a look at these deals that are having issues, most of them seem to be resolved internally between the existing sponsor and the lenders. I'm just trying to figure out if the 2021 vintage is going to create opportunity for you guys or if it's going to be one of these where most of the stuff gets resolved on its own.

Alex, you are correct that many deals were completed at low cap rates in 2021, typically funded with five-year debt. This suggests there should be numerous deals hitting the market that have lost their favorable debt rates. However, as you pointed out, there is substantial debt capital seeking opportunities in the multifamily sector, leading to ongoing negotiations between lenders and sponsors. We haven't observed any significant distressed sales in our market. It's also worth noting that Southern California has performed relatively well compared to the rest of the country over the past five years, resulting in increased NOIs and value creation in many instances. Therefore, I don't expect a considerable influx of distress in 2026 for the reasons you mentioned, including a generally favorable lending environment and decent overall performance.

This quarter, you took control of an asset in Los Angeles tied to the preferred portfolio. Can you talk about when you expect that asset to stabilize, if it hasn't? And was it much of a drag on earnings this year?

This is Ryland. Yes, this is a unique asset. We expect it to stabilize in the mid-5 range. There was no impact on the economics last year since we took management of it at the end of last year. Currently, it's probably a low to mid-4 cap. The previous sponsor had a unique business model where some units were rented as fully furnished short-term rentals, which didn't perform well, leading to elevated delinquency and higher controllable expenses. By transitioning it onto our platform, without expecting significant rent growth, we are confident we can achieve a mid-5 by the end of the year.

First question is on the legislative front. Are you seeing anything that may be related to the so-called junk fees or Essex's ability to continue to grow non-rental income?

Michael, we have looked at our practices as it relates to other fees, and we've also utilized consultants to ensure our practices are in compliance. Therefore, we don't expect that to have a meaningful impact on our business.

Got it. And then just as a follow-up, have you seen any changes in the pace of move-ins from outside of Essex's core markets?

Would you repeat that question, sorry?

Have you seen any change in the pace of move-ins into Essex's market from outside markets? The pace of move-ins into the market.

We have noticed an uptick in migration trends, particularly in our northern region. However, I want to caution you that these immigration numbers are likely more influenced by a return to office rather than a strong job hiring environment. Nevertheless, it has been positive for us and has provided a nice boost.

I just want to go back to Seattle. You mentioned the return to office plans for Amazon and Microsoft. But then on the other hand, both of those companies have announced corporate layoffs there by the thousands over the past six months. I guess, what is your sense of how that push and pull will sort of play out this year? Can the RTO benefit really outweigh the continued layoffs we've seen?

Yes, that's a good question regarding how we set our guidance. What we've observed in Seattle is that changes happen quickly. While there are layoffs happening alongside a return to office, Seattle is also seeing a 30% reduction in supply. Therefore, unless there's significant new job growth, this market should remain stable, if not slightly better than last year. Regarding the layoffs, we analyze the reasons behind them, which are crucial. When we look at major companies, including Amazon, the layoffs are often due to either the elimination of unprofitable sectors, like Amazon Fresh, in favor of Whole Foods, or they involve investments aimed at expanding into new business areas. Thus, these layoffs are not indicative of distress, which is a more positive context for them. Furthermore, increased office absorption and leasing activity support the notion that this remains a vibrant market.

No, that's very helpful. Maybe digging into the South Bay as well, just in light of the fears that are out there around sort of AI native companies disrupting legacy tech and software. On the face of it, the South Bay is also one of those sort of more legacy tech or software-heavy markets where companies have been announcing corporate layoffs and had sort of less of that AI native HQ benefit that maybe San Francisco has. Why do you think the South Bay is sort of holding up so well while Seattle has maybe struggled a little bit more?

I believe the South Bay market is significantly more robust than Seattle. While we anticipate some disruption from AI, such as from cloud or coworking trends, there is a growing demand and increased usage for Agentic AI. Although certain applications may decline, others are expanding, all within the same submarket. This concentration of technology companies is a key advantage for the South Bay.

In 2026, do you expect any year-over-year changes in tax expenses from Seattle and Washington state due to the Seattle Shield initiative and B&O surcharge?

This is Barb. We have accounted for a tax increase in Seattle this year in our guidance, which is in the high single-digit range. This reflects everything discussed, and it's a significant change from what we experienced in 2025 when we had a notable reduction in taxes.

What would be the dollar amount?

I don't have that off the top of my head. I can follow up with you after.

I had a follow-up to the return to office discussion from a few questions ago. I would have thought work patterns are normalized by now. Amazon's policy has been in effect, five days a week. It's been in effect, I think, for a year now. Has your local team seen a real second wind of demand to start the year, either in Seattle or the Bay Area or it's more of you're hoping that the positive momentum in the market continues gradually over time?

John, our expectation is based on what we've observed on the ground. What we've seen is that when a company announces a return to office policy, some employers comply while others do not for various reasons. It is only when they announce enforcement that everyone starts returning to the office. This was also the case with Essex; after announcing a policy, we allowed time for adjustment and then three quarters later, we stated we would check key cards, leading to everyone coming back. We expect this situation to unfold similarly. Amazon has announced they will start enforcement in January, which they are doing for a reason, and I believe their workforce won't behave significantly differently from the norm.

Okay. And then drilling into Seattle again. Obviously, it takes a little bit of time for layoffs to get announced, severance policies, et cetera, to actually flow through the housing decisions and people moving out. So in your Seattle portfolio, are you seeing a real uptick in notices to move out? Can you share any kind of forward-looking blended rate expectation just given the lag between the layoff announcements and the actual decisions renters make?

Typically, when layoffs occur, there are public announcements and private conversations, and employees usually learn about their layoffs through personal discussions rather than publicly. People often make housing decisions about 45 days before changing jobs. We believe that most of the impact from the layoffs has already been felt in the fourth quarter, with some continuing effects in January and lesser impacts in February. Our leasing activities and blended renewal rates for Seattle are not significantly different from historical trends. Therefore, we do not anticipate any further negative effects resulting from the layoff announcements.

Okay. So blended spreads for the first half of this year in Seattle, do you expect not to look meaningfully different than the second half of last year?

Correct. And I would say the whole year because we're not expecting a huge difference between first half and second half in 2026. And then the one other data point I'll point to is that Seattle supply is declining by 30%. And so that will also benefit the market.

I want to revisit Barb's comment about the cautious approach reflected in the idea that the structured investment redemptions would not be redeployed, which is essentially what our guidance currently assumes. How cautious is that perspective? Is it possible that this caution is somewhat unrealistic considering the opportunities in the pipeline and the actual expectations surrounding those redemption proceeds?

Rich, that’s a great question. What makes 2026 unique regarding our redemption profile is that 90% of the anticipated redemptions are linked to two assets. These are significant redemptions that have an impact on our guidance. For one asset, we ceased accrual in the fourth quarter after conducting a third-party valuation, and we feel confident about the valuation now. However, if we continued to accrue, we believed it would be excessive, so we made the wise choice to stop. For the second asset, we are currently in talks with the sponsor. Since the final outcome is uncertain, we opted not to factor in any potential redemption proceeds. There’s no additional downside in the guidance from these two assets, and while there could be upside, we won’t know until we advance further in our discussions.

Just a quick one for me. I wanted to talk about the delinquencies and they look to be near pre-COVID trend line. Do you anticipate further improvement even below pre-COVID norms? And could you quantify how much of a contribution is embedded into that 30 basis point tailwind from the other income bucket for your full year same-store revenue growth guidance?

Yes, this is Barb. We are pleased with the progress we've made regarding delinquencies over the last two years. Currently, we are at 50 basis points, which is about 10 basis points away from our historical pre-COVID average, so we are very close. As Angela mentioned earlier, this situation is particularly linked to L.A., where eviction court processing times are still slightly higher than pre-COVID averages. Therefore, we haven't factored in any significant benefit from delinquency for 2026. Most of our delinquency benefit was achieved in the previous years. We are still working to improve the situation in L.A., and perhaps we could see some progress by year-end, but it won't have the same impact as it did in 2025.

I wondered if you could talk a little bit about technology initiatives you guys are still undertaking to help with things like customer satisfaction, customer retention, rent growth, operating expense management and just kind of what benefits from that are being built into your 2026 guidance?

It's a good question. From a technology perspective, we do have a variety of initiatives in our pipeline, both top line and, of course, some on the bottom line benefits. On the sales and leasing front, it's really more AI-focused. And of course, on the bottom line, as it relates to expenses, there's some expense management opportunities and technology that we are implementing. Having said that, you'll see that other income contributions from these initiatives are fantastic, but they are lumpy. And when we start something, it usually takes a year or two to really monetize the opportunity. And so I'll give you an example. Last year, we had a nice pickup. And one of the reasons was EV parking, and that was rolled out in 2024. We captured the bulk of the benefit in '25, and there's some residual in '26, and that's a reasonable cadence. So we are not baking anything new from this year because this year is a pilot rollout phase, and we're going to see how the pilot performs before we assess the rollout and the ultimate economic benefit for future years.