Oct 26, 2016
Executives
Marty McKenna - IR David Neithercut - President and CEO David Santee - COO Mark Parrell - CFO
Analysts
Nick Yulico - UBS Nick Joseph - Citi Rich Hightower - Evercore ISI Conor Wagner - Green Street Advisors Wans Nabria - Bank of America Merrill Lynch Rob Stevenson - Janney Tom Lesnick - Capital One Securities Tayo Okusanya - Jefferies Wes Golladay - RBC Capital Markets Dennis McGill - Zelman & Associates
Operator
Good day and welcome to the Equity Residential 3Q 2016 Earnings Call. Today' conference is being recorded.
At this time, I would like to turn the conference over to Marty McKenna. Please go ahead.
Marty McKenna
Thank you, Cynthia. Good morning and thank you for joining us to discuss Equity Residential's third quarter 2016 results.
Our featured speakers today are David Neithercut, our President and CEO; David Santee, our Chief Operating Officer; and Mark Parrell, our Chief Financial Officer. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law.
These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.
I'll now turn it over to David Neithercut.
David Neithercut
Thanks Marty. Good morning everyone, thank you for joining us this morning's call.
As we discussed over the last several quarters, 2016 will not turn out to be a year we had originally expected due to elevated levels of new supply in both San Francisco and New York City which combined made up a large share of our initial growth forecast for the year. And as a result after five years of extraordinary strong fundamentals, revenue growth this year will now be more in line with long-term historical trends.
Good news however is that exceptionally strong demand continues unabated across our markets with current occupancies remaining at or near 96% and lower exposure on the horizon. Turnover across all markets when excluding same property movement is actually decreased for the first nine months of the year compared to the same period last year.
Move outs to buy single-family homes remain a non-factor in our high cost of housing markets and our recently completed development properties are absorbing units to significantly faster and at rates above or closer to our original expectations. Furthermore while our markets have experienced the slowdown in the growth of high income jobs, the absolute number of new high income jobs remains relatively strong and our preliminary indications that the trend may be reversing.
Perhaps more importantly for the first time since recovery began there are abundant times and wage growth occurring in all the industries across the country which obviously the very good signs of the apartment business. So as we look forward to what we see as peak deliveries next year, our teams across the country will work very hard in carrying for our existing residence, welcoming prospects and trying them into new residence and we remain extraordinarily excited about the outlook for our business, portfolio and the company.
So with that said, we’ll let David Santee go into more details on what we’re seeing across our markets today.
David Santee
Okay, thank you David. Good morning everyone.
Today I'll update you our Q3 results, discuss the current state of each market which we operate as well as providing additional color on 2017 deliveries. As David said, demand for quality apartments remain pretty robust with occupancies and our markets averaging 96 or better and resident turnover continuing to decline.
Year-to-date turnover net of same property transfers decreased 30 basis points versus the 10 basis point increase and the gross turnover that we reported demonstrated the strong customer satisfaction that are fully strived to deliver each and every day and the great locations our portfolio continues to enjoy. Renewal rates achieved for the quarter continued to be well above historical averages at 5.3% while new lease over least pricing was plus 90 basis points.
Combined results were in line with our revised expectations at 3.1%. Moving on to the market, in Seattle new lease over lease growth average 4.9% for the quarter while renewals achieved were 8.1%.
Seattle continues to distinguish itself as the epicenter of cloud computing services as Amazon remains the catalyst with the rapid downtown expansion of both jobs and new apartment deliveries. Through August Seattle, Bellevue and Redmond realize job growth of 3.50% that allows 7,200 apartment deliveries this year to be easily absorbed with virtually zero pricing pressure.
Now with 7,000 new deliveries expected in '17 and job growth well above the national average, we see Seattle is our best revenue growth market next year. Again easy job, Amazon job openings is a proxy for demand.
Last week there were 8,000 openings in Seattle almost double from same time last year, 3300 of which are for high paying software developer positions. This concentration of intellectual capital is also forcing the large well established tech companies to expand their presence in Seattle to better compete for talent.
Microsoft, the region's second largest employer, recently committed to a significant investment in a new artificial intelligent's group and most recently announced record operating results. With cloud computing in early innings and Boeing the areas of largest employer having a seven year backlog in airplane production, Seattle is poised for continued growth as rents are the lowest of all the markets in which we operate likely delivering strong revenue results that are slightly lower next year.
Then the San Francisco, while operations were quite volatile during the summer peak leasing season, where recently the market has been more stable across the key drivers of revenue growth. Occupancy has improved to 96% versus the low 95% that we saw only a few months ago.
The percent of residents renewing are at peak levels and contrary to some reports of rents being down double digits, our San Francisco portfolio average asking rents are down only 1.4% versus same week last year. Growth in higher paying tech jobs as not as robust as 2015 but the growth is nonetheless positive and while VC capital investment has slowed, the actual amount of VC funds available for investment have increased.
All the fundamentals are still in place for the market to absorb 2017 deliveries. However elevated supply and a slower pace of VC investment that drives the tech segment will continue to have a negative impact on pricing power in sub markets that see the most deliveries.
Achieved renewal rates for the quarter in San Francisco were 6.2%, new lease over lease rate averaged minus 30 basis points. The modest increase and turnover is more than accounted for about same property transfers.
Netting this out year-to-date turnover has actually declined 70 basis points on top of the improvement we saw last year. 2017 we’ll see the market deliver 8400 new apartments with deliveries that are less concentrated then in 2016.
In the downtown areas some will see 50% fewer units delivered with the balance spread across Mission Bay and the Dogpatch areas. The mid Peninsula will also be more disbursed with only 1600 units spread across all directions of San Mateo and Redwood City.
San Jose and Santa Clara will see the majority of deliveries in South Bay and with the less geographically competitive with our same store portfolio. Based on current delivery estimates, the 2017 supply appears to be more frontloaded in the year which means most of the supply will begin leasing up and periods of peak demand.
San Francisco remains ground zero for innovation and tech stalwarts continue to expand their footprint. As artificial intelligent and the Internet-of-Things continues to grow less, we expect San Francisco continued to lead the world in tech and overcome any short term challenges with supply.
Time and time again San Francisco has proven to come back faster and stronger than peak to the past but we would expect San Fran to deliver revenue growth in 2017 that is much lower than 2016. Dropping down to LA, job growth continues to be very strong but is dominated more by lower paying hospitality and leisure sector.
However, as downtown LA focuses on its Renaissance efforts and Silicon Beach continues to develop and build out the higher paying professional services sector is expected to lead job growth through 2020. As non-traditional entertainment content continues to grow, Southern California is poised to capture this additional investment as well.
Demand for apartments continues to be strong with occupancy across our LA portfolio at 96.3%. Renewal rates achieved for the quarter were 6.8% and new lease over lease growth was 2.5% on lower turnover for the quarter.
Based on current estimates, LA will see peak deliveries of 10,000 units during 2017 with over 80% of these units spread across three sub markets. Downtown Hollywood will represent 50% of the 80%, Glendale-Pasadena, 20% of the 80% and then Koreatown mid-Wilshire at 14% of the 80%.
To-date deliveries in the urban core and west LA have had modest impact on revenue growth which today is in the 3% to 5% range. As LA continues to add sully the urban core, downtown continues to be more attractive lifestyle that has been non-existed for many years.
With virtually no units been delivered this year or next, the East and West San Fernando Valley, Ventura County and Inland Empire continue to show signs of accelerated revenue growth upwards up 6% to 7% for the current month billings. For 2017 we would expect greater LA counting to deliver modest renewable revenue growth, pressured by the level of new supply in the urban core.
Orange County at 96% occupancy today achieved renewals for the quarter of 7.6% and that was the strongest across our portfolio and new lease - over lease growth of 4.4%. After taking a breather from elevated deliveries in 2015 and for the most part 2016, Orange County is expected to deliver 5700 units in 2017 and about 50% concentration in Irvine, Newport Beach sub market and the balance spread from Anaheim up through Huntington Beach.
With almost 65% of our portfolio in South Orange County, we would expect slightly lower revenue growth as a result of the concentration of deliveries at urban where we have 35% of our revenues. San Diego was extremely strong job growth in the first half of the year has seen strong demand for apartments with very little supply.
San Diego is distinguishing itself as the life science medical device tech manufacturing center and continues to have high paying jobs in these sectors albeit at a slower rate. Second, only the Orange County achieved renewal rate growth for the quarter averaged 7.4% with new lease over lease growth of 4.4%, again on lower turnover.
San Diego will deliver 2300 units in 2017 which appear to be disbursed equally between downtown and the I15 corridor on lower expected job growth. The I-15 sub market is already showing modest deceleration and we would expect revenue results in '17 to be somewhat lower next year.
Jumping over to Boston, as we previously said 2016 would be a window of opportunity in the urban core and especially Cambridge where deliveries were few. Today that has played out where we have seen modest deceleration and revenue growth with more pressure on rents in the suburbs than downtown.
New lease over lease growth of 1.6% for Q3 was the strongest quarter since Q3 of '15. Achieved renewal rate growth was 4.9% and again on lower turnover.
As Boston continues to position itself as a major tech, biotech hub and an endorsement with the GE headquarter relocation, the future of Boston and professional services job growth is very bright as professional services sectors moves from 35% of jobs created to 45% of new jobs created this year. In the near term Boston is expected to deliver approximately 6200 units in 2017 split evenly between Downtown Cambridge and then North and West Suburbs.
Given the concentrations of the new supply to our portfolio, we see continued deceleration across the market and expect revenue growth to be lower than 2016. New York for the quarter achieved an average renewal rates of 3% and minus 2% on new lease, over lease growth, again on slightly lower turnover.
With the trend toward affordability over neighborhood loyalty, prospective renters are proving to be more flexible in where they choose to live. To-date 55% of the 2016 deliveries have been absorbed.
Concessions have yet to become widespread and appear to be more targeted to specific unit types at stabilized communities. The Upper West Side and West Side down to Chelsea are currently the weakest neighborhoods in our portfolio and are delivering slightly negative revenue growth for the current month.
The New York MSA will see 14,000 units in 2017 and to clarify these are units that are identified and so very considerably to be within the competitive boundaries decline by our portfolio. It will not match the higher MSA numbers provided by third party data shops.
It should be no surprise that Brooklyn will deliver the lion’s share of new units where we have less than 8% of total New York Metro revenue, followed by a Long Island City, where we have no presence, Midtown West will deliver a good portion as Hudson Yard comes online and then the Hudson Waterfront, specifically Jersey City. These four submarkets were account for a little more than 70% of all deliveries with a balance spread across various Manhattan neighborhoods.
While there has been lingering pressures on the financial services sector, high paying tech jobs and venture capital continued to migrate to the area. Some believe that Brexit could bring back additional financial services jobs and that would be a good thing.
While supply pressures are driven largely by the expiration of the 421a program, the lack of any existing replacement legislation will create a scenario and the near future of significantly reduced supply. With expectations of more affordability in any future legislation and increasing concession cost is hard to imagine deliveries that come close to historical norms.
Given all these factors and the deceleration we see today, we see New York as our worst performing market with the high probability of revenue growth turning negative during the year. Last but not least the, DC, the metro area continues to improve, coming off of best job growth since 2008 out of our 10 submarkets are currently delivering accelerated revenue growth where our current month of growth exceeds year-to-date growth anywhere from the 100 to 300 basis points.
For the quarter renewal rates achieved were 4.6%, the strongest in the last seven quarters and new lease over lease growth was plus 20 basis points again the strongest in seven quarters with flat occupancy and turnover. With expectations of future job growth being very favorable and over half of the 10,000 units being delivered concentrated in the Southeast and Southwest submarkets we would expect continued favorable absorption and accelerating revenue growth in the submarkets and which we operate.
Like LA and living in Downtown DC, 10 years ago was not a consideration for most as more apartments come online, more restaurants and activities are creating an urban environment that did not exist previously, brining in suburban renters who find downtown more attractive and active lifestyle, given the traffic congestion and commuting costs that currently exist in the region. We expect the acceleration revenue growth that we see today to continue into next year.
And in closing 2017 revenue growth were certainly be lower than 2016. Job growth and job sectors will just take the ability of each marker to absorb these levels of elevated supply.
The degree of management sophistication and discipline will determine how we price it and overall impact to revenue growth. With occupancies still in the 96% range, demand remains strong, but elevated supplies that are not supported by the necessary job growth will face varying degrees of pricing pressure in the near-term.
So with that said, I will turn it over to Mark Parrell. Mark?
Mark Parrell
Thank you, David. Today, I will be giving some color behind our same-store expense growth in the quarter and on normalized FFO guidance and I’m going to move on to talk a bit about our recent debt deal.
On the same-store expense side, we moved our annual same-store expense range to 2.8% to 3.2%, which moved the center of our range back to the mid-point of our original February guidance range and to the high-end of our July guidance range of 2.5% to 3%. This is the relatively modest change for us, 25 basis points in annual expense growth is about $1.5 million.
Our same-store expenses through June 30 grew at a rate of only 0.9%, therefore as we mentioned on the second quarter call, we always expected our second half expenses to grow at a considerably higher rate somewhere in the mid 4% range in order to meet our July guidance range of 2.5% to 3%. In a moment I will give some detail on payroll expense and on leasing and advertising expense which were the two main drivers of our change in expense guidance.
But first I want to mention one of the bigger drivers of our overall same-store expense growth this year and that’s the recent adverse legal decision regarding the calculation of property taxes for several of our properties in Jersey City that I noted on our second quarter call. The same-store impact of this decision was an increase of 2016 annual real estate tax expense of $1.6 million.
We were aware of this and maintaining our same-store expense range of 2.5% to 3% back in July, but still thought that we could stay within that range. So overall for 2016, we expect property tax expense to grow by 6%.
So getting back to the change in same-store expense guidance on the payroll side, cost in the third quarter were about $1 million more than we had originally planned because we ran our properties in the third quarter at higher employment levels to keep our properties competitive in some of these challenging markets. We also made aggressive efforts to retain our field personnel in the face of the great demand for them in our markets as new supply gets delivered and needs to be staffed up.
In the leasing and advertising lines, we incurred promotional expenses at the high-end of our expectations mostly in New York and San Francisco in response to higher supply in these markets. This heightened spending of about $1 million included about $670,000 in gift cards given to new residents and payment of broker commissions on a few high rent units.
We did anticipate some gift card usage in the third quarter, but the order of magnitude is higher than we expected back in July. We also spend a bit more on internet listing services in the quarter.
Please do remember that higher occupancy in 2015 and we are able to reduce such spending in the comparable quarter. We expect additional promotional spending to continue in the fourth quarter though at a lesser pace.
So just an accounting note, those rules, the accounting rules require that we account for gift card spending as an expense. However, if we have accounting for the cards is a reduction in revenue, the impact of the Company’s results would have been a reduction in quarterly same-store revenue of 12 basis points which would have reduced our reported 3.4% quarterly same-store revenue growth number to 3.3%.
The impact on our full year same-store revenue as a result of the gift cards we gave in the third quarter the ones I just discussed and that we expect to give in the fourth quarter will be even less about 5 basis points if they were to be treated as a contra to revenue. So now I’m going to switch over and talk about move-in concessions on our same-store portfolio and those we do treat as reductions in revenue, so again on the same-store portfolio in the third quarter we gave approximately $190,000 versus in these concessions versus the $235,000 in move-in concessions we gave in the third quarter of 2015.
In terms of the sensitivity of our revised guidance range or expense range, leasing and advertising and payroll are the two likely pressure points that can move our annual expenses for the higher end of our new range of 2.8% to 3.2%. On the leasing and advertising side, we expect less gift card spending for the rest of the year because of the lower turnover we expect in the fourth quarter and our strong current occupancy.
If we are incorrect in these assumptions, our expense growth could be pressured. Another possible pressure point is the payroll cost continues to escalate due to wage pressure or service levels required by heightened competition in our markets.
On the revenue side, we have left our mid-point of 3.75% unchanged and David Santee has already provided you bit of color on that. We just fine-tuned a few other guidance numbers, so we will just talk about that for a minute and we continue to see normalized FFOs remain within our prior range that we narrow that range as we customarily do at this time of year.
Our current annual normalized FFO midpoint of $3.08 per share is nearly identical to the $3.10 per share midpoint of the range we originally gave you back in February as reductions in same-store NOI were offset by changes in transaction timing and amounts. Now just a note on our debt deal.
On October 12, we closed on a $500 million 10-year unsecured note offering with a coupon of 2.85% and an all in effective rate of approximately 3.1% which includes underwriter's fees and the termination of a small interest rate hedge we had. There is great demand for this debt and we printed the lowest tenure in our history and one of the lowest ever by a REIT and we thank our unsecured bond investors for their support of the company.
Proceeds from this issuance was used to for working capital and general corporate purposes. Our projected combined line of credit and commercial papers amount outstanding for those two combined at December 31, 2016 is now anticipated to be 130 million versus the 430 million we previously estimated back in July and that's due to proceeds from the $500 million debt deal, reducing line usage and that’s offset by a net $100 million reduction in disposition proceeds that we now expect in 2016.
So I’ll now turn the call over to Cynthia for the question and answer period.
Operator
[Operator Instructions] We'll take our first question from Nick Yulico from UBS.
Nick Yulico
Thanks everyone. I think the primary worry for your company and some of the other multi-family REITs remains New York City and San Francisco and how bad these markets can get in 2017.
You gave some commentary on it, but I was hoping to get some more parameters on how you're thinking about the downside for same-store revenue or rent growth in these two markets next year.
Mark Parrell
I believe we probably said and we intend to say at this junction Nick and we'll save more in detail, more color than we actually given, more complete guidance on our next quarter conference call. I think David was pretty clear about directionally what was happening in the supply and what have been happening in jobs et cetera and so what our expectations would directionally but we won’t go any further than that at this time.
Nick Yulico
Okay. And then could you just remind us for those markets what the assumptions are for fourth quarter, this year same-store revenue growth?
Mark Parrell
I'm sorry. Do you mean the overall or by market?
Nick Yulico
For San Francisco and New York separately what were the assumptions for fourth quarter this year?
Mark Parrell
I am going to talk just for a second about the overall assumption. So our guidance is wise about a 3% fourth quarter same-store revenue number, about a 4.5% or so same-store expense number in the fourth quarter.
I am not sure if we have market-by-market numbers right here in front of us and we don’t.
Nick Yulico
Okay. And then just going back to, David, if we think about multi-family valuations in the private market, do you think cap rates have changed in the past year for your core markets, particularly in New York or San Francisco, if rent growth has come down?
Do you think, if you were to sell assets in those markets today versus a year ago, has the pricing changed?
David Neithercut
I think it's tough to tell, Nick, I am not sure if there has been sufficient price discovery but if there has been some modest change in cap rates I am not sure that it’s had a big impact on value. We've had even San Francisco we'll still have strong decent NOI growth on a year-over-year basis so any modest change in cap rates they don’t necessarily mean value so they have decreased.
We've certainly seen fewer players in the marketplace looking for assets but I will tell you, not a week goes by when Alan George is not showing me some deal that traded at some very strong price across these markets. So we're watching it closely.
Certainly revenues not growing at the same rate, bottom lines are not growing at the same rate that they had but bottom lines by large they'll continue to improve, continue to grow. There continues to be a need or demand for yield, and so when you do trade they continue to trade fairly strong pricing.
Nick Yulico
Okay. So given that's the case, that valuation seems to be holding up in the private market and your stock is at a big discount to NAV, what point do you think about, does the Board think about, selling more assets, doing a stock buyback to exploit that arbitrage in pricing?
And also, did the asset sales year-to-date and the special dividend delay any sort of process you might have had to sell assets this year and do a buyback to force that discussion until 2017? Thanks.
David Neithercut
In response to the answer of your second question, no, I can tell you that very specifically as the Board table as we talked about large portfolio sale and the special dividend, distribution back to shareholders, we spoke very specifically with the Board that, that did not - would not impact any other things that the steps we might take to address the discount that you know. So those things are not - we're not precluded by having done what we did do.
In terms of when does the Board do that, there is no bright line, every situation will be different but I can tell you I guess I have on this most recent call and the call even before that, that we talk about that at the Board level. And the Board just believes that that activity we requires probably a bigger discount than what many on the street might suggest there what answers they get with their arithmetic.
We got a significant amount of gain built into most of our assets and that there is just not a lot of capacity after - we are doing things on debt neutral basis and distributing - dealing with the gains actually buy much stock back with the proceeds. And then with respect to borrowing to buy stock back that these are - you get relatively few bites of the apple and we want to make sure that if and when we do, there will be appropriate time.
And we'll continue to monitor this as we do on a regular and consistent basis with the Board and we'll – makes sense to do something down the road, we are certainly - we would be willing to do that. We've done in the past and we certainly will do so in the future if the circumstances are large and we talked about it with the Board all the time but in terms of when exactly what's the bright line I can't tell you that's we'll know when we see it.
Nick Yulico
All right. Thanks, David.
Operator
[Operator Instructions] We'll take our next question from Nick Joseph with Citi.
Nick Joseph
Thanks. Giving the operating environment is at inflection point, how do you think about setting the 2017 same-store revenue growth guidance range?
Historically, you've had a pretty tight range of 75 to 100 basis points for that initial range. So how wide could that be in 2017?
David Neithercut
Well, I guess I won't say how wide it could be, but I'll tell you it will likely be lighter to your point. We acknowledged that by now operating in fewer markets.
There is risk of more volatility in those - in our results and that we will likely provide wider guidance and what we have been able to do in the past. In terms of how wide that will be, will be same and you will certainly see when we share those results with you with that guidance on our next earnings call.
Nick Joseph
Thanks. And then just appreciate the details on the concessions and the gift cards.
But from an operating standpoint, how do you think about incentivizing with free rent versus using gift cards or other basic incentives?
David Santee
Nick, this is David Santee. As we've always said even in the last downturn, we were very committed to our net effective price again that is our preferred method of pricing because it provides complete transparency, it's easier to manage from here.
So that will always be our tried and true method. Occasionally, you get into some submarkets or different owners that do different things that cater to certain niches in our prospect base, and we try to stick to our guns as far as net effective pricing, but at times we find it we have to kind of match the market.
And I think that's been our philosophy for the last seven or eight years and that will be our philosophy going forward.
Nick Yulico
Thanks. And just finally on supply, I appreciate the detailed walk through by market.
But if you step back and think about all of your markets blended together, what are your expectations for next year’s supply deliveries of the urban versus suburban sub markets? I think we heard from one of your peers yesterday that they think there will be two times the amount of supply in urban submarkets as suburban?
David Neithercut
Well, I guess I would say that we just – we don’t necessarily look at it urban, suburban. We look at it as what set of properties are in a reasonable and conservative geographic area that could potentially compete with us and probably New York is a great example of where we have nothing in Long Island City.
There will be a lot of new supply in Long Island City and the price point maybe very attractive that could draw people from Brooklyn or Manhattan or what have you and the Long Island City just because of an affordability issue. So I mean all in numbers for 2017 are 65,000 units.
I would say a very high percentage of those are in the urban core.
Q – Nick Yulico
Thanks.
Operator
And we will take our next question from Rich Hightower with Evercore ISI.
Rich Hightower
Hi, good morning, guys. I want to go back to one of the prepared comments related to San Francisco, I think when David Santee was giving the market detail there.
I thought I picked up on some comments around a potential stabilization there. Is that accurate, just in terms of how new and renewals are trading today, or is that just a function of lower turnover at this point in the leasing season, or a shift in timing of supply, or some other factor?
David Santee
Well, I guess I would say stable relative to what we experienced over the past four or five months. I would say certainly not – the market is not moving back up, it’s kind of moving sideways right now.
But we started off with going from rent that were up 5%, 6% that within a couple of months went down to negative 2%. We saw occupancies that were well above 96% fall off over a 100 basis points in the peak leasing season, which is not a time that you would expect lower demand.
So the market just zigging and zagging for most of the summer, and so today our exposure is right back where it was, our occupancies for the most part right on top of last year. We don’t see any crazy pricing mechanisms in the market, I mean the newbies up will continue to offer the one, one and a half months free rent and we expect that.
But for the most part, I would really just say the market appears to be more disciplined today, instead of stable, it’s just more disciplined today than it has been over the last four months.
Rich Hightower
All right, would you say then that properties that are in lease up currently, the market overall is just getting a little more rational, in that sense? So it would indeed be a positive change that we could sort of extrapolate from here or anything else?
David Santee
Yes, I mean you had a very large concentration of assets in the SoMa area, which really trickled across, as well as South San Francisco and I go back to the kind of original underwriting where the market rent growth in San Francisco are out paced underwriting or new assets. I mean even looking at our own assets the market went well above what we underwrote on our new delivery.
So owners had a lot of wiggle room to price discover. There hasn’t really been any high rise brand new vertical class, great views with the way assets delivered in San Francisco for years.
So there was some element of price discovery and I feel like some could have probably achieved higher rents when you look at the pace of lease up. So I think you'll see, obviously you'll see less of that type of product.
In 2017 probably more podium, traditional development that you see down in San Jose what have you and pricing should - we expect and hope that it would be more reasonable than what we saw last year or this year.
Rich Hightower
All right. That's actually very helpful color.
Second, and final question, it's another twist on the 2017 question. But would you guys be able to rank order your markets next year, just in terms of top to bottom, strongest versus weakest?
David Neithercut
Okay. At Seattle we would expect it would be the best.
I think Southern – all three of the Southern California markets would probably be in the middle. Boston would probably be below that and there would be a wide range between SoCal and Boston.
Well, actually we want to put D.C. before Boston, I'm sorry.
So D.C. would be between SoCal and Boston.
D.C. continues to improve, great acceleration, great job growth.
Boston will be at the bottom and probably only slightly above our worst market New York.
Rich Hightower
Great. Thank you.
Operator
We will take our next question from Conor Wagner with Green Street Advisors.
Conor Wagner
Good morning. I noticed that you guys are offering some 24-month leases in New York and in the Bay area.
What was the uptake on that? And is that something that you're going to continue to offer going into 2017?
Mark Parrell
So we've tried in different ways we had a better take rate with no step up we've tried it with built in step ups. I think our customer is well educated enough to know what's going on in the market.
So when we built in the step up meaning you know call it 2% or 3% increase in year two, our take rate bill to basically zero. So you know we did that in D.C.
When we expected rates to fall in D.C. we had probably in the neighborhood of 15% take rate.
That's what we're seeing today is about 15% take rate and we will continue to you know experiment with that, but monitoring so that we don't you know get to committed.
Conor Wagner
And in the Bay Area how is the performance of your East Bay assets versus the overall Bay area versus San Francisco.
Mark Parrell
The East Bay is you know obviously the best I thing you know when we just look at you know were we flip today I mean obviously you know we were if not - if not the accelerating as such as example year-to-date East Bay is 7.5% on revenue growth the current month, buildings are 5%. So the East Bay still hanging I mean obviously Berkeley is helping that as well.
Conor Wagner
And then a question for David Neithercut. You mentioned the challenges of doing a stock buyback due to the gains.
What do you view as your most attractive use of capital going into 2017?
David Neithercut
All right now complaining our developments we've made a significant amount of money we will make a significant amount of money on the developments and we've got yet to complete and much of the free cash flow that we have for the next couple of years we’ll complete that and we make significant returns. In fact we’ve got a page in the most recent investor information we put up on our website.
It sort of shows how we’ve done throughout the cycle. And then after that we’ve not started much development at all so that the development spend will slow.
We continue to do very well with our redevelopment, with our kind of kitchen and bath rehab spend that’s been up 50 plus or so million dollar of spend per year which we’ve been realizing very strong low-to-mid double-digit returns for the foreseeable future and we look at those as great uses of capital.
Connor Wagner
And then as kitchen and bath spend has been elevated this year versus last year, have there been any markets that you've been particularly focused in with that, or has it been broad-based?
David Neithercut
It’s been rather broad based.
Connor Wagner
Okay. And do you have an estimate on what contribution that's been to revenue growth this year?
Mark Parrell
Year-to-date Connor its Mark Parrell. It’s 10 basis points and remember it varies around that.
It can be zero to 20. It doesn’t move the meter that considerably.
David Santee
Just to be clear, when we talk about this program because others talk about programs that they call rehab or whatever. We’re spending depending on the property $10,000 to maybe $14,000 per door on kitchen and baths.
This is not the $30,000, $60,000, $80,000 a door total renovation that some people undertake. We may remove that from same-store.
And if we did, we have done that very limited, we removed that from same-store ourselves when we do something of that magnitude.
Connor Wagner
Thank you guys very much.
Operator
And we’ll take our next question from Wans Nabria with Bank of America Merrill Lynch.
Wans Nabria
Good morning. I was hoping you could comment a little bit on the performance of A’s and B’s you're seeing across the market and maybe specifically between New York and San Francisco?
David Santee
Well, I guess I would say that San Francisco especially all of our communities kind of down the Peninsula what have you, are mostly be communities, garden communities. I am not sure it’s about A’s and B’s.
I think it’s more about location, supply, pricing of that supply, so there is no definitive obvious answer to your question.
Wans Nabria
And across the portfolio? Any comments you could make about A versus B?
David Neithercut
Again it’s sub market by sub market. We can tell you that one sub market maybe doing, as David just did about downtown San Francisco versus East Bay but that’s more sub market versus sub market rather than A versus B.
David Santee
I mean a lot of it has to do with market momentum. I mean, you look at our DC portfolio in the District.
We have high end building that we bought in the last downturn that were built to condo and specs that are doing just as well as the 30-year-old old Charles E. Smith portfolio up Connecticut Avenue.
So again it’s probably more about location and the impact of supply.
Wans Nabria
Okay. Great.
Thank you. And you made some comments earlier about concessions and gift cards.
But if we combine those two, what was the change 2017 over 2016, and do you have those numbers for New York and San Fran?
Mark Parrell
Well I gave it. It’s Mark Parrell, for the whole portfolio a moment ago.
And it would have moved the number 0.10, so 0.10 lower. We actually have lower concessions than we had last year.
So that isn’t going to make any difference. The concessions right now are $100,000 a quarter.
They’re just not that material. They were more than significant first quarter of this year.
Wans Nabria
And that includes the gift cards, or that's a separate bucket?
Mark Parrell
Gift cards and expenses accounted for under leasing and adverting. Concessions are accounted for the month that they’re given as a reduction in revenue.
Wans Nabria
But if you combine the two, because they're essentially kind of getting to the same ends…
Mark Parrell
You have combined the two because the same-store revenue numbers reported on a cash basis and then the deduction is already made for the concession. So all you need to do is subtract the gift cards which was the number I gave earlier.
Wans Nabria
Got you. Okay, thank you for that.
And just one quick question on kind of 2017 and how we should be thinking about renewal spreads versus new with how you're thinking about things today or maybe for the fourth quarter and kind of how that may trend going forward?
Mark Parrell
Well, I guess I would say kind of going back to the last downturn which is probably the best comparison. We were still able to maintain positive renewal growth.
And most recently DC which is probably a market that – many markets could mirror in the next year we were able to achieve high 2s to mid 3s on renewals. So I think regardless of what the markets do we should be able to achieve favorable renewal revenue growth.
Wans Nabria
Thank you.
Operator
We will take our next question from Rob Stevenson with Janney.
Rob Stevenson
Good morning guys. A few questions away from San Francisco and New York, if I might.
David Santee, I think when you were talking in your prepared comments about DC, you mentioned, I think, 8 of 10 of the sub markets there showing strong growth or accelerating growth. Can you just talk a little bit about those two that aren't, what are they and is that just all supply related?
David Santee
Yes, it is. Let me get to it.
Give me one second.
Rob Stevenson
Well, let me ask David Neithercut a question, while you're flipping ahead. David, you sold the Berkeley land parcel.
It looks like you've got $115 million in the supplement of land for development in the future. How many projects is that?
Or are we likely to see any of that starting in the next couple of quarters?
David Neithercut
It’s possible. We got some land sites in Boston that were really – land sites where densely, we were able to carve out of the existing deals that we had previously acquired that could create some development potential.
But we’re going to watch this all very, very closely Rob. We started very little this year after running about $1 billion average in 2013 and 2014, we cut that by almost two-thirds in 2015 and cut it by another two-thirds in 2016.
We’re down considerably. So we’re going to watch all that very carefully.
And I am not saying that we were not going to start anything, but whatever that starts will be, at least the present time will de minimis relative to what we have been doing.
Rob Stevenson
Okay. And then one for Mark in terms of, what's the $0.05 difference between the fourth quarter guidance on a NAREIT in a normalized FFO basis?
Mark Parrell
So that’s the – we moved Rob from the third quarter the sale of a piece of land that’s in the Northeast, so that’s the $0.05 difference.
Rob Stevenson
Okay. And back to David Santee on DC.
David Santee
Okay. The two markets that are not accelerating are the Bethesda Chevy Chase market which represents about two or three properties for us, 9% of revenue and then far out Fairfax which is 5% of revenue.
So the bulk of our revenue in DC is accelerating.
Rob Stevenson
And that's just because those two sub markets are getting hit with supply, or is the demographics moving away from that? What are you identifying as the primary issues there?
David Santee
So Fairfax I would say is probably more supply, Bethesda is probably more of a demographic.
Rob Stevenson
Okay. All right.
Perfect. I appreciate it, guys.
Operator
We’ll take our next question from Tom Lesnick with Capital One Securities.
Tom Lesnick
Hi, Thanks for taking my question. Most of them have already been answered, but just curious on the financing side.
You guys clearly have one of the lowest cost of capital of all REITs, and I think the most recent bond deal is indicative of that. But on the working capital side, how do you guys think about using the mix of your line and commercial paper?
And are there specific instances in which you would be compelled to use one over the other?
Mark Parrell
Hi, it’s Mark Parrell. Thanks for that question Tom.
So right now, we have about $200 million of commercial paper outstanding and nothing outstanding underline of credit. And I'll tell you the main reason, we use the CP program is that it's another talk in a money and right now which is vastly cheap.
CP now has being priced at LIBOR plus 30 basis points, on line a credit it’s LIBOR plus 95. We are saving more than half a percent on that.
So the way we think about using the CP is an adjunct to our line of credit and when it is cheaper or that market is cheaper for some reason or better for some other reason we will use the CP capability that we have.
Tom Lesnick
Great, thank you very much.
Operator
We will have next from Tayo Okusanya with Jefferies.
Tayo Okusanya
Good morning. Two quick ones from me.
First of all, again back to New York and San Francisco. In regards to underlying trends for renewals, I think everyone gets the fact that for new leases, rental rates have come down a lot.
Could you just talk a little bit about what you're seeing with renewals? Has the situation with new rents caused existing tenants also to start to become more aggressive about asking for concessions or lower rents, or what have you when they come up for renewal?
And how do you see that playing out going into 2017?
David Neithercut
I think what we've seen over the eight or nine years that we've been tracking this is that, number one most residents are just programmed to expect some kind of increase from their landlord. Our expenses go up every year regardless of what happens with revenue.
The other thing we see is that - the two things that people don't like most are negotiating or conflict and moving. So we see a vast majority as long as we send out reasonable requests you know a great percentage of people will check the box and choose to renew so that they don't have to relocate and go to the hassle of moving.
And then there's you know then there's a very small percentage those are always the holdouts that you know kind of renew with the very last minute. And you know there are people that are well educated on what's going on in the market and those are the pros that you have to work with.
Tayo Okusanya
Okay. But as a subset of people where there may be some pressure, but again, it's just a subset.
David Neithercut
Yes, the majority, again assuming were reasonable. It's played out the same we've tracked it year-after-year it's a pretty solid trend.
Tayo Okusanya
Okay. Great.
That's helpful. And then just another quick one, just in the Bay area and San Francisco again, a lot of conversation around increased rent control initiatives showing up on the ballots during the election season.
Can you talk a little bit about what you're seeing from that perspective, and what could be the potential risk to your portfolio out there?
David Neithercut
Sure. So in terms of you work the exposure that we have it's about three property 6.4% of total NOI of San Francisco only.
Okay, so it's very small percentage of the total portfolio. I would tell you that the details are unclear.
As an example Mountain View has two separate items on the ballot, one is put forth by to the council and the other one is a just a voter initiative both of which have two different approaches to any potential outcomes. So that's all that I can tell you today.
So we will just have to wait and see what the outcome is on the election and you know ultimately what the fine print will be.
Tayo Okusanya
Okay, much appreciate it, thank you.
Operator
And our next question will come from Wes Golladay with RBC Capital Markets.
Wes Golladay
Good morning, guys. Do you think increased regulation of Airbnb could lead to another step down in demand?
As you look to formulate your guidance, is this something you might contemplate? And it looks like you guys might be doing some pilot programs with Airbnb.
Do you have a sense of how much overall room demand you get from Airbnb?
David Santee
This is David Santee, I guess I would say that you know the legislation that occurred in New York City I believe is a benefit to us. Historically you know the state would, or the city, I am sorry, would find the building owner if any transient rentals were discovered and transient rentals mean anything less than 30 days.
On the other hand they do allow sharing as long as the owner is in occupancy, so I am not really sure how that gets policed and so I would say to what extent it affects Airbnb, I am not sure. But we do have a pilot, one property, we continue to learn, we continue to understand how to build-out this platform to really for the purpose of transparency and control.
This would not be a huge money maker for any particular owner or any particular property, this is more about transparency, control, managing something that is already happening and will happen regardless.
Wes Golladay
Okay, excellent. Do you think as a percentage of demand, it would be relatively small, the people that were in an apartment and then just sublet it out various nights on Airbnb, do you think that's a smaller part versus the people that maybe every once in a while, they're in the apartment and they just rent out the other room they have.
Do you think that's a bigger part of the picture?
David Santee
Yes, I mean I don't know, I guess, I don’t understand Airbnb that much, I know they kind of put out what percentages of people that rent out entire spaces and what percentage of people rent out rooms. I guess I would say if there is a large percentage of people that rent out their entire space in New York, then that's going to be a problem for them.
Wes Golladay
Okay. I hear you.
It's a hard one to track. Thanks a lot.
David Santee
Yes, and it’s just not an important part of the overall picture for us. What being Airbnb is doing or not doing in any particular market has no impact on the way we think about our expected revenue for the upcoming year.
Wes Golladay
That's what I was trying to get at. It could be a component of a demand, and it could be just 1% or 10 Bips of overall city demand for people that want to run mini businesses from Airbnb…
David Santee
We don’t allow those people. So we don’t allow anyone to rent an apartment from us with the sole purpose of running an Airbnb business.
David Neithercut
That is one of the benefits of the pilot is to have the transparency to prevent that.
Wes Golladay
Yes, that's exactly what I was trying to get at. So you don't have any of that subletting going on in your - unoccupied sub letting.
Okay. That's what I was looking for.
Thank you.
Operator
And we will take our next question from Richard Hill with Morgan Stanley
Unidentified Analyst
This is [Ronald Camden] [ph] on Richard Hill's line. Thank you for your time.
Just two quick ones from me. One, going back to DC, you mentioned bringing in suburban renters to downtown.
Just curious which suburbs are they coming from? And is there a way to quantify that for us so we can get a sense?
David Neithercut
Yes, we did that a couple, I think a year or so ago when we saw tremendous absorption of units on top of virtually zero job growth. And we just picked the handful of properties and look to see where people's previous address was when they applied and what have you.
And it was clear that lot of people were - I mean just around the gateway we are choosing to live in a city. I mean we have our office at 1500 Mass Avenue, downtown DC, we moved it from Tysons Corner and then we have people to live out near Culpeper and what have you, And it can take them - it can take them two hours just to get to the bridge to get across the river and then another hour just to go get across the bridge to the office.
So, if you ever lived in DC, I live there three times, it's a very difficult place to get around and there is every reason in the world why someone would want to move from the suburbs into the city today.
Unidentified Analyst
Great. That's helpful.
And then the last one, when I look at, take a step back looking at the portfolio of Southern California with same-store revenue growth above 5%, compared to New York, with the supply issues that you mentioned, when you think of longer term steady-state growth, what do those numbers look like? Is it one where, do they get to 3% to 4% type range.
Where do you guys see a sustainable number for those two markets? Thanks.
David Neithercut
I guess, I won't talk about specifically about those markets but just in general in the markets in which we have elected to invest our capital and…
Unidentified Analyst
Yes. That would be great.
David Neithercut
The presentation we put our website that does show over extended time period, the outside revenue growth in these markets, the outside increased in sort of underlying asset values in those markets compared to other markets. So like I said about those specifically, but just long term outperformance of these coast and gateway cities in which we have invested relative to more commodity like markets in a country, in general we got several slides on our website that we'll address that for you.
Unidentified Analyst
Great. That's all for me.
Thanks so much, guys.
Operator
And next we'll hear from Dennis McGill with Zelman & Associates.
Dennis McGill
Thank you. The first question, sorry if I missed this, but did you give the new lease growth and renewal growth that was finalized for the third quarter for the company-wide?
David Neithercut
Yes, that was 3.1%.
Dennis McGill
Separately the new lease and then the renewal?
David Neithercut
Okay. So renewal yes - renewal was for the quarter - renewal rates achieved were 5.3% and new lease pricing was plus 90 basis points for combined number of 3.1%.
Dennis McGill
Perfect. And do you have the assumption that's baked into 4Q for those same numbers?
David Neithercut
No, we do not.
Dennis McGill
Separately, with regard to the development pipeline, just cost to go vertical, any kind of color you can provide on what you're seeing for both labor and material costs and all-in costs of vertical construction and how you guys think that might trend over the next 12 to 18 months?
David Santee
Well, across our market we are looking at the growth in hard in cost anywhere from 2% to as high as 6% and 7%. And that's on top of 3% to 7% growth or so a year ago.
So we're looking at continued increase in cost a lot of that driven by labor and you know this is just another reason why we believe that we are going to see a reduction in starts and reduction in new deliveries going out, because land prices were up, the hard cost are up and those two yields are roughly low. So we are certainly seeing solid middle or single digit growth.
We are expecting growth year-over-year on top of on a light growth of one year ago.
Dennis McGill
And David, if you do get a pull back in supply, whether that's capital driven or some other reason, do you think there's an opportunity to that to alleviate some of this burden and lessen that cost increase?
David Neithercut
Well, I guess costs are just being driven, but what's going on in new supply. Labors being - these costs are being driven by what’s going on lots of different places and in Boston lot it’s been impact of some casino that’s been built.
So, it’s not simply and only exclusively multifamily and but certainly I mean if there is a reduction you’d expect there to be a modest some reduction in construction overall you'd expect to see this growth rate to moderate.
Dennis McGill
That's helpful. Appreciate guys.
Operator
And that concludes today's question-and-answer session. Mr.
McKenna at this time, I will turn the conference back to you for any additional or closing remarks.
Marty McKenna
Well, thank you all, appreciate your time today. We look forward seeing many of you Phoenix, and go Cubs.
Operator
That concludes today's call. Thank you for your participation.
You may now disconnect.