Oct 28, 2016
Executives
Michael Schall - President & CEO John Burkart - Senior EVP of Asset Management Angela Kleiman - CFO, EVP John Eudy - EVP of Development
Analysts
Richard Hill - Morgan Stanley Nick Joseph - Citigroup Tayo Okusanya - Jefferies Nick Yulico - UBS Dennis McGill - Zelman & Associates Tom Lesnick - Capital One Rich Hightower - Evercore ISI John Kim - BMO Capital Market Rich Anderson - Mizuho Securities Conor Wagner - Green Street Advisors Drew Babin - Robert. W.
Baird Michael Kodish - Canaccord Jordan Saddler - KeyBanc Capital Markets
Operator
Good day, and welcome to Essex Property Trust Third Quarter 2016 Earnings Call. As a reminder, today's conference call is being recorded.
Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risk and uncertainties. Forward-looking statements are made based on current expectations, assumptions, and beliefs, as well as information available to the Company at this time.
A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the Company's filings with the SEC.
When we get to the question-and-answer portion, Management asks that you be respectful of everyone's time and limit yourself to one question and one follow-up. It is now my pleasure to introduce your host Mr.
Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr.
Schall, you may begin.
Michael Schall
Thank you for joining us today, and welcome to our third quarter earnings conference call. John Burkart, Angela Kleiman and I will make brief comments followed by Q&A.
I'll discuss the following three topics: the third quarter results and current conditions; our 2017 preliminary market forecast; and an update on investment markets. First topic, we're pleased with the Company's performance during the quarter in which we reacted opportunistically to rapidly changing conditions.
As a result, we exceeded our core FFO per share guidance for the quarter by $0.05. I thank the E team for their great effort and result.
Similar to the second quarter Q3 was challenging from an operations perspective against a very tough comp in 2015. Job growth remains strong relative to the U.S.
especially in Seattle where September month-over-month job growth increased from the prior year to 3.5% in 2016 versus 3.2% in September 2015. Northern California continues to significantly outperform the U.S.
in job growth although it has decelerated. For example, in San Francisco, September 2016 job growth was reported at 2.6% significantly below 5.1% reported for September 2015.
Southern California job growth was significantly better than the nation in Orange County and San Diego and slightly behind in Los Angeles and Ventura. Overall, against the backdrop of decelerating of U.S.
job growth, the West Coast economies continue to outperform. Rent growth continued to be muted in Northern California which we attributed to the large concession being offered by lease-up communities.
Job quality ranked by annual salary levels for each industry was another issue in Northern California as there were more service jobs and fewer tech jobs being produced. In San Jose for example approximately 10% of the jobs created year-to-date were in the highest paying information and manufacturing industries as compared to about 32% in 2015, less significant deterioration in job quality occurred in San Francisco and Seattle.
It’s surprising that more service jobs are being created given the wealth effect related to the financial success of so many tech companies and their highly compensated workforce. Our venture capital contacts tell us that there is considerable movement of personnel within the technology industries as the next ways of new product services and companies are emerged.
Recent loss of pricing power of Northern California and a few other submarkets could indicate that we have achieved equilibrium between housing supply and demand. We don’t believe that this is correct, and we use historical data from San Francisco and San Jose metros to demonstrate.
For the period 2011 to 2016, San Francisco and San Jose have produced about 440,000 jobs, assuming two jobs equals to one household that would equate to demand for about 220,000 home. The actual total housing units built over that period was about 65,500 or less than the third of the expected demand that would ordinarily result from 440,000 jobs.
We experienced exceptional pricing power in San Francisco and San Jose from 2011 to 2015, and the delivery was about 10,000 apartments in 2015 which are included in the 65,500 previously noted that has done little, we believe to eliminated pent up demand in prior years which leaves us with the question of why such concessions are required if there is so much pent up demand. We believe that the answer to that question relates to the concentrations of supply, the fundamentally different financial objectives of the apartment lease-up versus stabilized community and affordability factors.
Apartment developers in an effort to minimize overall free rent over the lease-up period typically set absorption targets of 25 to 30 leases per month. In some markets as many as five leases are directly competing for this lease volume.
That means that over 100 leases per month are needed in that submarket to achieve leasing velocity to be target. Recent job growth has not generates sufficient demand and the large concessions run out of stabilize communities.
Two months free rent again equate into 16% annual rent drives that absorption and at least temporarily resolves the affordability problem at the same time. We see this is a short-term phenomenon that will likely clear the market as supply deliveries decline in 2017.
Higher incomes are probably the most important solution to the affordability issue. Many rentals are displaced by large rent increases and search for more affordable housing when rents grow faster than income levels.
The opposite occurs when income begin to grow faster than rents which is now happening. In Q3 2016, as compared to the comparable period of 2015, San Francisco and San Jose are estimated to reproduce 6% growth in medium household income, which is the huge growth rate that improves affordability relative a year ago.
As through supply we expect about a 20% drop in apartment supply in San Francisco and nearly 30% in San Jose in 2017, and fewer deliveries in each quarter for our 2017. Therefore, we expect supply pressures to moderate in northern California especially in the second half of the year, assuming of course the job growth was kneeling on track.
Southern California apartments supply will be similar to 2016 and will decelerate throughout 2017 with the exception of Orange County, which is expected to have a 30% to 40% increase in supply. I wanted to provide a quick update on rent control there are ballet proposals during that rent control in five Northern California cities, while slower rent growth has removed some of the motivation for rent control.
There are well organized and finance groups that are pushing ahead. At this point, we expect some but not all of the ballot proposals to path.
In any events, these measures are not expected to have a significant impact on the Company's the reasons provided in previous conference calls. And then my second topic market outlook for 2017.
Page S-16 of the supplemental provides an overview of the key housing supply demand and economic assumptions supporting our market rent growth expectations for 2017, as before our macroeconomic scenario for the U.S. realized on leading third party sources.
The Essex economics we have been estimate how the national economic picture will impact housing supply and demand for each submarket we have selected for potential investment. For 2017, the U.S.
economy is expected to experience muted grow with U.S. GDP and job growth of 2.2% and 1.6% respectively.
This year we made three notable changes to our assumptions that are incorporated in the S-16 including; first, we have modified our definition of multi-family supply to be similar to add few metrics, which includes multi-family properties under development with at least 50 units and excludes senior student and 100% affordable communities. We diligence this information by driving each property to understand deliveries schedules, saving and remove project duplication.
Therefore our supply estimate should differ from the data vendors. We have observed that the various research providers estimate supply in a variety of ways often with materially conflicting conclusions.
We hope others will follow our lead with respect to using a similar supply methodology. Second, as we approach the top of the cycle development deliveries are often delayed due to shortages of trained construction personal.
This causes some development deals to be pushed into the following year. With that some of our 2016 schedule deliveries have emerged into 2017 and the same thing may happen at the end of 2017.
Therefore our supply estimates may be too high. Third, as noted in my previous comments the typical relationship between supply and demand is connected in Northern California in 2016, there is no historical President for the adjustments we made to consider affordability they represent our best judgment.
Notably on Page S-16, each of our West Coast metros is expected to outperform the national average job growth. In each metro again assuming the two jobs equals one household, housing demand exceeds total expected housing supply that's both rental and for sale.
The resulting 2017 market economic rent growth is slightly above the long-term CAGR of rent growth in Southern California and Seattle and slightly below in Northern California. In summary, 2017 seems likely to produce a soft landing, thus the extraordinary rent growth from several years should transition to the long term averages in the Essex portfolio.
And now the third topic investments, we experienced a relatively quite quarter from an investment standpoint as outlined in the press release. During the quarter the stock traded mostly at or below net asset value making accretive acquisitions challenging to execute on a match funded basis.
We expect to be more active in the fourth quarter with all new deals being funded with disposition proceeds. Cap rates remain stable in the last quarter, with A-quality property and locations trading around a 4 to 4.25 cap rate using the Essex methodology.
And from time to time, more aggressive buyers will pay sub for cap rates. Generally, there are fewer motivated apartment investors in the market as compared to a year ago.
We don't see cap rates changing materially given the extraordinary amount of positive leverage that is generated when cap rates average around 4.5% and a seven year fixed year loan is approximately 3%. In connection with our preferred equity program we look at both existing and to be developed apartment communities that are consistent with the Essex portfolio.
Recently we've noticed an increasing number of development transactions that don't meet our criteria, typically used due to increased cost of construction and conservative construction lending practices. This supports our belief that 2017 will represent the peak of supply in Coastal California.
That concludes my comments. Thank you for joining our call.
I'll now turn the call over to John Burkart.
John Burkart
Thank you, Mike. The Essex team had another good quarter, delivering total same-store revenue growth of 6.9%, and NOI growth of 8.3% relative to the comparable quarter.
I want to thank our associates for their daily commitment in providing exceptional customer service and for their enthusiasm in achieving our company objective and helping make this possible. Our markets are reaching a point where the strong performance in Southern California will enable the region to outperform Northern California.
Although, this quarter, they both were equal at 6.5% revenue growth. In Seattle, the strong demand in the market fuelled by above expectation in climate growth enabled the market to absorb the new supply and continue to grow revenue.
Our Seattle portfolio grew revenue 8.5% in the third quarter of 2016, relative to the comparable quarter. The CBD submarket outperformed the expectations growing revenue approximately 7%.
East side, North, and South submarkets were over 80% of our portfolio located, all grew revenues between 8.4% and 10.8% in the third quarter of 2016 relative to the comparable quarter. During the quarter, the market absorbed 950,000 square feet of office space or 1% of total stock.
Amazon continues to expand with our 10,000 posted job openings and signing another 360,000 square foot office lease for a building under construction located in Belvieu where the Company would founded. Currently, there's approximately 7.2 million square feet of office space under construction with 41% of it preleased.
In contrast to the strength of Seattle, the Bay Area rental market has been impacted by affordability and aggressive lease-up. Currently, Axio shows September rents in San Francisco and the San Jose market relatively flat compared to the beginning of the year.
Submarkets that are most impacted are those with higher levels of new lease supply and related lease-up concession. Concessions in the marketplace vary they are driven by the concentrations of high-end lease-up which largely podium and high rise buildings, where in order to obtain this difficult typical occupancy the entire property needs to be largely completed resulting in 100s of rent ready unit at each property hitting the market simultaneously.
Generally, the lease-up managers generously give away concession to achieve certain coupon rent and absorption goal. In certain markets with concentration that supply such as San Francisco and South San Jose, we are seeing selective cases were managers are providing two month free rents or more.
During the quarter, we completed the lease-up of Agora of 49 unit luxury property in downtown Walnut Creek and continue to successfully lease-up the Galloway in present and private station. Currently Galloway is 63% lease and in order to maintain leasing velocity we have increased concession to about six weeks for lease which is up some four weeks offered during the peak demand season of the summer.
Office absorption continues to be positive in all three Bay Area market with over 800,000 square feet been absorbed in the quarter. Some of the quarters leasing activity included General Electric expanding their footprint adding their additional 100,000 square feet in San Ramon and Google signing a lease to occupy the entire Moffat Gateway campus, which is approximately 612,000 square feet.
Currently, 11.5 million square feet of office space is under construction in the Bay Area of which 46% is preleased. Moving down to Southern California.
The region continues to be a solid performer overall. In the LA market, CBD grew revenues 4% in the third quarter compared to the prior year’s quarter, as it continues to absorb the new supply.
The Woodland Hills and Tri-City submarkets continue to be strongest in the LA market growing revenues about 8%. In Orange County, the North Orange submarket continues to outperform the South Orange submarket in the third quarter with revenues growing 6% and 4.4% respectively.
With 1.9 million square feet of office space under construction, this would support the addition of approximately 11,000 jobs in the Orange County market. Finally revenues increased 8.4% in San Diego with Northern submarket outperformed in the CBD and Southern submarkets relative to comparable quarter.
Third quarter office absorption in these three Southern California markets was over 1.4 million square feet with San Diego leading the way of almost absorbing 1% of total stock. Currently our portfolio occupancy is at 96.7% and our availability 30 days out is 4.4%.
Our renewals on average being sent out at about 4.5% for Northern California a little over 5% for Southern California and about 6.3% in the Pacific Northwest. We are positioned well for the end of the year and 2017.
Thank you. And I will turn the call over to Angela Kleiman.
Angela Kleiman
Thanks, Don. Today, I will discuss our quarterly results, the full year outlook and comments on the balance sheet.
We are pleased to report that our core FFO per share exceeded the high-end of our guidance. The outperformance this quarter was primarily attributed to favorable operations, accretive investments and lower G&A, some of which is timing related.
Turning to the full year outlook, we are reaffirming the midpoint of our same property guidance of 6.8% revenue growth and 8.1% NOI growth. As for our core FFO, we have increased the midpoint by $0.05 per share to $11.03.
We are now projecting a 12.3% year-over-year core FFO growth, which represents our sixth consecutive year of double digit growth. Onto the balance sheet, our net debt-to-EBITDA ratio improved to 5.7 times this quarter from 5.9 times last quarter primarily due to continued growth in EBITDA.
In addition, we received an upgrade on our senior unsecured debt rating from Moody's to Baa1 and from S&P to BBB+ with stable outlook. The upgrades substantiated the strength of our balance sheet and our improved debt metric.
The rating agencies also face their upgrade on the solvent operating track record and long-term favorable economic fundamentals in our select race course market. We believe this upgrade will enhance our cost with debt capital going forward.
That concludes my comments. I will now turn the call back to the operator for questions.
Operator
Thank you. At this time, we will be conducting a question-and-answer session.
[Operator Instructions] Our first question is from Richard Hill from Morgan Stanley. Please go ahead.
Richard Hill
So, I want to just get a little bit more color from you about the comments about the peak and supply in 2017. Does that mean you see supply pressures still accelerating into 2017 and then looking forward into 2018, when do you really start to see these supply pressures starting to decelerate and maybe providing a little more release for me in the reasons that you mentioned?
Michael Schall
This is Mike. Thanks for joining the call.
I would say what we are seeing is movement of some of the supply from 2016 into 2017, and we see it continuing at a pretty significant level through about midyear in 2017 and then dropping off pretty significantly from that point. And again, I think that there is a lot of deals being discussed here on the west coast, the issue is because of construction cost increases delays in the cities because the cities are very busy and the construction lending environment which is becoming more and more conservative that is starting to make deals push them off or hand over they are not achieving the level of returns required to make the deals work.
So, we are seeing those deals being pushed off. And so that gives us confidence that the supply is underway it will be delivered late and hence the movement from supply from 2016 into 2017 but it gives us confidence that we are going to see a pretty significant slowdown in the middle of 2017.
Richard Hill
And just two quick follow-up questions about that, your same-store revenue growth and same-store NOI growth, should we think about that as sort of the steady state right now, with supply pressures being moved into 2017? And then I've follow-up to that.
Thank you very much for the disclosure on high end job growth, that's really helpful. Did I hear you correctly that you thought the high end job growth would begin to reaccelerate as some new products are coming to market?
Michael Schall
We're hitting that one first, we don't know. We can't tell you.
We think that, there will continue to be more service jobs created and more services consumed for the reasons noted namely that we have very high income workforce, and we're going to consume more services, so we feel pretty confident with that. We do think that there'll be more tech jobs, again, we think that tech is going through a essentially a retrenchment or really defining what the next chapter is going to be in fact, which is a variety of things for example the Internet of Things, the use of Big Data, more mobile applications, sensors and security devices as it relates to many-many applications and including apartments for example, sustainability in cyber.
So there's a whole bunch of things that are happening in the tech world that are being pursued but we're not really seeing it in the job numbers yet. So, again, we view the tech industry as an ongoing revolutionary type of process and -- but it's not a straight line.
And so, but we expect it to take on more momentum as we get through the next couple of years.
Richard Hill
And the same-store revenue growth is -- is that sort of a steady state that we can expect at this point, do you think? I know it's hard to project.
Michael Schall
Yes, it's hard, I mean we don't want to get in the -- into giving guidance at this point in time, but from our perspective here, we think that probably Q1 and 3Q will be a little weaker. You have our market forecast expectations on F'16, so you know what the overall view is for the year.
But if I were to look at the first part of the year versus the second part of the year, I think we'll have somewhat of a slow start and then pick up momentum as we go through 2017.
Operator
Our next question is from Nick Joseph from Citigroup. Please go ahead.
Nick Joseph
I guess just sticking with that theme, what's the loss to lease for the portfolio today versus at this point last year?
Michael Schall
This is Mike. Welcome to the call.
It is September '16, '16 is about 1.9% and 7.2% last year. And it was back in July typically, if we had the peak of loss to least in July was 4.9%.
So, it's been a fair amount of deceleration since just July.
Nick Joseph
And then, for the 2017 economic rent growth forecast, when you think about the potential variability of each regions, which regions are you most or I guess which region are you most confident and which is the widest range of potential outcomes?
Michael Schall
Let's see, that's a good question. I would always point to Southern California as being more stable.
We don't -- it's more like the U.S., it doesn't have really the upside or the downside typically because you've got more pieces to the economy and they trend a little slower. When I think about Northern California and Seattle I think overall over the long term it grows faster, but it's more volatile and is generating faster growth over the longer period of time.
So, I think that’s always case, I don’t think there is anything unique about right now the Southern California is closer to the U.S. economy, Northern California has the ability to move aggressively a little bit aggressively in both directions.
And you’re seeing part of that, I mean affordability is the concern about Northern California because demand grew so quickly and we have the great pricing power that rental grow at much faster than incomes and you can do that for some period of time. And but at some point rents and income have reconcile one another over the long haul.
Operator
Our next question is from Tayo Okusanya from Jefferies. Please go ahead.
Tayo Okusanya
Yes. Good morning on your end.
First of all big congratulations on a putting up such great numbers against the backdrop you’re operating in. Just on the Northern California in general again you look at the aftermarket data on the pin to a very green picture.
If we look at your results and you guys are still doing very, very well. Just trying to understand again how you're managing against all that pressure from aggressive developers trying to fill up their buildings, the concession, the store job growth.
I mean is it just the quality of the portfolio in regards to owning a lot of the assets not at the very high end of the market. Is it -- what is that actually you guys doing this is creating this kind of massive alpha?
Michael Schall
Well. Thank you, Tayo for apprising to that.
I would like to believe it’s because we have the smartest operations team led by Mr. Burkart.
So, we’ll get hit more shut out on that point. But I think that if you look at the Axio charts what we saw this year was a pretty weak peak leasing season and so I think John and his team did was anticipate and really understand and execute around that.
And so, but I don’t want to steal John's thunder. John, what if you do that was magical this quarter?
John Burkart
I prayed a lot. As Mike said, we think our reaching the strategy typically the software where we’ll do what I call is actually closing the leasing door where it takes certain units and it holds them out above the market trying to identify top potential market rents.
And so we make some changes in the settings to bring those units to market which enabled us to gain occupancy during the peak demand period and positioned us very well going into the fourth quarter. That strategic change plus the loss lease that we have taking the advantage of that as well as quite frankly nickels and dimes executing in all different many different places from collections to reducing models et cetera.
We worked very hard and I’m very proud of the team, they did a very great job.
Operator
Our next question comes from Nick Yulico from UBS. Please go ahead.
Nick Yulico
Well, thanks. A couple of questions, first on the 2017 market forecast that you gave on rent growth.
Are those numbers only for like a new lease growth or is that some sort of like a blended rent growth?
Michael Schall
Yes, Nick, it's Mike. This is supposed to be marker rents and not the asset portfolio but all the assets in the submarkets in which we are invested weighted as if it was our portfolio.
And so we’re not trying to make a comment at all about Essex or As versus Bs or anything else. Just broadly speaking what do we expect, the submarket to do take a market rents at the beginning of the year versus the end of the year.
Nick Yulico
Okay, so I guess when we look here at Northern California 2.5% that's higher than I guess where the latest sort of monthly Axiometrics data has been, which is sort of no growth or slightly negative, it is some sort of difference and then you are assuming that there rents actually are growing and across the market next year just trying to kind of reconcile.
Michael Schall
I think the question is that I would ask historically back to you is how many straight lines do you see on these rent graphs and pretty much the answer none they don’t act in the straight line they move. So yes if you look at September alone you'll say okay that's this is extrapolate and figure out where things are going from there I think you end up with the bad answer because I would say what impact as of September the seasonality have on the overall results we already know but we have affordability issue, we have too much supply in the form of these lease ups to operating typically 16% off on your annual rent and then now we have the affordability factors layered on top of that.
No one can get aggregate what each of those pieces means, so by focusing exclusively on September, I think that you are making an implicit assumption that, hey, this is the way, it's going and it's going to continue that way. We don’t believe that if you look at just look at the Axio chart for San Francisco, San Jose and in California markets.
There was the point on which we were getting 2% to 4% rent growth, and again trying to stagger leases so that you take advantage of that and make good decisions with respect to building occupancy during the right period of time, allows you to have some ability to manage around that. And so I wouldn’t focus too much on the one September number, but look more broadly at where rents have gone this year.
And I would to assume the next year again will be a little bit challenging in Q1 and Q2 because we're going to be dealing with this issuer to much supply and big discounts because lease ups operator is heavily incentivized, they have a bunch of big units to discount and absorb apartments. And he does so by just stealing from the stabilized -- so I think that dynamic is not going to change and that will have the effect of dampening our results.
However, we start building demand in February or March. And we would expect that to happen and that will temper that.
So, again we try to understand these relationships and how the rents vary throughout the year and try to make good decisions and execute well around what we expect to happen.
Nick Yulico
Okay, that's helpful. Mike just as a follow-up I don’t know if I miss this but can you give a sense for where new lease growth was in Northern California through your portfolio in the quarter and how it's trending in the fourth quarter so far?
Thanks.
John Burkart
Sure. This is John.
So our new leases in the third quarter So-Cal were about 3.6% and Nor-Cal about 1% and Seattle about 5.6%, so on an average about 3% year-over-year and where it's trending we're going to the lower demand periods, so I don't have the correct numbers but it'll trend typically little bit lighter, but one thing to remember is that last quarter -- a year ago quarter '15 was a weak quarter so that'll help the year-over-year comps.
Operator
Our next question is from Dennis McGill from Zelman & Associates. Please go ahead.
Dennis McGill
First one just has to do with the -- I think people are trying to get their arms around whether the supply curve peaks in '17, extends in '18 and you draw out the point, I think others have as well, that you might get more of a smoothing effect, as things get delayed and pushed out. I guess, the question is, if you guys look at it, do you feel like we end up in a different place in 2018 whether it pokes up into '17 or it gets smooth outs?
Is there a preference in your market as far as one or the other? And do you think it matters as far as the end game?
Michael Schall
It's Mike again. I think it does matter and I think that it's very difficult to look out too far out there because conditions changed and back to the point I was trying to make before there're no straight lines, and it's industry we react based on what we see happening on the market day-in and day-out and again what we see and we see a lot of this with good visibility onto what's going on in the development deal, because of our preferred equity program where we are coming at that 55% to 85% loan to cost ratio on development deals and so we're seeing a lot of deals and we're originating these preferred equity loans on properties that we would -- that would be very consistent with the Essex portfolio.
But I guess the point is that a number of those are ready to go development deals that don't hit the yield thresholds that make them buyable in the marketplace and therefore they're being pushed off and they don't qualify for our program and a lot of that is when you get into the discussion of reconciling costs, I think a lot of that land owners think that the cost are much lower than they really are when they sit down and actually price things out. And that process I don't think is going to change any time soon.
It's possible for example that the construction industry will have less fewer projects and they will become more competitive from the cost standpoint and some of these land deals will start working. But we're certainly not seeing that at this point in time.
So, what we've before us is a number of I'll say half the deals that we're scheduled or could come to market or actually getting done because of again these constraints, the cost rising issue, silly delays from deal and planning departments -- they're really busy and the impediments from conservative construction lenders. So, as long as those circumstances remain in place, I think we're going to see the development pipeline moderate as we model for 2017 and you would not expect it to get any better in 2018.
Hope that answers the question.
Dennis McGill
I think so, but just making sure, I am thinking about it -- so I think it smoothed out, do you think that ultimately leads to more supply because they make the underwriting a little bit less cautious?
Michael Schall
No, I don't think it's a matter of the underwriting being cautious. I think that -- again we've never seen a pro forma that didn't have the right numbers on it.
And so we see lots of pro forma's that have un-trended cap rates development deals in the 5 to 5.25. But again when you actually sit down with someone to price that out it is coming out to be somewhere in the 4.5 to 4.75 range.
And that pressures the numbers in terms of how much equity you need and some of the other constraints. And begin very conservatively lenders, lenders that have a huge balance sheet that are somewhere in 55% to 60% loan-to-cost ratio et cetera.
So, I don’t see that, I don’t see that will see that changing I don’t see construction cost moderation happening in the very short-term again if developers become or if the developers become less busy, I’m contractors becomes less busy and cost are down and maybe some of these deals will made it through. But, again right now I feel pretty confident and our forecast in terms of first half of 2017 be in a bit heavy and then abating each quarter throughout 2017 in the second half of the year been much better.
So, I feel very confident in that although again like we’re seeing before there could be some movement of projects quarter-to-quarter as delays and other things happen.
Dennis McGill
Okay. That’s helpful.
And then and you did mention the preferred equity program. Can you just give us an update on how you see that pipeline it seems this quarter was as their resignation quarter and heavy relative to the outlook that you gave last quarter?
Are you seeing more opportunity or that opportunity expand?
Michael Schall
Yes. I think, what I would say about that, so we’re at 186 million outstanding and we did few deals that funded a few million dollars this quarter.
We have a pipeline of around 50 million, but and talking to our team there they are again lot of deals of this business, they can make work. And so they it is not like we have 30 deals and we’ll pick in deals the best of it, it’s more or like we’re looking at the lot of deals and somewhere around half of them are making sense to the other half or again not producing the returns.
One would normally expect that you’re going to take development. And I would, but that's against the context of looking at an acquisition and an acquisition you can lock in somewhere around 4.5 cap rate, with seven year loan in around 3% range.
So you have a huge amount of positive leverage. So, I guess I would say, why would you take all that development risk when there is so much positive leverage on existing acquisition all things being equal.
So, I think that the alternatives with respect to where capital get allocated are putting in interest in and it means that development deals plenty of handful into the development deals at lower yield because there is another alternative out there that is better economic and certainly risk rewards.
Operator
Our next question comes from Tom Lesnick from Capital One. Please go ahead.
Tom Lesnick
Hi. Thanks for taking my question.
Most have been answered already, but just wanted to adjust subjective buybacks since you’re share price still looks relatively discounted, any update or thoughts on that?
Angela Kleiman
Well, as you may recall we have a $250 million program in play and we’ve always been opportunistic when it comes to us capital allocation and we plan to continue to do so. And so, we had a small purchase, but not enough as it relates to subsequent investments to the very small amount.
And like I said, we're just continuing to be opportunistic on that front.
Tom Lesnick
And I guess where the stock is trading today, how do you evaluate that as opportunity against your overall investments?
Michael Schall
I think we like the better yesterday. It's interesting I mean the one thing I would add that it's a continue conversation between Angela and me is that it's isn’t like we can sell our whole portfolio primarily because the cost to routine tax planning etcetera we have somewhere around a 1 billion dollars, so we call sell relatively easily.
You need to pay us special dividend and/or buy shares back, we don’t really care about which of those we might want to do. But I guess the point is there are some assets that are many assets that we had huge games on the business large difference between while we pay as property tax as wasn’t what the buyer pays his property tax and the buyer will cap out that difference and you get a lower value.
So, there is something there is a headwind in California to large scale dispositions and we purchase transactions and so we have essentially gone through our portfolio and categorize them by type and so we have a list of assets that we know we can sell, we have a calling portfolio, we have opportunistic sale portfolio and again we are just trying to get the relationships right but we are not going to do it if it has a very small impact with much rather weight for opportunities to see meaningful differences between the value of the real estate portfolio and the value of the share and so we are going to be patient on that. As Angela said we did execute on debt repurchase and so that will give you some ideas that we're interested in it and following through.
Tom Lesnick
That's really helpful. And just one last one from me, I think you mentioned the aggregate loss lease figure earlier in the call, but I was wondering if you can provide that between your three portfolio segments?
John Burkart
Yes, sure. This is John Burkart.
So, the aggregate as we said is about 1.9% and that breaks down with Southern Cal at about 3.4%, the Bay Area with a slide gains in lease at this point in time about 40 basis points, and then Seattle add about 2.6%.
Operator
Our next question comes from Rich Hightower from Evercore ISI. Please go ahead.
Rich Hightower
So, another sort of twist on the loss to lease question, so and I don’t know if you can answer this readily on this call, but I'm trying to get a sense of what loss to lease has represented in terms of Essex's outperformance tend to your rent growth versus the market rent growth or your competitors rent growth over the past couple of years, if you could attribute that outperformance the last at least if you can attribute part of it to that a revenue management just trying to get a sense of the split there again attribution of outperformance I guess.
John Burkart
I'll take a shot at it and if Mike wants to follow up, but ultimately loss to leases is the product that of rent growth, right. So, it's assets by acted in the marketplace and are we investing the right locations?
What's the rent growth look like? And then loss to leases is drives by what we actually rent at versus where the markets at?
So, at Essex we've had very strong markets. As Michael said many times on the call, we had a self-imposed rent cap that we put in at basically 10%, that has plus the market strength has led to loss to lease growth over time and over the last year as we said earlier, about a year ago we were about 7.2% loss to lease now we're about 1.9% loss to lease, so you can see that a big portion of that has rolled through to the bottom line.
Does that basically answer your question?
Rich Hightower
And then my second and final question is just on Seattle, I think you guys quoted renewals running around 6% and change in the Pacific Northwest earlier in the prepared comments and then when I compare that to the market forecast for next year around 4.5% and then also measuring that again it's around 8% which is what you guys have done so far in 2016, I'm just wondering what all that implies in terms of new lease growth in Seattle for next year? It sounds like it should be pretty low to get to kind of those numbers when you tie it all together?
Michael Schall
We think we've laid out -- in our supplemental we see as rental growth rate whereas 4.6% for next year for the market place. As it relates to the renewals for the fourth quarter, what we say, what we're setting at this point in time, that's going to be a function of the leases in place that are there.
And as you get to the fourth quarter you got to pull back a little bit, but we're setting it now like 90 days in advance or 60 to 90 days in advance. So, the renewals are very strong.
I won't look at that as staying the market is not strong.
John Burkart
I think, let me add something important to that. In Seattle, we have two couple of things that have happened, so we have supply in '16 estimated as 9,800 units, this is multifamily.
So we have that increasing to about 10,900 units and we have job growth decelerating from 3.5 to 2.7. So, now will that happen, exactly like that?
I'm not sure, but again our market forecast is based on a scenario and those are the two key inputs in the scenario so we have some moderation of market rent growth in Seattle, again this is market growth on F'16. It does not include loss to lease.
Operator
Our next question is from John Kim from BMO Capital Market. Please go ahead.
John Kim
I think John mentioned in his prepared remarks, that pick up in office net absorption in some of your markets and I realized there's different supply and leasing dynamics but I'm just wondering if you -- office leasing has the leading or lagging indicator to your market?
John Burkart
This is John. From our perspective we look at that, we try to look at a variety of pieces and that's one of them to understand A do we have enough space that's going to be available which is via optimal measuring construction because we've got such jobs -- strong job growth, we've enough space for the people and then B is that space being leased up, in another words so the Company is making decisions, real capital decisions preparing for the people.
And so that's why we bring that up and somewhat is a leading indicator, confirmation of our jobs numbers.
John Kim
And then on Page S-8, you had an increase sequentially in both turnover and financial occupancy and I'm wondering how we should read that?
John Burkart
Turnover, yes I look at it as it from a yearly perspective. So, if you look at year-to-date our turnover for the portfolio is about 55% that’s up about 1% from last year year-to-date and its pretty consistent there.
John Kim
But are you leasing second year faster or turning over units quicker?
John Burkart
We are and it's kind of get about to the change of strategy where the software would typically holds unit vacant at above market rent trying to find the peak of the market so to speak. And so we're making that modification and a few others we’ve reduced our vacant days down.
Operator
Our next question comes from Rich Anderson from Mizuho Securities. Please go ahead.
Rich Anderson
Thanks. And still good morning.
So, it’s unlike if we use a word analogy you were a mood ring did you wear that in the last year it would be kind of nice shade of blue and it’s now kind of brownish. I don’t know if you wear mood ring, but it did that would probably be the right analogy.
And you’re talking about the soft lending scenario in 2017. But so often our expectations of whatever happens to the future, it’s hard identify until they actually happen.
So, the point is, I know you’ve mentioned behaviors of municipalities and behaviors of lenders to kind of cut off the supply chain to some degree. But is that all that’s kind of pinging on what could either pivot from being a soft lending to something materially worst than that, because if you were to kind of just plod how your view has changed over the past year, it would suggest that it could be something worst than that soft lending in 2017?
Michael Schall
Well, Rich only you could phrase a question like that. I appreciate it, I guess I would say I’m not sure what color this should translate into is, I would say is we are cautiously optimistic.
Rich Anderson
Well, green is jealous.
Michael Schall
Okay. Well, we need to send me that wheel, the motion wheel.
But, I think we are cautiously optimistic. We think we’re, it feels timing to be like starting to be late cycle and so that is one element of caution be the weaker GDP report looks great, but the jobs are decelerating.
So, we see a lot of inconsistencies out there in the marketplace and that cause the great deal is concern. We feel pretty good about the supply projections, there is been a lot of time on them.
If we miss that, it’s our bad. So the broader issue I think is what goes on in the economy, and we’re always concerned about that and especially over the last several years where we just every time it seems like we’re getting a little bit of momentum something come better to wood work to knock it again down.
So, I guess cautious optimism is what I would get, as it relates back to supply, just look back. So, if you get, what there's been 7% to 12% rent growth in Northern California for four years guess what’s going to happen, every piece of land it's available to put some apartments and its going to be build.
And that is predictable. And so the current pipeline deliveries is really a function of the extraordinary rent growth we had over the last several years.
Normally, half of those sights there were some portion of those sites would not have been build able and so and then this is what always seems to happen as they get delivered in a different economic environment and soften conditions further so this is what causes the greater volatility of Northern California and Seattle again with better long-term growth rates overtime. So I think it's just various function of what's happened in the function of history again huge rent growth making every deal work and then have been all of that hit the development pipeline at the same time and then delivered at the same time.
Again as you are looking at development deal today versus looking on it two or three years ago it is completely different world out there you don’t have the expectation of rent growth that you had couple of years ago you don’t have this financing infrastructure from the banks and specialty that have become much more conservative and you got a backlog in the cities and a variety of other constraints so we feel very comfortable that we are not materially up as it relates to with the current conditions and what's going to be build that comes out of this for those reasons. So again from my perspective it's all about the economy.
Rich Anderson
Okay, I guess as it seems to me that you get 12% rent growth then you're destined to get, have these wide swings as you describe, but I guess it's just, maybe different this time I don’t know, but if you recall back to when the year to before Northern California went to heck. And if you guys saw that coming as clearly or do you think it's just there is so much more information well now you just had a at more of an advantage to see this things coming a little bit more clearly?
Michael Schall
Well, I think to comment we saw the supply coming definitely where we miss is what's going on with the economy when the economy paying, so we didn’t see how correctly the mortgages became in 2007 and 2008. We didn’t know that.
And then the impact of that was something that clearly we didn’t see, we have I think a very good idea what the supply was going to be. But I don’t really, and again this is where our asset doubles, something that keep you awake at night because we just didn’t see that asset double develop.
And we didn’t see if lowered up in the days when you go back into the internet boom/bust period we will be coming a lot more conservative. We were moving our portfolio pretty dramatically from Northern California to Southern California because we didn’t believe in the rents and we didn’t believe in the sustainability.
And so actually I think that we play out when pretty well, but again did we see the magnitude of the economic sort of disaster that happen when the internet companies in floated, no I don’t think we've got that one right either.
Operator
Our next question is from Conor Wagner from Green Street Advisors. Please go ahead.
Conor Wagner
And as you guys, you mentioned the development is leasing up and the aggressive pace or at the pace that they had to do there. How do you guys anticipate things going when most of these lease up turned within a year of the development.
Do you have any idea what impact that will have on the market or are you trying to position yourself for that in anyway?
Michael Schall
Conor, it's a great question. I will just start trying to figure out how to put that into my call comments because I think it remains to be seen, it's enormous question.
Developers, there's a limit on which they can offer concession and that limit in effect what it does is it pressures the first renewal to huge extent. And if you're -- in essence, it becomes a something that fills up their buildings quickly sometimes with the wrong tenants, and so when there're first lease renewal come, you end up with either another concession or people that have to leave in fairly large numbers.
So, I'm not sure exactly how that's going to play out, I think that that is been big problem with a lot of people that are moving into San Francisco for example or San Jose because they can now afford it. And even though they are relying on that 16% concession in order to make those numbers work I think you're going to see a change because each of those newly developed apartment communities go from being a leased up with their very unique financial equations to be stabilized owner and when they do I think there's going to be a lot of people who're going to be shocked within their resident pool.
In our experience one month it's no problem, at two months it begins to be a problem as it relates to your tenant base cannot generally pay market rent and they end up with this problem on the renewal. And you start getting above two months you end up with a real problem.
And I think that we're starting to see that as John noted in his comments. There are some two plus months concessions out there by the time we added free parking and a variety of other things and I think that's going to make for a very ugly first renewal on those buildings.
Conor Wagner
And the impact they'll have on your pricing power or is that sounds like negative for owners who've stabilized that?
Michael Schall
No, no, I don't think so. I think you go back into normal supply and demand.
People that can't afford it have to move into more affordable housing which means longer commutes for them and or double ups. And so I think it's a good thing for us because again they become a stabilized owner, they're -- right now they're disconnected from the stabilized ownership.
We've got two different constituencies with dramatically different financial objectives. So, as soon they become a stabilized owner they're interested in generating the most rent they can.
They're going to have a messy situation in dealing with the people that they let in. They can't afford to pay mark up rent.
And you're just going to see another transition within the renter pool. I think it's all better because net-net the places that the properties of best locations and the best property will go back to having the pricing power that they normally have whereas the secondary or tertiary areas are going to have people moving to them that they will probably they will underperform and the better areas will recover these 16% rent with their loss or some portion of that.
So, it's good for the area.
Conor Wagner
And then with the diminished outlook the rent growth in the Bay Area, 2017 does that change your ability to do revenue enhancing CapEx in the region or the economics there?
Michael Schall
I'm afraid it does, because again if they can offer on your A product to 16% discount you're going to compress As and Bs and the -- we have premium somewhere between the difference between the A rent and the B rent and so your premiums that you're going to achieve on your rehab properties will likely change a little bit and then be lower. And so, from our perspective, I would aspect the volume of turns in our rehab program to moderate or decline, and as we become more selective and find the market that can get the premiums that we need in order to make the number for us.
Operator
Our next question is from Drew Babin from Robert. W.
Baird. Please go ahead.
Drew Babin
Hi. Quick question on your expense growth side given the market forecast from the deceleration from next year is there anything you might be differently next year relative to this year in terms of running when you normally do earnings that you’re doing specifically there?
John Burkart
Yes. This is John.
A couple of comments there, to the skit market get slower there is commonly and there is been a little bit more on market. So, cutting back to necessarily work in that spend but, we are pretty focused on procurement and FX and really refining some of our pricing and taking advantage of our largest scale here.
So, that’s working for us at this point in time. And I think that two will work together will end up that at a reasonable spot.
But, normally when the market slows down there is been a little bit more in marketing and that’s often which is expenses up a little bit. And the other thing just to note, in California we have the minimum wage growth so that is effecting lower wage positions like the turnover, the landscape security the effective rate going up at about a 7.5% rate a year, it’s not the same each year, but effectively that’s what’s happening for several years so that is putting pressure, upward pressure on those different area and where we’re working to offset that various ways.
Drew Babin
Okay. That’s helpful.
And secondly, Alameda County had posted -- it wasn’t the worst, but had a decent amount of sequential revenue growth deceleration. Is that a product that Alameda County just having the most robust growth last year?
Or is that an indication that the new supply in downtown San Francisco, San Jose the impression expression are aggressive but not to draw from lower price point further out in the suburbs?
John Burkart
Yes, it’s more of the later. It’s a -- it's benefitted from people moving out there for affordability and now you can see the reverse of that as people search them back as there is not as much rent pressure in San Francisco and San Jose.
Operator
Our next question comes from the line of Michael Kodish from Canaccord. Please go ahead.
Michael Kodish
Hi. Thanks for taking my question.
I just have a one quick one. And I’m sorry if you answer this previously but, in your developments at 500 fulsome, I believe cost went up about 35 million on the – underlying assumption changed.
Do you know what drove that cost increase?
Michael Schall
I do. This is Mike Schall again.
The same things that we’ve been talking about as it relates to the broader issues and development it was driven by delays number one in terms of getting through the city process and construction cost growing at double-digit rates which out-script our expectations for that property. And so, again back to these conditions that are leading to lower supply obviously we’re not immune from those conditions and that 500 fulsome deal is a good example of that.
Michael Kodish
And is the same thing kind of happening with the Galloway Hacienda and Pleasanton? I mean, is that part of the under the same issues there?
Michael Schall
No, it really isn’t because that was started couple of years ago, so again 500 fulsome we just signed the contract with the general contractor. Finish up the city requirements.
We hope to have done that several months ago. And again the delays and movement of cost increases are really the reason for that cost bust.
And Hacienda was fortunately done before that. Again, this is one of the reasons why we are trying to decelerate the development pipeline.
The bottom of the cycle we end up with really good cruise because it's not that much going on. Cities are helpful, trying to push deal through.
At the top of the cycle, it's sort of the opposite. The cities are trying to increase fees, increase supportability requirement; have greater say in the product that's been built.
They are less motivated actually to get the construction workers back working because the construction workers are really busy. And so, this is why we tail back the development at the top of the cycle.
Michael Kodish
Thanks, that's very helpful. And then just one follow-up on that, with cost up and pricing power down, how is that affected your yield functions on 500?
Michael Schall
It was certainly had an impact. I think were in the 4 and 3 quarter percent expected cap rate un-trended 500 fulsome where I was somewhere around the 5 to 4.
Operator
Our last question will come from Jordan Saddler from KeyBanc Capital Markets. Please go ahead.
Austin Wurschmidt
Hi, guys. It's Austin Wurschmidt, here.
Mike, you mentioned early in the call that the concentration of supply is contributing to the heavy concessions by developers, and I was just wondering if that concentrations spreads further out. And if so, could we see that concessions start to abate before our overall supply actually abate?
Michael Schall
That's a good question, we do have some increase in Oakland for example in terms of development but again off a very small base and so we don’t see that is that's a major issue. I think it has more to do with California's Global Warming Solutions Act of 2006 where California is trying to create a residential model that is going vertical as opposed to horizontal and trying to eliminate urban sprawl.
And the way to do that is to have high density projects on all the major transit hubs. So, later seeing is greater concentrations of apartment buildings and actually condos and other housing in an effort to become more efficient from an environmental perspective.
And I don’t think that that changes, so I think that, again, in the Bay Area, we need to go through a map which is upgrade of our public transit system and but I think you are going to see more and more residential construction just on the main trends at lines at all in that urban core I do not think that's going to change anytime in the next several years. And I think, if that access a further supply constraint that is a more recent phenomena.
Austin Wurschmidt
Thanks for that. And then just lastly on the investment side you mentioned last quarter you were previously working on some acquisitions.
Did those just get push further out or does anything change with the deals you were previously looking at?
Michael Schall
No, we do have some acquisitions that remained in the process. We're trying to 10/31 Exchange which has caused us to push out some of the closing dates.
And again, we'll be more active in the fourth quarter, so you'll start seeing a few deals closed, again funded with disposition proceeds.
Operator
I'd now like to turn the floor back over to management for any closing comment.
Michael Schall
Thank you. While in closing, we appreciate your participation on the call and look forward to continuing the conversation with many of you at the NAREIT Conference in a couple of weeks.
So have a great weekend. Take care.
Thank you.
End of Q&A
Operator
This concludes today's teleconference. Thank you for your participation.
You may disconnect your lines at this time.