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Northern California apartment construction to fall in 2018, Essex CEO says

Essex Property Trust Inc. expects construction of new apartment buildings in its Northern California markets to drop by roughly 30% from 2017 to 2018, potentially helping the company's ability to charge higher rents.

In webcast remarks at NAREIT's REITWeek conference, President and CEO Mike Schall said a glut of new construction in recent years has stoked competition among apartment building owners, with some offering months of free rent to attract tenants. San Francisco in particular has exhibited some of the slowest rent growth among major U.S. markets in recent months, in large part because of new supply.

"I make the general observation that when you have really strong rent growth and look ahead about two years, you end up with very large supply deliveries," Schall said. "In 2015 we had double-digit rent growth in northern California, and that has led to really strong supply deliveries in 2016 and 2017."

Schall said owners of new buildings typically seek to rent out 25 to 30 units per month, and much depends on how many new buildings are available for lease at a time in a given market.

"If you have more than one or two, the concessions start being pushed up from two weeks to a month to somewhere in the two-month range," he added. Buildings offering two months of free rent to attract tenants are often able to draw new residents from outside their immediate areas, "because two months free is roughly 16% of annual rents, and that is a lot of incentive to make a different choice about where you live," Schall said.

If new supply in Northern California falls by 30% year over year, as expected, "we will see fewer instances where there will be two, or three, or four buildings delivered in the same market at the same time that are competing directly with one another, and therefore offering two months free," he said.

In other markets, Schall said there are pockets of Southern California where landlords are offering tenants roughly two months of free rent, including downtown Los Angeles and parts of Orange County. In Seattle, he said, strong annual job growth — in the 3% range — has enabled landlords to avoid serious rent concessions despite rising supply, Schall said. The company expects new supply to decline by roughly 10% in Seattle from 2017 to 2018, he said.