Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential
Thanks, Alex. And thanks to everyone for joining us today. This morning, I will review our third quarter 2024 operating performance, as well as our expectations for the remainder of the year and what the setup for 2025 could look like. As Mark mentioned, fundamentals in our business remain solid. During the third quarter, our focus on serving our customers and our corresponding strong renewal process led to the lowest reported third quarter resident turnover in our history, and strong physical occupancy of 96.1%.Move-outs to buy homes remained extraordinarily low and renewal rate achieved was strong across most markets. Blended rate, however, ended up at the low end of our expectations for the quarter, primarily from lower-than-expected new lease change driven by the City of Los Angeles and continued pressure in our expansion markets. In these markets, the pressure from excess inventory from both eviction-related, existing and new supply, has led us to prioritize occupancy to maximize revenue, which came at the expense of some rate growth during the quarter. It is also important to remember that it is often not uncommon to see variability in new lease change over relatively short periods of time. For example, while we saw a steeper and earlier decline than usual and new lease change in the third quarter, we have seen a better picture so far in the fourth quarter for this volatile statistic. Looking at the remainder of the year, our strategy of maximizing revenue by maintaining higher occupancy heading into the quieter months of the year should drive performance along with positive contributions from other income and bad debt net.
We still anticipate normal seasonal rent deceleration which will result in negative new lease change in the fourth quarter. But at this point, we are seeing very stable renewal rate achieved results. And of note, Seattle and San Francisco have both a relatively easier pricing comp in the fourth quarter and have shown good early signs of improvement, including maintaining strong occupancy and reducing concession usage. Sitting here today, our net effective rents at the portfolio level are close to 2% above prior year, which is also a solid position to be in. Now let me give you some color on the market starting with East Coast. The Boston market is one of our best performers in 2024. Both our urban and suburban portfolios are performing well, but consistent with our expectations, the urban portfolio produced stronger results in the third quarter. We like our positioning here as our urban-centric portfolio will see very little competitive new supply for the remainder of 2024 and the full year of 2025. Moving on to New York, demand feels good as we are more than 97% occupied. And as we have said on past calls, with a solid job market and very little competitive new supply, we think this market will continue to produce good revenue growth, and we'll have some of the best supply-demand dynamics in the country for the next couple of years. Rounding out the East Coast, Washington, D.C. continues to be the rock star of 2024. The market is over 96.5% occupied and is producing some of the top rental rate growth in our portfolio. Demand feels good across all of our submarkets and is expected to continue but we do expect some pressure from deliveries in the fourth quarter, particularly in the central D.C. submarket.
On the West Coast, as I mentioned, Los Angeles showed some weakness in blended rate growth, particularly in the new lease change. We think there are a few factors in play here. First, our overall pricing power here was clearly impacted by less job growth than anticipated, especially office using jobs and a bit of a pause from the L.A. studios in the content production. Second, on supply, we are seeing some competitive new supply, particularly in the downtown, Koreatown and West L.A. submarkets, as well as some excess supply coming online due to continued improvements in the eviction process, which is now taking about four months, down from six months earlier in the year. Finally, the city is still working through some quality of life issues in the urban submarkets like Koreatown and Downtown L.A. Our suburban portfolios, primarily driven by Santa Clarita and Ventura County, are performing better than our urban submarkets. The good news is that we are seeing some positive momentum across the entire Los Angeles market right now. And with our rents on top of last year, a condition we have not seen all year long, puts us in a favorable position. In addition, today's occupancy is running 40 basis points above both the prior year and is trending positively versus the third quarter. We are also experiencing some of the highest retention rates of the year in Los Angeles. And while job growth has been somewhat muted in 2024, projections for Moody Analytics are much more positive for growth in Los Angeles in 2025, particularly office-using jobs. Assuming that comes to pass, then along with the modest new apartment deliveries in most places across this vast geography, we think we should drive a reacceleration of results in 2025.
In the rest of Southern California, San Diego and Orange County, we continue to see demand but evidence of some price sensitivity with residents willing to move further out in these markets for affordability reasons. After showing some of the best growth in the portfolio over the last few years, we are likely returning to more normal long-term growth rates. Rounding out the West Coast, San Francisco and Seattle continue to perform better than our original modest expectations. At this point, we feel good about the pace of recovery in these two markets and they are set up to contribute to growth in 2025, and we have included a page in the management presentation that highlights some of the favorable trends we are already seeing in these markets. In San Francisco, demand feels good with occupancy of 96.2%, which is 90 basis points higher than last year. Rents are following normal seasonal patterns, but we are seeing slower deceleration compared to last year and renewals are performing well. In addition, some impactful return to office policy from firms like Salesforce, are helping to drive significant improvements to street activation. Having just spent a week in the market, you can really feel the energy and a reminder of why this market is the center of the tech universe, including the rapidly growing AI sector. On the supply side, there is very little new supply coming to the market. Overall starts are way down, and there have been almost no new competitive starts for the last year, which supports improving conditions for the next couple of years. We are optimistic about this market and its ability to drive our results in 2025.
In Seattle, the recovery feels similar to San Francisco but further along. During the third quarter, same-store revenue reflected improvement driven by low turnover, strong occupancy and better-than-expected renewal rate achieved. New lease change, while still more negative than we would like is better than last year, and we would expect this metric to improve over time. As we sit here today, demand drivers are better than we thought. Our occupancy is over 96% and our renewal performance remains strong. And looking at our migration patterns, we are also seeing more people come to us from further out suburbs, which is an additional demand driver for our assets. The big recent story here is the five-day week return-to-office announcement from Amazon, which is the 800-pound gorilla in the market. For the past several weeks, our local team have reported increased interest from Amazon folks who are living further away from the office and looking for apartment homes in the downtown and South Lake Union submarkets. With focus from city government and the local business community, along with increased business and tourist foot traffic, livability in the downtown just keeps getting better. Another reason positive is that the tech employment in the market looks solid as we see more postings for physicians in both the city of Seattle and Bellevue, Redmond's area. As previously discussed, there is supply coming in the fourth quarter, and we will need to see how the demand and pricing holds. But at present, it should finish the year strong and like San Francisco, we have some real optimism on this market and what it can contribute in 2025.
Switching to the expansion markets. The volume of competitive new supply continues to impact both occupancy and rate. Denver is our best performer of the expansion markets and our relatively small same-store portfolios in the other expansion markets, Dallas is producing the best revenue results in Atlanta where we have the most direct exposure to new supply right now is the worst. We continue to see demand, but it is a challenging operating environment for both new lease and retention given the amount of new supply. Similar to last quarter, the pressure on new leases makes renewing residents and maintaining occupancy, the number one priority for these markets. As you know, we added a number of new suburban assets to our portfolio in Atlanta, Dallas and Denver during the quarter that will have a while before they are in our same-store reported results. Overall, we are excited to grow our portfolio and create operating scale in these markets. While these markets have near-term supply risk, they continue to demonstrate long-term demand from our target renter demographic and provide a nice balance to our core portfolio. On the innovation front, we are very pleased with the initial results of our new AI resident inquiry application, which was able to handle almost 60% of our inquiries in our test market. We have a lot of confidence that as this application keeps learning we will get to 75% to 80% coverage, which will create an additional layer of operating efficiencies in the company.
Looking ahead, now that we have centralized the support of many parts of our customer journey, we are looking forward to improving and optimizing those processes, including the upcoming efforts to streamline the leasing process to make it faster and easier for our renters. Before I discuss the 2025 building blocks, I would like to highlight our expense performance in the quarter. Continued favorable results on property taxes, low increases on repairs and maintenance and utilities and an actual decrease in on-site payroll drove the quarterly results and should get us to our expected 3% midpoint for the year. We are very proud of our 10-year same-store expense compounded annual growth rate of 3.2% and consider cost control and innovation implementation as core to our DNA at EQR. In closing, as Mark mentioned, while it's still too early to give 2025 guidance on page seven in the management presentation that we have published last night, we gave some building blocks for next year's revenue performance. Overall, the setup for 2025 feels solid. Today, we expect that we will start the year with embedded growth near 1% and in a very well-occupied position. We also have a very favorable setup as the expected deliveries of competitive new supply in our established markets will be lower again. And while the expansion markets still have significant supply expected, the absolute quantity is beginning to come down. On top of all of that, we like our ability to attract and retain new residents. In particular, we are most excited about the potential we see from our focus on the customer and our ability to maintain occupancy along with the upside we see from our West Coast markets of Los Angeles, San Francisco and Seattle, which make up 42% of the company's NOI. Those factors, coupled with the continued performance in our East Coast markets should deliver solid revenue results for the company in 2025. I want to thank our amazing teams across our platform for their continued dedication to innovation, enhancing customer service and their exceptional disciplined approach to expense management.
With that, I will turn the call over to the operator to begin the Q&A session.