Q3 2023 Equity Residential Earnings Call
Participants
Alexander Brackenridge; Executive VP & CIO; Equity Residential
Mark J. Parrell; President, CEO & Trustee; Equity Residential
Martin J. McKenna; First VP of Investor & Public Relations; Equity Residential
Michael L. Manelis; Executive VP & COO; Equity Residential
Robert A. Garechana; Executive VP & CFO; Equity Residential
Adam Kramer; Research Associate; Morgan Stanley, Research Division
Alexander David Goldfarb; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Eric Wolfe
Haendel Emmanuel St. Juste; MD of Americas Research & Senior Equity Research Analyst; Mizuho Securities USA LLC, Research Division
James Colin Feldman; Equity Analyst; Wells Fargo Securities, LLC, Research Division
John Joseph Pawlowski; MD of Residential and Health Care; Green Street Advisors, LLC, Research Division
John P. Kim; MD & Senior U.S. Real Estate Analyst; BMO Capital Markets Equity Research
Joshua Dennerlein; VP; BofA Securities, Research Division
Michael Goldsmith; Associate Director and Associate Analyst; UBS Investment Bank, Research Division
Richard Charles Anderson; Analyst; Wedbush Securities Inc., Research Division
Stephen Thomas Sakwa; Senior MD & Senior Equity Research Analyst; Evercore ISI Institutional Equities, Research Division
Presentation
Operator
Good day, and welcome to the EQR 3Q '23 Earnings Conference Call and Webcast. This call is being recorded. At this time, I would like to turn the conference over to Mr. Marty McKenna. Please go ahead.
Martin J. McKenna
Good morning, and thanks for joining us to discuss Equity Residential's third quarter 2023 results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer. Bob Garechana, our Chief Financial Officer; and Alex Brackenridge, our Chief Investment Officer, are here with us as well for the Q&A.
Our earnings release is posted in the Investors section of equityapartments.com as is a management presentation for the quarterly call. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. 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. Now I will turn the call over to Mark Parrell.
Mark J. Parrell
Thank you, Marty. Good morning, and thank you all for joining us today to discuss our third quarter 2023 results. As you can see from the press release and management presentation, the business continues to do well in most of our markets, with our East Coast markets outperforming our West Coast markets. New York, Boston and Washington, D.C., comprising a bit more than 40% of our net operating income are all having very good years and are meeting or exceeding our expectations.
Our target renter demographic remains well employed. Unemployment for the college educated is at 2.1%, with increasing pay levels and a continuing high propensity to rent, given elevated single-family ownership costs, low for-sale inventory and lifestyle reasons like delayed marriage and smaller families that favor our business.
We're also seeing lower levels of new apartment construction in most of our established markets where we have 95% of our net operating income versus the Sunbelt markets, a pattern that will continue for the next several years.
Consistent with this view throughout the primary leasing season, our pricing followed a trajectory that was pretty typical for a normal pre-COVID year. And as you can see in the management presentation, on par with our guidance assumption, the normal rent seasonality would return in 2023.
We saw our portfolio-wide rents peak in early August and then begin to decelerate as we expected. However, we recently saw a deceleration in pricing in San Francisco and Seattle that was more pronounced than usual seasonal patterns. The main culprit here seems to be a lack of job growth for our target renter demographic.
Michael will have more detail on this as well as the building blocks for 2024 that are laid out in the management presentation in a moment.
In Los Angeles, we are working through the impact of a drawn-out process to normalize delinquency levels and to reduce bad debt. We continue to make good progress here, portfolio-wide bad debt before application of rental relief funds in the third quarter was about 1.3% as compared to 2.4% in 2022. But the process is uneven, and it is lengthy. Evictions are now taking 6 months or more in Los Angeles versus the 2 to 3 months prior to the pandemic.
Given the underperformance in San Francisco and Seattle and the lumpiness and improvement in bad debt as well as the impact from the noncash write-off of a $1.5 million straight-line rent receivable in the quarter due to the bankruptcy of Rite Aid, which is a retail tenant of ours, we have adjusted our same-store revenue guidance expectation for the year to 5.5% from 5.875% at the previous midpoint. We have also adjusted our EPS, FFO and NFFO guidance accordingly.
Turning to 2024, the long-term health and outlook of our business remains positive, with favorable tailwinds that should support performance. While job growth expectations for 2024 are lower than 2023 levels, we'll continue to benefit from demand from a well-employed resident demographic, we think are going to rent with us longer, given the cost of single-family ownership and powerful social trends like delayed marriage and smaller families that I previously mentioned.
We also see a significant benefit from lower deliveries of new supply in our established markets compared to the elevated deliveries in the Sunbelt markets over the next few years.
Switching to capital allocation. While the overall market remains quiet, we did have some activity in the quarter. We sold a 30-year-old asset in downtown Seattle during the quarter at a 5.4% disposition yield as we continue to lighten the load in the urban centers of our West Coast markets. We also continued to invest in our expansion markets by acquiring 2 assets in suburban Atlanta. One property was built in 2019 and was acquired from a large private equity real estate player. The transaction is a 5.1% acquisition cap rate, including the impact of the mark-to-market on some low-cost debt that we assumed as part of this transaction.
This property is located in an upscale mixed-use development, though we acquired none of the retail with a resident base having high-paying jobs at the large education and medical employers nearby.
The other asset we acquired is in Gwinnett County, with easy access to the I-85 employment corridor and was acquired for $98 million. This asset is brand new and is still in lease-up, and we expect it will stabilize at a 5.4% year 2 acquisition cap rate. The median home price in the desirable area where the property sits is $600,000, which assuming a normal down payment in current interest rates equates to an all-in housing cost at 2.5x our pro forma rents.
Median household incomes in the area and among our residents at the property are around $100,000, making rentership a good financial and quality of life decision. It is important to note that our 2023 acquisition activity was paid forward capital from our asset sales without incurring any dilution as we took a cautious approach to transaction activity given the pricing uncertainty and low volumes in the marketplace.
We sold properties that averaged 30 years old, and that we expect will have more capital needs and lower go-forward IRRs than the properties that were acquired, which were 1 year old on average. We are well positioned to further our portfolio diversification by taking advantage of acquisition opportunities that we believe are likely to arise from the substantial development pipeline that is delivering in our expansion markets over the next 2 years. And now I'll turn the call over to Michael Manelis.
Michael L. Manelis
Thanks, Mark, and thanks to everyone for joining us today. This morning, I will review the third quarter 2023 operating performance in our markets, our outlook for the remainder of the year and some views into 2024 and that we included in our management presentation.
We continue to produce very good results with residential same-store revenue growth of 4.4% in the third quarter driven by generally healthy fundamentals in our business and some improvement in delinquency, although not as much as we expected.
The East Coast markets continue to outperform the West Coast. Demand and occupancy remains healthy, especially across our East Coast markets and absorption and our results in the Washington, D.C. market continue to impress.
As I will discuss shortly, San Francisco and Seattle are experiencing more pricing pressure than we previously expected. Before I get to that, let me touch upon October leasing spreads, new lease, renewal and blended. The stats we published through October 27 captures almost all the months activity, and as we mentioned, are consistent with seasonal declines outside of Seattle and San Francisco. New lease change is negative, which is normal for the month and will continue to get more negative as pricing trend, which is presented on Page 6 of the management presentation, continues to decline for the balance of the year.
In a normal pre-pandemic year, by the time you get to December, it is not uncommon to see new lease change be negative 4% or 5%. Given the weakness in our Seattle and San Francisco portfolios, we will likely be slightly more negative than that.
Renewal rate achieved should moderate slightly, but remain relatively stable and make up more of the transaction mix. Put it all in the blender and Q4 blended rate will continue to moderate. In terms of the specific conditions on the ground in San Francisco and Seattle, as we stated previously, we have had little to no pricing power throughout the year. However, the peak leasing season did demonstrate an increased volume of demand and some moderation of concession use, which led us to what we initially thought could be the beginning of better stability.
Over the last 6 weeks, however, these markets have slowed more than normal, which has resulted in larger price reductions than seasonally expected, characterized by both declining rates and increased concession use. This is most pronounced in the downtown areas of both markets, though there are other suburban pockets experiencing pressure like downtown Redmond in Seattle. The uncertainty of back to the office from the big tech employers, combined with their slowdown in new hiring is keeping a lid on demand.
In order for these markets to fully recover, we will need to see the vibrancy that comes to these areas when the offices are active, employment increases and residents want to enjoy the city lifestyle and easy commute to the office. Both cities are making progress on improving the quality of life issues, and we are seeing signs that a few of the major tech employers are slowly adding positions back, especially in Seattle, but the improvement in both of these areas need to accelerate in order to generate enough in migration to these markets, which will allow pricing power to return.
While recognizing challenges in these 2 markets, overall, our business remains healthy. Even with these now muted expectations, 2023 is on track to deliver very strong same-store revenue growth with several positive trends that we expect to continue into 2024 and support our business.
First, our residents remain in good shape financially with rent-to-income ratios remaining at 20% portfolio-wide. Resident lease breaks and transfer activities to reduce rent, often early indicators of resident economic stress remain below pre-pandemic levels and in line with seasonal expectations. Overall, the job market and our residents remain resilient, which would expect -- which we expect to carry into 2024.
Our resident retention remains very good. Turnover in the portfolio remains some of the lowest that we have seen. Single-family home purchases continue to be an expensive housing alternative, especially in our established markets. In fact, only 7.5% of our residents who moved out, bought home as the reason in the third quarter which is one of the lowest numbers we have seen since we started tracking the data back in 2006.
At this point, we are not seeing anything to suggest that the overall turnover rate in the portfolio will not remain low. As I mentioned earlier on the demand side, generally, the employment picture, particularly for the college educated, remain solid and supportive of continuing demand into 2024. So as I already noted, the high-quality job creation machine in San Francisco and Seattle recently paused, but longer-term fundamentals support the potential future growth.
On the supply side, overall, we are favorably positioned, particularly compared to those concentrated in the Sunbelt. We should benefit from less direct competitive supply pressure in most of our established markets while DC will be about the same and Seattle will have elevated supply in 2024. When looking at new supply as a percent of inventory, there are significant differences between the overall Sunbelt and our expansion markets -- as compared to our established markets.
The average new supply as a percent of total inventory in our established markets is around 2%, which includes the Seattle market at 4.5% which is the only outlier both on an absolute percent basis and relative to historical norms. Meanwhile, the Sunbelt markets are forecasted at just around 6% and our expansion markets range between a low 4% in Atlanta and a high of nearly 10% in Austin, which will result in pronounced supply pressure. This shouldn't be overly impactful for us since only 5% of our NOI is located in these expansion markets and, in fact, may present acquisition opportunities for us as financially stressed developers sell properties.
So putting all of these factors together, our overall revenue outlook for 2024 right now anticipate solid growth led by the East Coast markets. As you can see in the management presentation, our embedded growth going into next year is trending slightly above pre-pandemic norms and loss to lease is generally in line.
With bad debt net, it is hard to predict the exact amount of tailwind from improvement, but our view is that we will continue to gradually work our way back towards pre-pandemic levels. The eviction process is taking twice as long as it did pre-pandemic, and this speed is not yet sufficient to both clear the backlog and allow for new typical volume of evictions to be processed. That said, we see no decline in the credit quality of our resident and their propensity to pay.
We continue to believe that we will see meaningful improvement in 2024. In addition to the tailwind from bad debt net, we expect to see some incremental lift from several of the operating initiatives that we have in place around renewals, parking, connectivity and other income opportunities.
Moving to expenses, which continued to trend in line, we would expect our 2024 same-store expense growth to be slightly below this year. We will feel continued pressure on the repair and maintenance lines with some of the new technology fees like Smart Home and WiFi, although the comp period from 2023 is pretty high, so that will help offset some of that growth rate.
Insurance is clearly in for another significant increase. And right now, we expect real estate taxes to be higher than this year, but nothing that will create too much overall pressure. Some of the growth in these expense categories will be mitigated by continued operating efficiencies in the payroll line being created from our centralization initiatives.
Let me wrap up by saying that the apartment business continues to be good with favorable demographics driving demand and limited new supply in most of our markets. We will continue to enhance our operating platform to take advantage of the opportunities that the markets present while delivering a seamless customer experience to our residents. I want to give a shout out for our amazing teams across our platform for their continued dedication to their residents and focus on delivering these results. With that, I will turn the call over to the operator to begin the Q&A session.
Question and Answer Session
Operator
(Operator Instructions) And we'll go first to Steve Sakwa with Evercore ISI.
Stephen Thomas Sakwa
Michael, I was just wondering if you could expound a little bit on the October numbers on the new side. If you do sort of the -- I guess the implied change, if you stripped out Seattle and San Francisco, the number was only down 30 bps, but that kind of implies that those markets were down kind of high single digits to almost 10% in October which is sort of like a month-free or rents are down with some concessions. Are we thinking about that right? And I guess, just trying to figure out what really turned the market to be that south. And it sounds like it's really in the urban core as opposed to less in the suburban communities?
Michael L. Manelis
Steve, this is Michael. So yes, you are thinking about it correct. When you look at the October new lease spreads and you drill into Seattle, San Francisco, and I kind of put the expansion markets in there as well, they are running in the new lease change rate in the high negative single digits. If you drilled into San Francisco and Seattle, I'll tell you about 400 basis points of that is driven from the increased concession use. So you can almost look at that negative 8%, negative 9%, split it in half and say half is from increased concession use. The other half is from rate.
Some of that rate decline is really a function of who moved out, when did they move in, but the rates are down about 2%, 2.5% in those markets on a year-over-year basis. And if we drilled in even deeper into there, it is heavily concentrated into those urban cores of both Seattle and San Francisco. But as I said in the prepared remarks, the suburbs aren't completely immune from it. When you went around San Francisco, we are using some concessions on the East Bay concentrated in Alameda. But when you look at the value of the concessions, we're up at like 6 weeks, call it, 55% of the applications receiving 6 weeks in Seattle and San Francisco, which is very different than what you see in the suburbs, which are running less than a month.
Stephen Thomas Sakwa
Great. And then just maybe a follow-up on the transaction market. Mark, you sort of talked about maybe starting to see some increased activity, particularly in the Sunbelt. I'm just curious where that transaction market is? Where is the bid ask? I know you're sort of maybe a little bit indifferent on cap rates based on where you can sell. But just how are you thinking about pricing? And how have you maybe changed your underwriting?
Alexander Brackenridge
Steve, it's Alex. So it seemed like over the summer, things were settling down to, say, 5.25%, maybe even a 5.5% cap. The last 60 days have changed that a lot. With the spike in the tenure, it's really uncertain what the market is doing right now. So you hear about transactions closing, but those reflect pricing from the summer, not from right now. So we're all feeling it out. So there are properties -- limited number of properties on the market. No one knows exactly what cap rate reflects what the seller is willing to give up and what a buyer thinks is appropriate returns.
So it's definitely upward pressure on cap rates. We're pricing things all the time. As we've talked about on past calls, we look hard at replacement costs, and there might be compelling activity. And we just think there's going to be more and more pressure to sell over time where people are going to have to accept a new reality, particularly in these high supply markets, particularly people have exposure to caps or debt that's maturing and that there'll be more activity as the market kind of settles down over the next 6 to 9 months or so.
Operator
We'll go next to Eric Wolfe with Citi.
Eric Wolfe
On your bad debt, if the court process had been as quick as you thought, I guess how much more would have bad debt been down from the current 1.27%. And once you're through with the bulk of evictions and court proceedings, where would that take a bad debt?
Robert A. Garechana
Yes. Eric, it's Bob. So had it kind of progressed as fast as what we would have thought instead of having, call it, a 1.27% in the third quarter, we probably would have been about 10 basis points ahead of that and would have trended closer. So the trajectory that we were hopeful that we were going to get to. And what we're just seeing, as Mark mentioned and Michael also mentioned in their prepared remarks is that it's just taking longer, right? And so as the residents are staying longer with us as they go through the process, we're incurring more bad debt overall.
We do have excellent transparency and excellent visibility into who's where in the cycle. So who's where in terms of where they are in court cases, who's awaiting lockouts and all of that stuff, but we don't have great visibility into when exactly those proceedings are going to occur.
As Michael mentioned in his prepared remarks, going forward, we do expect that at some point, this will accelerate because the backlog from the pandemic era will be worked through and that we, at some point, will be able to get back to that 50 basis points, particularly given the fact that the credit quality of our customer hasn't changed, but it's harder to swag where we're going to end up on a full year basis.
Mark J. Parrell
And Eric, it's Mark. Just to add to that. We certainly hope 50 basis points is where we end up. But I would say that the fact that in some of these markets, the process has been maybe more permanently elongated because of either rights to counsel and funded rights to counsel in some of our markets and just general, more bureaucratic effort required to get through it, you may have folks, and that's what Michael was alluding to in his remarks, we aren't seeing more delinquency with our new residents.
We're seeing what I'll call the normal amount. But usually, they'd be out in a month or 2. And now it's just taking longer, and that means they're going to hit our bad debt reserve.
They're still leaving. But I just think again, we feel like the credit quality has not changed from all we can see, but the underlying bureaucratic process and regulatory environment has and it may be that we end up pointing to something modestly higher than 50 basis points going forward, again, not because the customer changed but more because the process did.
Eric Wolfe
Got it. That's helpful. And I guess that sort of brings up how much more would be just with the new normal of bureaucratic process like that make it 50 and 70. But I guess my other question was really just on the loss to lease at this point in the year, sort of how you think that informs blended rent growth next year? Because I assume the loss lease will probably just go lower, maybe be like 0 by the end of the year. You included it in the presentation, but wasn't sure how to translate that sort of 0.8% loss to lease in the October to some type of rent growth in 2024.
Michael L. Manelis
Eric, this is Michael. So yes, the 80 basis points that we included in the management presentation, the snapshot as of October 15, and we're just giving you the historical context. So that number will kind of decelerate a little bit as you get towards the end of the year. But there's nothing that suggests that right now, we don't expect our loss to lease to be in a relatively normal place to start the year. In terms of how you fold that into the blended assumptions for next year, I'm going to kind of stay away from giving any specific guidance on '24.
I think what I would look at is the hardest part of the piece right now is for us is that intra-period growth rate. What are you going to layer in by market? And we're in the very early stages of this budget process that includes both a top-down and bottom-up approach. But I could tell you that we do expect like Seattle and the expansion markets to be pressured from new supply. We continue to see and expect the strength in the East Coast markets, and we'll model some solid growth in Southern California, driven in part by the improvements in delinquency that we just talked about.
San Francisco has potential, but I think you could tell from the prepared remarks, we're going to need to see a few consecutive quarters of improving fundamentals like before we adjust the somewhat muted current expectations for next year. But if you really put all those factors together, you look at where that embedded range is, you think about loss to lease being in a relatively normal. You hold in the intra-period comments that I just gave you, it really does still put you in a place where we expect to see solid growth next year.
Operator
We'll go next to John Pawlowski with Green Street.
John Joseph Pawlowski
First question is on the transaction market. It feels like private market pricing, particularly in the Sunbelt has been very slow to adjust the reality of higher rates, but also declines in market rent. So curious in recent quarters, have you considered setting a complete pause on these one-off acquisitions in the Sunbelt? Or are you considering that going forward until more distress flows through the private market?
Mark J. Parrell
John, it's Mark. I'll start with that. I mean we have been match funding that. So this year, it was a pretty modest year for us, $350-odd million of buys and sells. And frankly, we have paused our acquisition activity. The deals you saw closed, they priced really in the early second quarter, and one of them went through a long assumption -- loan assumption process and the other one had a lease-up and an elongated close process. So we really aren't buying anything right now. What you see out there in the release is really that tail activity. We may expose a few more assets for sale.
We're always doing that, trying to figure out where that market is. And continue to execute on the strategy of moving the capital around. But before we commit to your point to buy assets at this price, we're going to sort of let market settle out a bit or look for an opportunity to just obviously very good.
John Joseph Pawlowski
Okay. Makes sense. Last question is on New Jersey rent control. So obviously, there's some media rumors out there about a few assets being subject to [roll]. And so hoping you can give us a range of potential financial impact on these assets? And then is there additional risk working in New Jersey -- your broader Jersey portfolio that we may hear about in the coming months or years?
Mark J. Parrell
Yes. Thanks, John. So I'll give a little color on that. I'm not going to be able to be terribly specific because it is pending litigation and giving you a range is something I'm just not able to do. But we are the only ones facing these sort of issues, both public and private competitors of ours in Northern New Jersey have these litigation concerns.
In our case, the particular matter you're talking about in Jersey City, there was a ruling in our favor actually a year ago that these properties, these 2 towers were exempt from rent control by an administrative entity that administers these rent rules. The decision that was announced a couple of weeks ago was by a politically appointed Board that overruled the bureau's original decision here and we completely disagree with that.
And we're going to go and litigate that in the courts and have our say there and try not to talk about it too much in the press, except to say, again, we think whether it's in Northern New Jersey or elsewhere in the portfolio, we follow the rules of the road. We feel like we comply with, whether it's rental control rules or notice rules or whatever they may be in all these markets, those rules are complex. They're ever-changing. We've got a great legal team, a great operations team that follows up on all that.
So I don't have any sense of an overhanging doom, but I think this is another sign of just political pressure that's manifesting itself in litigation in some of these markets rather than in just going through the process of trying to influence your public officials to change the rental rules.
Operator
We go next to Alexander Goldfarb with Piper Sandler.
Alexander David Goldfarb
And Mark, maybe just continuing that theme on the Jersey City. You and I have chatted before on the risks of tax-exempt deals and deals that have incentives that years or decades later could come back to bite. So in thinking about this, do you still see the appetite for EQR to pursue deals, especially in politically charged municipalities, deals that have tax incentives as worth the longer-term risk? Or what's going on here is your view is, hey, when we underwrite these deals, even if we shave off a few points for the risk -- for the political risk, going after these tax incentive deals are still economically worth it.
Mark J. Parrell
Yes. Thanks for the question, Alex. I go up a level and say political risk. So when you look at these markets, it's more about us managing political risk in these markets and our feelings about regulatory matters. In New Jersey, I think, is a market. We are rational capital allocators that is probably disqualified itself from material additional investment by us in terms of development or new asset acquisitions because some of these regulatory things are coming out of left field.
They're really not the result of incentives, these particular ones, incentives on construction. What was done is these were placed in a state where for a number of years, they were exempt from local existing rent control rules. And that's what this whole discussion is about. It's not about sort of a 421A type question, just to be clear, but I get your point.
For example, in Atlanta, almost everything built there has a tax incentive. That tax incentive is really well understood. We priced it in there at the beginning. We understand the cap rate and we understand what happens at the end of the deal in terms of the incentive going away 10 years in or whatnot. So I guess it's more of an indicator of these different lawsuits of political risk and places that I think for us and for others, will be less attractive to allocate development capital or acquisition capital and places like Atlanta where you feel more comfortable with political risk, and it's just really an underwriting exercise to price the tax benefit in the deal that the city did with good reason to try and encourage affordable housing in that market or at least buildings that have affordable components.
Alexander David Goldfarb
And then the second question, by the way, Mark, just speaking of political risk, obviously, rents being down shoots a hole in the whole YieldStar litigation argument. So I guess, yes, there is a positive at our third quarter earnings but thinking about Seattle and San Francisco, those are 2 markets where the downtowns continue to suffer and have issues recovering. By contrast, the issues in the Sunbelt are really, there's a lot of supply this year, into next, and then that supply goes away. So as you think longer term, it almost seems like the resolution of Seattle and San Francisco, to your point, is political, and it's unknown for the recovery, whereas the Sunbelt is known because you can see the product delivering and that there's nothing behind it.
So again, think about EQR and capital allocation, are you guys still comfortable in the belief that Seattle and San Fran downtowns will recover? Or at what point do you sort of throw up your hands and go, the traditional recovery isn't there, we have to think differently this time?
Mark J. Parrell
Yes. Thanks. Great question. So I'm going to start by saying the Sunbelt definitely will have a lot less supply in 3 years, but it doesn't mean there will never be more supply again. I mean it's proven every bit of the cycle, that happens again. So I want to speak to San Francisco, and it's [manage] Seattle real quick and then sum it up here. But we've got to have a little longer-term perspective for us because we're long-term investors in these markets. So a little background on San Francisco. I know you've been around the real estate world a long time. This is probably the best performing large market in terms of rent growth in the country over long periods of time. It's got the high housing costs we want, it's got these big barriers to supply. It's got often explosive high wage job growth. And it's historically been a super desirable place for our resident demographic to live, but lately, I admit a little less so.
Prop 13 also helps us limit those real estate tax increases, and that's our biggest expense. So there's -- the framing in that market is very good. But it is a volatile market. And that's part of why we've been saying since 2018, we wanted to lower exposure. But you get paid for the volatility. So for example, post GFC, EQR same-store revenues in San Francisco, they were down over 2% each year for 2 years in a row. So we got hammered a little bit there. But for the next 5 years, on average, our same-store revenue was up 9% a year. I think our shareholders got paid back for taking that risk and volatility.
I think the conditions in the job market in San Francisco can improve pretty rapidly. It certainly -- along with Redmond, Washington, the center of the artificial intelligence employment boom that we hope is coming but I will fully concede there's an elongated recovery going out in San Francisco. And this management team is responsible. If it's responsible for anything, it's responsible for being optimistic. And some of the things we saw in the middle of the year in that market made us feel like that recovery was coming right now. We still have faith that will come.
But in terms of capital allocation, we're going to lighten the load downtown. We've said that. We have been selling in that market. We even sold this quarter so far an asset in San Francisco, but we like that exposure to the tech industry there. We still think it's the tech capital of the world. And the argument on Seattle is not a lot different. I mean it has been a strong performer over time.
Again, when we look back on that market, we were down, gosh, 4% on average for 2 years in 2009 and 2010 after the GFC. And then we're up 6% or more for 5 years after that. So again, you get paid for your volatility. Seattle is a place where our balance is a little off where we have been saying and we have been moving assets and capital out of downtown and into the suburbs and you'll see us continue to do that but we like that market.
So I believe -- I think the management team and the Board believes in those markets. I think we are a little overexposed to San Francisco. We've been forward about that. A little exposed to the downtown areas. But longer term, we think that's where this demographic of high wage earners who aren't going to lose their jobs because AI aren't going to lose their jobs because automation are going to get the biggest pay increases, can handle all this inflation risk. That's what we think these people are, so that's where we're headed with our capital. But I'm as impatient as you are to see those markets improve.
Operator
We'll go next to Haendel St. Juste with Mizuho.
Haendel Emmanuel St. Juste
I'd like to get some clarification on a comment you made earlier in your remarks that it's not uncommon to see new lease rate declines of minus 4% to minus 5% by December. And given the weakness in San Fran and Seattle that you expect you'll be slightly more negative than that. So am I correct to read that you're implying that your entire portfolio, new lease rates that you expect to be minus 4% to minus 5% or potentially weaker? And then what does that sort of imply for these rates you're expecting for San Fran and Seattle by that point.
Michael L. Manelis
Yes. Haendel, this is Michael. So yes, just to give you like some historical context. So when we say historical norms, I'm really just looking at like 2017, 2018, 2019. And to give you -- in new lease change would typically in the month of October, be like a negative 1.5% to 2%. November goes down to like a negative 3% to a negative 4% and December would be like a negative 4% or negative 5%. So right now, you're seeing we're putting up a number in October, that's a negative 3.1% because of the inclusion of San Francisco and Seattle and really the pronounced concession use that we have going on in those markets.
So as you think about the fourth quarter for us, I think our new lease change for the full quarter is going to be somewhere around a negative 4% but if you go all the way to the month of December, given what we're seeing, I don't know why we won't be a negative 5% or even slightly above that negative 5% in that spot month. But for the quarter itself, I would put new lease change somewhere around that close to negative 4%. Renewals have been really stable for us and really have been doing better than what we thought. We will hold somewhere right around that 5% net effective change on achieved renewal increases. And when you put those 2 factors together, that's going to give you a blended somewhere around [1.25] give or take, 10 basis points either way.
Haendel Emmanuel St. Juste
Got it. And any color or any views you want to share on new lease rates for San Fran and Seattle?
Michael L. Manelis
So look, I mean we're running high single digits right now. I think San Francisco stays kind of at that level. And I think a little bit has to do with if you back up and think about what were we doing in the fourth quarter this time last year, we did have concessions in play in Seattle. So we were like a minus 6% new lease change in the fourth quarter of last year. So I would tell you, maybe we kind of just hold the line in this high single digit for the balance of the year in those markets.
Haendel Emmanuel St. Juste
Great. That's helpful. And if I may, one more. I'm trying to get a better understanding of the range of reasonable expectation that we should have for your same-store revenue next year. You outlined in your presentation the earnings of 1.3% to 1.5%, which is helpful. But the new and renewals getting softer, blended towards 2% for the fourth quarter, negative new leases. The bad debt is improving. But further than you expected and occupancy, I think based on a bit of a tough comp. So I guess putting it all together, I can't quite seem to get to the same store revenue projection for next year above the mid-2s? Is that maybe unfair or what maybe could I be missing or underappreciating.
Mark J. Parrell
Well, I appreciate the question, Haendel, it's Mark, but we can't answer that with any specificity. We -- just sort of sharing what we know at this time, we're in the middle of the budget process, which is both top down and bottoms up. In places like Seattle and the expansion markets supply and close in proximate supply is going to matter. Other places we're looking at job forecasts and how well occupied we are. So I think that's just news yet to be written.
Haendel Emmanuel St. Juste
Fair enough. Fair enough. But maybe can I ask you about Rite Aid and how you think about backfilling those stores and if we expect -- should expect that to be a drag or maybe a tailwind to next year?
Alexander Brackenridge
Haendel, it's Alex. We actually have a lease in place already. So we're very excited about it. It's going to be a good user. It's going to be a great amenity for our residents and for the neighborhood. So it's a matter of getting them into the space, and that's going to take a little bit of time through next year, 6 months or so and then they'll be in place.
Robert A. Garechana
Yes. And Haendel, from a P&L standpoint, as Alex mentioned, there's 2 things that will go on to determine the P&L is just how fast those folks get in place, the new lease because that's when we'll start recognizing the revenue for them in 2024 and what that impact is relative to the write -- we had the write-off which you're not going to have again in our base year in 2023. So those 2 pieces in that rate of growth. But I would expect -- in all likelihood, it will be relatively flat because you had the impact in '23 of the $1.5 million write-off.
Operator
We'll go next to Josh Dennerlein with Bank of America.
Joshua Dennerlein
Just wanted to touch base on the same-store CapEx, you increased it again to $3,600 per apartment unit. I looked back like a year ago, I think it was like $2,600 per apartment. Just kind of curious what's going on there? What are you guys seeing? And if there's any shifting from like same-store expenses into CapEx buckets or just rising costs?
Alexander Brackenridge
Josh, it's Alex. Yes, you're right. It did go up, but it went up for a variety of reasons that I'll go through, not related to shifting expenses into capital. It's really related to starting the year thinking that spending capital on our portfolio was a more compelling use of capital than acquisitions or development. And we had a big budget. I always handicapped the budget a little bit because things generally take a little longer its construction, things go wrong, contractors, misstates and through the first half of the year, we are right on track for that. We actually had a very productive summer, and so we ended up doing more work than I thought we would do. So it's partially that.
It's also -- we added in some ROI projects, specifically some solar panel installations that have a great return that weren't available to us until the middle of the year. And we did have some storm damage that carried through into the third quarter. And on top of that, we've had some smart rent installations that we've accelerated that added on top of that. So we expect that next year, we'll be back more in a normalized spend rate. And again, it doesn't relate to any accounting changes.
Joshua Dennerlein
Okay. Great. Appreciate that color. And then I wanted to just explore the cadence of lease rate growth through October, I guess, particular the new. Was there -- as October was progressing, was there like a big drop off towards the tail end of the month? And then if there was, were you kind of doing that in response to maintaining occupancy? Or just kind of what's the dynamic playing out?
Michael L. Manelis
Josh, this is Michael. I think I would back you up a little bit and say it's probably like that third week in September. And again, you're hitting a period of time which you see seasonal softening. So it is not uncommon to see demand start to soften. And what we saw in that kind of later part of September specifically in the San Francisco and Seattle market, as things were trailing off, you clearly saw a market react very quickly with concessions increasing and rates coming down to basically get enough demand to hold occupancies. And that has manifested itself throughout the month of October with continuing deceleration, but it's not like the deceleration has been even more rapid through October.
I would tell you it's kind of been at this level now for a while, but we do expect rates to keep decelerating a little bit. But the demand right now in those markets needs to be stronger in order to stop the deceleration rate. And we're just -- we don't have anything that would suggest that we should model that way right now.
Operator
We'll go next to Michael Goldsmith with UBS.
Michael Goldsmith
We've seen new lease rate growth fall quite a bit faster than renewal rate. So how long can the gap remain wide? And are renewing residents more aware of pricing and pushing back harder on renewals? Or are they just accepting the rent increase?
Michael L. Manelis
Yes. Michael, this is Michael. So we are negotiating a little bit more, but again, that's not uncommon to do in the fourth quarter of any year. We have quotes out for the next 90 days. I think our residents are clearly aware of what's happening in the marketplace. You definitely have kind of more conversations being -- taking place within our centralized renewal team. We're negotiating. We have quotes out somewhere in that kind of mid-7% range, and we expect to achieve somewhere around the 5%, maybe it's like low 7s to mid-7 depending on the month that we have out there. But we have a lot of confidence that the spread you're seeing is not uncommon to see in the fourth quarter.
If new lease rates typically go negative, our renewals typically hold up in that 4% to 5% range. So I don't really see anything that suggests that the spread is not going to continue as we see it. And then as we turn the year, again, it's really more of a function of what happens with intra-period rate growth. But as you start the year off, you'll see us start tightening up some of the renewal negotiations, but we expect a lot of stability on that renewal front. And what we're still trying to figure out is how to peg that new lease change assumptions for the year.
Michael Goldsmith
That makes sense. And my second question is, in this environment, how do you think about your relationship with Toll Brothers? Is there a greater opportunity to push harder and deliver units into a more favorable supply environment in the expansion markets? And then along with that, have you changed your acquired yields on development?
Mark J. Parrell
I'm going to split that in half and talk about Toll. It's Mark and I'm going to ask Alex to speak to our required hurdle rates on development. So we have a great relationship with the folks at Toll. They see the same thing we do, that there's a need to moderate development in some of these markets. We have 3 deals delivering. One of them, we move forward a couple of quarters. I mean their -- Toll is everything we thought they were. They're an expert developer builder. They're doing a great job. Obviously, we're going to face those same supply issues in Dallas that everybody else is when these 3 assets get up and running.
So I'm not sure why we delay anything. I'm getting the asset up and running getting heads and beds, getting income, that's in our in the shareholders' best interest. So that's what we'll do. And we're just -- we're assuming that starting at the beginning of next year, middle of next year, we'll have all 3 of those development deals in the lease-up process. And we'll report back. But I wouldn't delay any of those. If you're talking about other starts with Toll and anyone else, that goes more to Alex response on hurdle rates.
Alexander Brackenridge
Yes. And I think -- it's Alex. With the 10-year in the high 4s, you think cap rates have got to be in the high 5s. And you think that development yields have got to be mid-6s or high 6s. So the challenge right now is just getting a project to underwrite with that hurdle. Construction costs are not going up like they used to, but they're not going dramatically down and rents are not booming. So it's very hard to get to a number that underwrites and Toll understands that and so do our other potential partners and ourselves as we look at projects we might do on our own or with partners, it just very, very difficult to make the numbers work.
Mark J. Parrell
But I want to interject one thing because there are a couple of development deals we're looking at now that we like, that are in markets in the Northeast. And the thing that really distinguishes them is the really hard places to buy. So we look at these assets, they have the benefit of having certain zoning and electrical codes and other things that are beneficial. It might be to start that deal or start 1 or 2 of these deals, but we're being super selective. We haven't started anything this year.
But we do have instances like that where there's an opportunity to build somewhere that you really can't buy in and where we like that exposure where we might be willing to move forward even if it isn't really high 6%, mid-6% return, but the return and the sort of overall IRR in the long haul makes some sense. So yet to come on that, but I do want to put that out there.
Operator
We'll go next to John Kim with BMO Capital Markets.
John P. Kim
I wanted to ask about Seattle and your comments today that seems like it's more of a demand issue and a lack of job growth versus last quarter, where I think you cited it was more of a supply risk and there was a lot of optimism on the Amazon return office. So I guess my question is, has that Amazon pull faded and maybe disappointed as far as drawing in employees and some of the peers. And when do you expect the supply to peak in downtown Seattle?
Michael L. Manelis
John, this is Michael. So I think last quarter, what you heard us speaking to is with Amazon's return to the office mandate, you did see South Lake Union's occupancy tick up. You saw the demand tick up. It wasn't in migration from outside the MSA, it was just pulling people back in from further out within the MSA into that specific area. And in South Lake Union, we did have some new lease-ups. Those lease-ups did feel like they were getting kind of their application volume through. So you saw concession use really kind of pull back a little bit or stay stable. So the pressure we felt was a little bit less in that specific area.
If you fast forward into next year, Seattle is going to have elevated supply, and that supply is going to be concentrated in the city of Seattle, and we are going to feel that specifically in like a micro submarket of like downtown Redmond where we happen to have 6 properties, 5 of which are really a product that will compete head-to-head with that supply. So in terms of like how to think about when that pressure is coming to us next year, I don't have the breakout for the new leasing stats by quarter. But I do know that it's not like Q1 is not when we're expecting to feel it. I think we have a little bit of a ramp-up period, but we do expect outside pressure in that market.
John P. Kim
Okay. That's helpful. And then, Mark, one of your answers, you mentioned that acquisitions are in pause for now. I was wondering if there was a cap rate or spread to your cost of capital over the 10-year that you would be looking to transact at? Or is it more about the timing and the volume activity anticipated over the next 6 to 9 months and for selling in the market?
Mark J. Parrell
We remain open for business and acquisitions. We're underwriting deals. They just have to make sense relative to our cost of capital. We're looking for a discount to current replacement cost. So it is right now at a pause because the market isn't offering us that opportunity. And usually, it happens that there's a whole bunch of deals that people have signed up and everyone just close them at the end of the year, and that's not what's going on there.
So there likely isn't going to be a lot more exposed for sale until the beginning of next year. So I'm not sure this situation is going to change much. Like I don't know that Alex and I and the Board are going to make big pronouncements about acquisitions in the next couple of months because there just won't be much to action on. But we're hopeful next year, you start to see folks that look at the higher for longer scenario on interest rates that maybe see some pressure on NOI and especially in the Sunbelt markets, and maybe are more open to selling and folks like us that are more open to buying.
The last point to make is what is our source of capital for that. If we're able to sell our assets in some of these over -- sort of over concentrated coastal areas that we like general exposure, but we're a little out of balance, if that's the fuel, then we'll be thinking a lot about the degree or not of dilution between those 2. If we're borrowing money, we're going to think a lot about not just the beginning cap rate, but where it can reasonably go over the next few years. But right now, I think we'd be borrowers around 6.4% or so on 10 years, and that's a pretty significant hurdle. So those are the kind of things we're thinking about over there. Is that helpful framing for you?
Operator
We'll go next to Jamie Feldman with Wells Fargo.
James Colin Feldman
Great. I guess sticking with acquisitions, what is your appetite as you think about your target markets? I mean what is your appetite to do something big? Are there -- as you look at the portfolios that are out there, are there anything that you think would be particularly interesting? Or do you think the game plan will be kind of singles and doubles as you sell out of more noncore?
Alexander Brackenridge
Jamie, it's Alex. We're open to anything. The bigger is great for us. If the pricing makes sense and if the locations and the quality of the assets are good enough. And that's generally been the challenge with some of the portfolios we've seen over the last couple of years is that the mix of properties and locations just aren't compelling enough. So we have been targeting one-offs, and we'll do that as well. But something big comes up, we'll certainly pursue it. But in the meantime, there's going to be a lot of product coming to the market at some point. And we really primed up for that, and we're excited to take advantage of that opportunity.
Mark J. Parrell
Just to add, I mean, in 2021, the last time the market was open full blast, I mean, Alex bought and his team, more than $1.7 billion of assets, almost entirely in those expansion markets and a little bit in suburbs of Seattle and Boston. So we are capable of hitting a lot of singles and scoring a lot of runs by doing that. So we're happy to acquire in small dribs and drabs if that gets us to our goal. But as Alex said, we're open to portfolios, but they just need to make some sense. And a lot of what we've seen, you're getting 3 things you like and 2 you don't, you're not really ahead of the game.
James Colin Feldman
Okay. So I guess just listen to your answer, it sounds like there's nothing that would be a perfect fit at this point?
Alexander Brackenridge
Yes. We're not looking for perfection to be clear, but there's nothing that's compelling right now.
James Colin Feldman
Okay. And then I know there's been some questions on litigation. There's an article out talking about a DC RealPage lawsuit and you've been named as a defendant. Can you -- probably can't say much here, but can you give us any color on that at this point?
Mark J. Parrell
You guess it right. I can't say very much. That just kind of came over the wire to us, too. We are unfortunately in a very good company with a lot of our public and private competitors are in that suit as well. So again, we haven't analyzed it. We haven't even been served to our knowledge. So it's hard for me to have any real comment except to say it's not uncommon to have copycat lawsuits filed by other members of the plaintiffs bar or by the states and the District of Columbia when you have a lawsuit like the antitrust case that's being litigated in Tennessee and Federal Court that's out there and gets publicity. I'm not sure it's a new risk. It's the same risk in a different place. And again, let us analyze it, and if it's appropriate to comment further, we will.
Operator
We'll go next to Rich Anderson with Wedbush.
Richard Charles Anderson
A question to Michael. You mentioned the history of negative 4% to negative 5% by December. If you look at that same history, what's the new lease rate typically change to by the time we get to April or May?
Michael L. Manelis
Rich, this is Michael. I don't have that in front of me right now, but I can tell you that it clearly steps up and it's got to be in the positive 1% or 2% range because it's just going to keep sequentially building as you turn the corner into the year.
Richard Charles Anderson
Of course, that would be expected. I was just wondering if you had some specific numbers for December, I thought maybe I'd ask you about specific...
Michael L. Manelis
I don't have that specific number by month outside of this fourth quarter. But I'd be surprised if it's not up near that 1% or greater number.
Richard Charles Anderson
Okay. And then going back to L.A. and perhaps the opportunity cost of having to deal with all this litigation and so on, is there a common thread to some of these bad actors that maybe you don't want to sort of put them in a group publicly, but maybe that there's some cleansing that can happen so that you don't -- you say you can avoid some of this scenario that's perhaps bound to happen in the future? Is there a changing -- change to your leasing sort of documentation or your credit quality process to sort of avoid a certain sort of segment of the renting population on a go-forward basis? Or is it just...
Mark J. Parrell
Rich, it's Mark. I'm trying to answer that. I mean there are tons of rules about who you can and can't rent to. And California, as you sort of implied, as more rules than most, and we're certainly going to comply meticulously with all of those rules. But this is, again, an issue when you create this regulatory framework where delinquency is more expensive, you do motivate us, and we are using our data analytics tools and other means to try and determine whether our credit standards should be raised even further because now the marginal cost of delinquency, which is what your question was getting at, is higher.
So we need to decide whether instead of, call it, 3x income to rent, we need 3.5. But we need to do that thoughtfully. We need to do that in a way that doesn't completely tank occupancy. So again, we're rational actors like all the operators are in that market. And we have the advantage of having a great team and a lot of good analytics, but we'll certainly comply with the law, but we're going to look really hard at is there a different cutoff, but there is no group of bad actors. There's not like some particular percentage that's causing this problem. It's more that the processing of delinquencies takes longer. So therefore, just the normal delinquency is in the building 3 months instead of 2. And so now I have 1 extra month, that's real money, what do we do to address that? Maybe nothing, but maybe it is a change, too.
But I think are already pretty stringent credit standards. And so we'll see where we go with that.
Richard Charles Anderson
Is there an AI application to this possibly?
Michael L. Manelis
Yes. Rich, this is Michael. So I guess I can just answer a little bit on that and tell you, as an industry, it is exciting. Mark mentioned a little bit around the data and analytics. But what you're seeing within our industry is there is a lot more available data around this. There are new kind of screening tools that are coming to the market, screening processes that do leverage kind of different data points than conventionally the industry has looked at. There's clearly identity verification tools that are coming into play, not only for the touring side, but the application side. And you're starting to see more and more of these alternative security deposit kind of programs come into play. I think all of these things together in the blender actually do help start mitigating some of what I would characterize as fraud or bad actors in the system.
Operator
We'll go next to Adam Kramer with Morgan Stanley.
Adam Kramer
Just wanted to ask about the earnings, which I know you guys put in from your slide deck, I always find the deck to be really helpful. I guess if I'm just looking at that 1.3% to 1.5% range, I'm assuming that's kind of your assumption today for what the earning will be going into next year, so on January 1? So just to confirm that.
And then maybe just thinking about over the last 2 months of the year, what could kind of change that number, right? And maybe a focus on San Francisco and Seattle specifically, would there be some risk to that number? Or is kind of further softening in those 2 markets already kind of embedded in that embedded growth.
Michael L. Manelis
Yes. Adam, this is Michael. I think right now, we put the range out there because it is hard to move that number much more than 10 basis points. And it is our assumption as to where do we land on 12/31. So you start 1/1, what does that rent roll look like? And what is the embedded growth from the leases that you have in place.
Typically, we wouldn't really give a range, we'd give a number, but you do have some volatility sitting out there right now, not on kind of the renewal front, the growth that we're going to get from renewals feel pretty stable. But you could see concessions tick up. You could see rates decelerate a little bit more or the inverse. You could see things pull back a little bit. And that's why we're giving you that 10 basis point spread. The midpoint of our guidance is peg at the 1.4% which is the middle of that embedded growth.
Adam Kramer
That's really helpful, Michael. And then maybe just a follow-up on the -- kind of the pricing trend seasonality charts in the deck. I always find this would be really helpful. I guess I'm just trying to kind of square this with the kind of year-over-year new lease numbers that you talked to. I think it's going to be minus 4%, minus 5% as we kind of progress through the rest of the year for new lease.
I recognize that, obviously, there's seasonality here, right, things on a sequential basis are going to worsen. I guess I'm just a little bit surprised that the minus 4%, minus 5%, that should be a year-over-year figure, if I'm not mistaken, right? So it should kind of already include the impact seasonality?
Again, apologies, it's a little bit of a conceptual question here maybe, but just trying to kind of square the kind of seasonal versus sequential, I guess, kind of discussion here.
Robert A. Garechana
Yes. I'll start and maybe Michael can augment, if you will. So I think if I understand your question right, you're kind of looking at the pricing trend looking at the spread between the lines and saying, like, how does that square with my new lease change? And I guess I would tell you to start on your new lease change. There is a lot of noise around mix, and we do all terms. So we report all terms in our new lease change.
So that means that you could have had a lease that was signed in August that was for -- at a premium rent that was for 3 months reset in October. And therefore, you're going to have a much bigger change than what would be reflected if you just looked at those lines and said, everybody is on a 12-month lease, everybody's on a year-over-year basis, and that does create a decent amount of noise.
If you look and dig into the numbers, there. You also have some level of -- even though these are small as a percentage of total, meaning most of our leases are 12 months, there's enough noise in there and enough volatility in the transaction base to not make that comparison kind of apples-to-apples. What we do think is really helpful for the price -- in pricing trend and why we present it is just to look at the overall kind of directionality of where prices are going and where they are relative to seasonal trends overall. So I would say the pricing trend is best suited for a directional viewpoint and the new lease change is really what's going into the revenue line and it's really what's supporting your [GRP] and your revenue overall.
Operator
And at this time, there are no further questions.
Mark J. Parrell
Thanks, Jennifer. I want to thank everyone for their time and interest in Equity Residential today, and look forward to seeing everyone on the conference circuit over the next few weeks. Thank you.
Operator
This does conclude today's conference. We thank you for your participation.
