When the pandemic hit in early 2020 apartment landlords like Essex Property Trust (ESS 0.93%) were particularly hard hit. That's partly because of the short-term leases inherent in the apartment space and, in the case of Essex, the region on which it was focused. However, as the world has started to learn to deal with the coronavirus, Essex's business has started to show that the old trends that underpinned its business are still going strong. Here's what you need to know.
The very real fear
In 2020 governments around the world took drastic measures to try and slow the spread of the coronavirus, including shutting non-essential businesses, asking people to practice social distancing, and looking to businesses to shift toward a work from home model. Essex was particularly hard hit, with job growth in its West Coast markets falling more than the average for the entire United States. That actually makes some sense, because the apartment real estate investment trust's (REIT's) portfolio is focused on high-tech regions in California and Washington.
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Basically, it's easier for knowledge workers to shift to working from home. Notably, some major tech employers made the move to remote work permanent, raising the fear that such arrangements will be an enduring trend in the post-pandemic environment. That could be very bad news for the regions, like the West Coast, that are driven by technology employment. In other words, one of Essex's core business pillars looked like it was at risk of faltering.
Not so fast
There's evidence that there is a real issue here. For example, while the United States as a whole has seen job growth rebound to 96% of pre-pandemic levels as of early 2022, Essex's markets have only bounced back by around 79%. But, the REIT has been highlighting that, as pandemic restrictions eased in its markets in the second half of 2021, job growth in the regions it serves picked up and exceeded the national average. This could be the market's catching up to the broader recovery or a sign that the West Coast remains a vibrant market. Keep an eye on the company's second quarter update to see if the trend keeps going.
Notably, when Essex reported full-year 2021 earnings, revenue growth in Southern California, which makes up nearly 45% of its top line, was a robust 8.3%. And while Northern California, around 38% of revenues, slipped 0.2%, revenues at the company's Seattle properties rose 3.4%. While the variability here shows that Essex is hardly out of the woods just yet, the robust revenue growth in Southern California is a clear indication that Essex's core regional focus remains a strong point.
In fact, technology companies continue to represent a huge amount of demand for office space, with some of the biggest names in the industry working to get employees back into the office. Those employees will need to live somewhere and Essex is planning to help house them, just like it has for years.
To be fair, some of the improvement in Essex's results is related to rent increases. Indeed, occupancy fell in 2021. However, the drop was a relatively modest 0.4 percentage points. And that hints at a strong business upturn, if the company can get occupancy back to historical levels as it also pushes through rent increases. While the work environment is changing, it seems like Essex remains fairly well positioned thanks to its West Coast focus.
Technology is the key
Investors in Essex Property Trust should be pleased to see these underlying trends, as they validate the REIT's long-term approach. Moreover, they show the resilience of the company's technology market focus even in the face of a global pandemic. That's good news and, given the still rebounding West Coast employment market, there could be more upside to come. In fact, despite the pandemic, the Dividend Aristrocrat's annual streak of dividend increases remains intact, with increases in 2020, 2021, and again in 2022. Just remember, however, that Essex is tied at the hip to the technology sector and as that industry waxes and wanes so, too, will Essex's results over the short-term and long-term.
