The delicate balance between occupancy and rent increases, a major theme on many REITs’ first-quarter earnings calls, came up again today on the call for Essex Property Trust. Like many of its peers, the Palo Alto, Calif.–based company is dealing with how many units to allow to go vacant so that it can, theoretically, turn those over to higher-paying renters as the leasing season picks up in the late spring and summer.


For the second quarter, Essex expects to give up 90 basis points in occupancy. It’s seeing higher rents in those units, though. In the first quarter, the firm saw a 5 percent increase on the leases signed, and in April that number jumped to 6 percent. “Modest declines in occupancy and higher rent levels help us meet our goal [of higher revenue],” said Erik J. Alexander, a senior vice president in charge of property management, on today’s call.


Burgeoning job growth and little new supply in the company’s West Coast markets set the stage for those rental increases. Northern California and the Seattle area have been Essex’s leading markets so far, with Los Angeles improving and Ventura and Orange counties also strengthening. San Diego has been the straggler, partially because of military deployments.


In some parts of the Bay Area, analysts have noted, the company was seeing more than 10 percent rent increases. Even with these increases, Alexander said, many markets are only now approaching their average rent-to-income levels, with San Diego and San Francisco being closest to that average. Income among applicants for new units is also going up. “The long-term average rent to income is not the ceiling,” Alexander said. “Typically, during expansions, it runs higher than the average.”


These increases also present other opportunities. “The ramp-up of redevelopment continues as we see residents willing to pay more in rent,” said CEO Mike Schall.


But ultimately, new development could dampen the increases in some markets. Schall said the most competition will occur in San Jose, which expects deliveries of 1,100, 2,500, and 3,000 units over the next three years, and Seattle, which expects deliveries of 1,800, 3,800, and 4,400 in the same time frame. The company expects new deliveries in its other core coastal markets to stay under 1 percent on current supply.


“We’re happy with the results from the first quarter and are optimistic about the summer leasing season,” Alexander said.


In fact, Essex expects the rental run to go into at least 2014. “We don’t see anything that will fundamentally change the outlook for multifamily housing in the short term,” Schall said.
Schall did mention that he thinks this improving market will create an environment where the industry could see mergers and acquisitions. “I think it’s starting to become an interesting time,” he said. “Not that there’s anything specific happening.”