When the pandemic struck the U.S. in early 2020, apartment landlords like Essex Property Trust (ESS 0.94%) were particularly hard hit by its economic ripples. That was in part due to fact that short-term leases are common in the apartment space, and in the case of Essex, also due to the region in which most of its properties are sited.
However, as the direct impacts of the coronavirus have receded, Essex's business has started to rebound, showing that the trends that underpinned it are still going strong.
A genuine fear
In 2020, governments around the world took intense measures to try and slow the spread of COVID-19, including shutting non-essential businesses, asking people to practice social distancing, which included a shift toward a work from home model for most jobs that could be performed remotely.
U.S. unemployment soared, and on the West Coast, the job market shrank even more sharply than average. That was particularly bad for Essex Property Trust, because the real estate investment trust's (REIT) portfolio of apartment complexes is focused on high-tech regions in California and Washington.
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Compared to workers in many professions, it's easier for knowledge workers to shift to a work-from-home model. Notably, some major tech sector employers are making the remote work option permanent, suggesting that such arrangements will be an enduring feature in the post-pandemic environment. And if more of those workers can do their jobs from almost anywhere, that could sap demand for housing in the crowded real estate markets of the West Coast, where the tech sector is a cornerstone of the economy. In other words, the are reasons to fear that one of Essex's core business pillars is at risk of faltering.
Not so fast
There's evidence that there is a real issue here. For example, across the United States, 96% of the jobs that disappeared during the pandemic's downturns have come back. In Essex's core markets, that figure is just 79%. But as pandemic restrictions eased in the second half of 2021, the employment trends in those markets shifted from contraction to growth, with gains that exceeded the national average. This could be the market was catching up to the broader national recovery or a sign that the West Coast remains a vibrant market. The company's first-quarter update, due out later this month, will indicate if that trend has continued.
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 though the top line in Northern California, which accounts for around 38% of revenues, slipped by 0.2%, revenues at the company's Seattle properties rose 3.4%. This variability shows that Essex is hardly out of the woods, but its robust revenue growth in Southern California is a clear indication that its core regional focus remains a strong point.
In fact, technology companies continue to represent a huge amount of demand for office space, and some of the biggest names in the industry are working to get their employees back into the office. Those employees will need to live somewhere within commuting distance, and Essex plans to help house them, just as it has for years.
To be fair, some of the recent improvement in Essex's results is related to rent increases, as its occupancy rate fell in 2021 by a modest 0.4 percentage points. That hints at the possibility that the business could experience a strong upturn if it can get occupancy rates back to their historical levels while also boosting rents. While the economic environment in which it operates 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 by these underlying trends, as they validate the REIT's strategy. Moreover, they show the resilience of the company's focus on markets where the economy is driven by the tech sector, even in the face of a pandemic. That's good news and, given the still rebounding West Coast job market, there could be more upside to come. In fact, despite the pandemic, the Dividend Aristrocrat has kept its streak of annual payout hikes intact. Just remember, however, that Essex is joined at the hip to the technology sector. As that industry waxes and wanes so, too, will the REIT's results.
