There's a fair amount of truth to the suggestion that the West Coast is an opinion leader for this country. That impacts every aspect of life, from social issues like the use of "medical marijuana" to the technology we carry around in our pockets.
Getting bigger, getting better at Essex
Essex completed a $16 billion merger with BRE Properties in April. The deal allowed Essex to leapfrog its West Coast competition, giving it more apartments on the West Coast than any other apartment real estate investment trust (REIT). The two portfolios were quite similar, so the regional breakdown didn't change all that much: 50% of Essex's portfolio is in Southern California (Los Angeles, for example), 33% is in Northern California (San Francisco), and the rest is largely in Seattle.
Why care? For starters, the average price of a home on the West Coast is over twice the U.S. average of around $200,000. That makes the pool of renters far larger for Essex than it would be in other regions. Rent growth has also been better than average, growing more than 30% cumulatively since 2002, over five percentage points better than the Southern region, the next best performer.
And while household incomes tend to be higher on the West Coast, the difference isn't so large that buying a home becomes easily attainable. Moreover, the number of younger adults is elevated. This demographic generally doesn't buy a home as readily as older demographics. That trend is particularly prevalent today as the 2007 to 2009 recession has some industry watchers suggesting that home ownership rates will continue to fall even further than they have so far.
Essex offers a yield of around 2.7%. That's not huge, but the the REIT is well positioned in desirable markets. And if you want to focus on the West Coast, this landlord is now the biggest and purest play on the West Coast apartment market.
Building it from the ground up at Kilroy
Like Essex, Kilroy Realty is focused almost exclusively on three markets. Southern California makes up 52% of Kilroy's properties, Northern California 35%, and Seattle 13%. That's a big change from 2009, when the REIT was solely focused on Southern California. Interestingly, the regional expansion allowed Kilroy to keep its West Coast niche while providing important portfolio diversification. It is, truly, a better positioned company today than it was just five years ago.
Buying and selling properties has always been a part of Kilroy's business model, effectively recycling its capital as it grows. However, construction has been increasingly important. For example, after a multi-year hiatus following the start of the 2007 to 2009 recession, Kilroy has spent over $1.5 billion on development over the last two years. It has another five projects totaling nearly 1.4 million square feet of office space on the drawing board.
In other words, look for growth to come from new construction over the next few years at Kilroy. And, like Essex, Kilroy will benefit from West Coast trends like high salaries drawing young and highly educated workers to the region. That, in turn, makes the region more appealing for key employers like technology companies. Which, according to Kilroy, absorbed around a million square feet of office space in 2013, on a net basis.
Kilroy yields around 2.3%. While that's not impressive, this office owner is an interesting way to invest in the future of technology without the direct risk of, well, technology. Aside from its unique West Coast focus, Kilroy is also appealing because its construction plans offer notable internal growth prospects.
The West is the best
You may or may not agree with that headline, stolen from Jim Morrison and The Doors, but if you do Essex and Kilroy are two REITs that you need to look at. They offer a direct and relatively low risk play on a region with favorable demographics and that acts as a technological and social driving force for the entire United States. Dividends are kind of just icing on the cake.
Make sure you read this if you are interested in dividends...