Equity Residential (EQR) and Essex Property Trust (ESS): A Competition for West Coast Dominance?
Equity Residential's (EQR) evolution to a more urban, bi-coastal REIT increases competition with pure west coast play, Essex Property Trust (ESS)
Equity Residential (EQR) west coast properties are located in locations near tenet desired features like Starbucks (SBUX), Whole Foods Market (WFM) and public transportation
However, over the last year Essex Property Trust (ESS) has adopted a strategy similar to Equity Residential (EQR), moving its portfolio closer to tenant desired features like Whole Foods Market
We have previously written about Equity Residential (NYSE:EQR) and its sale of 72 properties to Starwood Capital in October of last year and how the sale of 1/5 of its property portfolio changes the geography and demography of the largest (though at the time of this writing second largest by market-cap) multifamily REIT. As REIT Data Market stated in November, the sale of the 72 properties concentrates EQR owned communities to urban and coastal markets. In fact, EQR is saying "bye-bye" to fly over country with its exit from the Colorado market, and we expect the announcement of additional dispositions in Arizona, which is a market not aligned with EQR's vision going forward.
Given the significant changes ongoing at one of the largest multifamily REITs, it's important to pay attention to how the changes at EQR may affect other REITs, particularly REITs that hold strong footings in urban and coastal markets. These REITs are likely to face competition from an EQR looking to expand into new urban, coastal markets, or solidify their presence in areas where their properties are already located.
EQR is often compared to Avalon Bay (NYSE:AVB). Indeed they are linked via the Archstone transaction and by their comparable size and geographic footprint (bi-coastal). However, in looking at EQR's move since the Starwood transaction, we see value in comparing EQR to Essex Property Trust (NYSE:ESS) due to an increasing geographic overlap between the two REIT portfolios. ESS is the third largest multifamily REIT (by market cap), and owns properties in only two states: California and Washington. Since Q42015, five of the last six EQR acquisitions have been in Washington or California. This suggests EQR is focused on acquiring assets on ESS's home turf. In analyzing the evolving footprints of EQR and ESS we find growing overlap in their portfolios from Q12015 and Q12016 at the zip code level, specifically 92101 (San Diego-Carlsbad, CA MSA), 94105, 94158, 94402, and 94588 (all located within San Francisco-Oakland-Hayward, CA MSA). Certainly, disposing of 72 properties mostly located in markets the two REITs do not directly compete will predictably augment the proportion of overlap between the two REITs, but the overlap has grown in absolute terms as well to 64 zip codes by 31 March 2016. The maps below depicts EQR and ESS overlap across three regions: Southern California, Northern California and Seattle, Washington.
Figure 1: Southern California Zip Codes containing a property owned by EQR, ESS or both
Figure 2: Northern California Zip Codes containing a property owned by EQR, ESS or both
Figure 3: Seattle Area Zip Codes containing a property owned by EQR, ESS or both
The increasing overlap between the two REITs has sparked two specific questions: 1) Where is the overlap expanding?; and 2) In areas of overlap, what REIT holds the strategic advantage with regard to geographic location of properties at the tactical level (zip code), specifically a property's distance to tenant-desired features like Starbucks Coffee (NASDAQ:SBUX), Whole Foods Market (NASDAQ:WFM), metro stations, and highway entrances/exits? Answers to these questions will help us better assess which REIT is better positioned going forward.
Proximity of properties to features across all regions of competition
The following plots depict the average number of "features" of one type (e.g. SBUX, WFM) that are found within a given range of each ESS-owned property versus the average number of features within the same range of each EQR-owned property. A regression line in also plotted to show the trend as the range increases. Lastly, because our axes have different scales, we show the line y=x. Regression lines that lie below y=x favor EQR, while regression lines that fall above y=x favor ESS. Regression lines that lie along y=x represent parity.
Figure 4: Proximity of SBUX to EQR and ESS owned properties within the 64 zip codes where the REITs compete
Figure 4 shows that EQR properties average 1 SBUX at a range of 450m, while ESS properties average 1 SBUX at a range of 550m. This is important because, as Zillow argued in a 2015 analysis , the presence of SBUX is a strong indicator of a residential neighborhood's attractiveness and therefore of value
Figure 5: Proximity of WFM to EQR and ESS owned properties within the 64 zip codes where the REITs compete
EQR-owned properties are a hair closer on average to upscale WFM than ESS owned properties, but the difference is so small as to be negligible, especially inside of 1500 meters (~ 1 mile).
We also note that neither REIT appears to target WFM, as on average the nearest WFM to properties owned by both REITs exceeds 5000 (~ 3 miles) meters.
Figure 6: Proximity of metro stations to EQR and ESS properties within the 64 zip codes where the REITs compete On the other hand, EQR properties are significantly closer to the metro (just over 1500 meters, on average) than ESS properties (just under 2000 meters). Proximity of homes to public transit is often a selling point, and may be a driver of value.
Figure 7: Proximity of highway exits to EQR and ESS properties within the 64 zip codes where the REITs compete
Again, EQR properties are closer on average to highway exits than ESS properties, although the difference is not as dramatic as with metro stations. Still, the two together show that EQR is more committed to serving commuters.
Proximity of properties to features in areas of recent competition
The plots in the previous section refer to EQR and ESS properties in all 64 zip codes where the two compete (as of Q12016). However, we can focus in on the 5 zip codes where overlap results from one or more property acquisitions or developing properties in the last year (in other words, where the overlap has only existed for one year or less). These zip codes (92101, 94105, 94158, 94402, and 94588) highlight recent maneuvers. Here we find that the disparity is not nearly as great, and in the case of proximity to WFM, ESS is favored by a large margin.
Figure 8: Proximity of SBUX to EQR and ESS owned properties within the 5 zip codes where competition is less than 1 year old EQR still leads ESS in proximity of its properties to SBUX, but the gap is narrowing.
Figure 9: Proximity of WFM to EQR and ESS owned properties within the 5 zip codes where competition is less than 1 year old
While across all 64 zip codes the two REITs have approximate parity regarding proximity of their properties to WFM, within these 5 zip codes, ESS has what appears at first glance to be a commanding lead. In fact, the regression line may be slightly deceptive. Note that Neither REIT has any property within 700m (~ ½ mile) of a WFM. ESS' real growth appears to be in the 1500m to 3000m (~1 to 2 mile) range, which is still significant, but maybe not quite as significant as the plot may make it appear.
Figure 10: Proximity of metro stations to EQR and ESS owned properties within the 5 zip codes where competition is less than 1 year old
While across all 64 zip codes EQR had dominated proximity to metro stations, within these 5 zip codes ESS has completely closed the gap.
Figure 11: Proximity of highway exits to EQR and ESS owned properties within the 5 zip codes where competition is less than 1 year old
Highway exits represents the one feature (considered here) whose proximity ESS has failed to contest within these 5 zip codes. In fact EQR has grown its lead slightly.
It would be easy to construct a narrative that reads something like 'Seeing EQR successfully implement a strategy of carefully selecting a portfolio of sites in desirable areas, over the last 12 months ESS has begun to adopt a similar strategy, and we are seeing the fruits of that strategy in 5 zip codes in California.' However, while there may be some truth to this narrative, it does not wholly explain the data. ESS acquired or is developing new property in all 5 of the focus zip codes over the last 12 months, but EQR is also active in these areas developing property in two of those five zip codes. Instead, REIT Data Market believes that ESS may be adopting aspects of EQR's site selection methodology, focusing on locations in close proximity to tenant-desired features, but ESS has some catching up to do as the graphs above show. We suspect the continued evolution of EQR' s west coast portfolio in the coming year will increase competition between two of the three largest multifamily REITs in the country and could potentially super charge the race for high quality multifamily communities in close proximity to tenant-desired locations.