住宅地產 (EQR) 2020 Q2 法說會逐字稿

Good day, and welcome to the Equity Residential Second Quarter 2020 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Marty McKenna. Please go ahead.

Good morning, and thank you for joining us to discuss Equity Residential's second quarter 2020 results. Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer.

Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

Now I'll turn it over to Mark Parrell.

Good morning. Thank you all for joining us today. During one of the most challenging periods in our country and industry's history, we feel that our business showed considerable resiliency. We continue to be pleased with the financial strength of our customer base with their average annual household incomes of $164,000. Data suggests that only 4% of workers making more than $150,000 a year have recently lost their jobs compared to the low teens for lower-income categories. We have collected about 97% of our residential rents during the second quarter and attribute this to a customer base that remains well employed and capable of meeting their obligations. July is trending similarly.

We also demonstrated strong expense results. While the pandemic both added and subtracted costs from our operations, the innovations around leasing and service that we've described in prior calls have really taken hold, and we expect a durable reduction in our expense growth rate even after COVID is in the rearview mirror. And while our 90 basis point decline in same-store residential revenue was our first quarterly revenue decline in 10 years, our residential business held up reasonably well under very trying circumstances. We also believe that we have stabilized our physical occupancy at 95%.

In a moment, Michael will give you some color on what is going on in each of our markets, and Bob will address our expenses, nonresidential operations and balance sheet and then we will welcome your questions. But before I turn it over, I want to highlight a couple of things.

First, in the quarter, we stabilized 2 development properties: one in Cambridge, Massachusetts and another in Seattle, Washington. The Cambridge asset is a 64-unit property adjacent to an existing asset of ours and was built for $47 million and stabilized at approximately 5% yield on cost. This property complements our large existing Cambridge portfolio of 6 properties with about 1,100 units and is ideally suited to house the biotech employees working in that area. The other property consists of 137 units and is located in the Capitol Hill neighborhood of Seattle and costs $65 million to build. It's stabilized at about a 5% yield on cost.

In terms of transactions, we're pleased to close on 2 dispositions during the quarter that sold more than $750 million in assets during 2020. We feel that we received strong pricing on this quarter's sales as both sold assets were over 50 years old and our combined disposition yield was 4.4%. But we note that these sales were priced prior to the pandemic and so shouldn't be seen as a look-through on current pricing. We have not acquired anything this year, but we like to think of ourselves as professional opportunists and have a balance sheet that is as strong as it has ever been, which will allow us to take advantage of opportunities when they present themselves.

And now a bit about our capital allocation strategy. We have spoken on prior calls about the company broadening its portfolio by expanding into Denver and into the dense suburbs of our markets. For the last few years, we have been actively pruning our exposure in some urban locations, including Manhattan, and buying more dense suburban assets. Our current portfolio mix stands at about 55% urban and 45% suburban. We will continue to build and buy apartments in locations both urban and dense suburban where affluent renters wish to live and in markets where we feel long-term returns will be maximized. We believe that our strategy is sufficiently flexible to retain high-quality urban properties while adding some breadth to the portfolio over time so we can continue to produce a reliable and growing stream of income for our shareholders.

And now I will turn the call over to Michael Manelis.

Thanks, Mark. Let me start by acknowledging the dedication and hard work of our employees during the second quarter. Despite very challenging operating conditions, the team was able to focus on the health and safety of their fellow employees and our residents by implementing our new operating standards to address COVID concerns. These heightened cleanliness standards have been well received by residents and prospects. The team elevated their voices in various listening sessions held throughout our organization to share how they were navigating and managing stress due to the unrest in our country. Their voices will help us continue to cultivate a culture of inclusion at Equity Residential.

They stayed on top of delinquency by executing a consistent and transparent process that emphasize frequent communication with residents who are financially impacted by the virus. Our collection rate remained strong and fairly stable throughout the quarter with a little over 97% being collected. They focused on retaining existing residents as evidenced by turnover at 11.8% for the quarter, which is 130 basis points lower than the second quarter of 2019. This was driven by a 10% reduction in move-outs during the quarter as more residents opted to stay in place.

Achieved renewal rate increases were positive 70 basis points for the quarter, but we expect this number to trend lower as negotiations become more challenging. Right now, about 20% of our renewal offers for July and August include a slight market rate increase. The team also adopted new technologies for both sales and service that allowed us to meet the needs of our customers while creating operating efficiencies, which contributed to the low growth in our operating expenses. As to occupancy, we stated on the last call that we expected the occupancy impact to be the most pronounced in the second quarter, setting a new base from which we hoped we would improve as shelter-in-place orders were lifted. That, so far, appears to be the case. The portfolio is 95% occupied today, and we averaged 94.9% through the quarter after recovering from a 94.2% low point in mid-May.

On the rate side, since last week in May, base rents have been relatively stable, but this is a bit of a bifurcated story. Pricing remains challenged in the urban cores of New York, the City of Boston and Downtown San Francisco, which represents about 1/4 of our portfolio. The rest of the portfolio is showing more price stability, though rents are still lower than last year. New lease change was down 7% this quarter for our same-store portfolio before concessions. New lease concessions during the quarter were heavily concentrated in the urban cores of New York, San Francisco and Boston. Factoring in concessions, the net effective new lease change for the portfolio during the quarter was down 9%.

Overall, traffic and application activity improved throughout the quarter as net effective prices were being lowered. As we mentioned on last quarter's call, application activity was recovering at the end of April and continued to do so through the remainder of the quarter. By late May and into June, we were seeing somewhat new higher application week-over-week relative to the same periods in 2019. This improvement, however, was not sufficient to make up for the nearly

40% year-over-year reduction experienced in April. As a result, the total number of move-ins for the second quarter were 20% below the second quarter of 2019.

At present, we think it is helpful to split our portfolio into 3 pieces as we think about our forward operating performance. First, our suburban assets, which represents approximately 45% of the company's portfolio, have been more resilient during the pandemic with occupancy declining to a low point of 95.2% before recovering fully to levels at or above prior year and ending the quarter at 96.6%. Suburban renewal percent was very strong at 65% and continues to trend well above prior year. Rates have been slowly recovering since early May, and there have been very limited concessions used in this portfolio.

Second, our urban assets that are located in the City of Boston and Cambridge, Manhattan and Brooklyn and Downtown San Francisco, which represents about 25% of the company's portfolio and is currently 91% occupied. As stated earlier, this portfolio has the highest use of concessions and the most rate pressure. For the quarter, this urban portfolio renewed 58% of residents, which is 500 basis points lower than Q2 of '19 and was trending down throughout the quarter, ending at 53% in June. The urban cores in Boston, New York and San Francisco have the highest risk of volatility in operations for the balance of the year.

Our third grouping consists of urban assets and other markets, like Washington, D.C., Seattle and Southern California, and consist of about 30% of our portfolio. These assets reached the low point in occupancy of 94% in mid-May but quickly bounced back and remained at 95.2%. Pricing has been stable since the middle of May, with rates being down year-over-year and concessions being used on about 15% of our applications. During the quarter, 57% of residents renewed from these assets, which is 300 basis points better than the second quarter of 2019. Overall, this group of urban assets has had consistent operations for the past 2 months with a slight uptick in occupancy in the past couple of weeks.

Let me provide some quick color on the markets, starting with Boston. The urban center of Boston and Cambridge represent about 3/4 of our total Boston portfolio and were more impacted by early termination and nonrenewals from international students and third-party corporate providers. While neither one of these represent a significant amount in total units, the impact was concentrated. The Boston Urban Center is now 91.5% occupied and continues to be pressured on rates and occupancy, especially given the uncertainty around international students and the competitive supply being delivered. The other submarkets in Boston have been operating at 95% with consistent rates and very little concession use. Overall, applications have been running at or above prior year for the entire market as we see good demand for our product. We continue to like this market long term due to its combination of bio, education and technology jobs and the high quality of lifestyle.

Washington, D.C. continues to demonstrate some resilience, although the market has not escaped pricing pressure. Absorption of new supply continues, and the use of concessions remain extremely limited in our portfolio. Applications have been running at prior year levels, and the portfolio is 95.8% occupied.

Moving on to New York, which continues to be one of our most challenging markets. Leasing traffic and application volume returned to 2019 levels by mid-May but at reduced rental rates and higher levels of concessions. The leasing traffic in the city is heavily centered around local bargain hunters who are moving within the market and searching for a deal. Concession use is widespread with about 50% of our applications receiving concessions, which now average greater than 1 month. While the application count has recovered to prior year levels, this was not enough to make up for the deficit created by the lack of volume in April. Retention started strong in the quarter but has since moderated. During June, we renewed 57% of our renewal offer, which is strong by all accounts but lower than June of 2019.

Our assets on the Hudson Waterfront, New Jersey, which is about 1/4 of our New York exposure, had performed better than Manhattan and Brooklyn. We have held 95% occupancy on the Waterfront for the past month. And while concessions are being used, it's at a lower level than in Manhattan. Our New York same-store portfolio, including New Jersey, is about 92% occupied today. Recovery in Manhattan and Brooklyn will take some time. But if office reopenings begin in early 2021 as currently expected, and the city continues to show good progress on controlling the virus, we may see higher than usual demand later this year and early next year during a period when demand is typically seasonally soft.

Heading over to the West Coast, Seattle delivered the strongest revenue results in the quarter, both in terms of absolute revenue growth and the combined impact of new lease change and renewals. The portfolio is 95.3% occupied today, and overall revenue performance has been very consistent since early April, although pricing decelerated slightly through what normally is the growth period of the peak leasing season. We have not seen big layoffs in tech jobs in the market, but we are keeping an eye on employers like Amazon who last week announced that they were extending their corporate office employees working from home until early January and have delayed new hire start dates from August into September, October. Overall, this trend may cause some short-term pressure on demand and occupancy but could also provide a boost to the fourth quarter, which typically slows down.

San Francisco's revenue performance is very different depending on the submarket, most notably between urban and suburban. Our portfolio in this market is approximately 30% urban and 70% suburban. In the City of San Francisco, we are seeing declining rents that are presently well into the double digits year-over-year and represents the largest year-over-year decline in our entire portfolio. The city also has widespread concession use at or above 4 weeks and has experienced the biggest impact from start-up layoffs and the lack of foreign immigration.

Our suburban portfolio located in the Peninsula South Bay and East Bay as well as a few urban assets that we have in those submarkets stabilized in early May. While rates are down on a year-over-year basis here, they have been holding in place for over a month with very limited use of concessions. The South Bay is still at risk as new supply enters that submarket at a time when the large tech companies have slowed growth and are trying to figure out longer-term work-from-home policies. That said, the San Francisco Bay Area remains a great place to live. Tech companies remain a strong high-wage job growth engine, and the long-term outlook remains positive.

Heading to Southern California, overall pricing is down in L.A. but very stable through June with very little concession use in our portfolio. L.A. is 96.1% occupied today. West L.A. remains the most challenged submarket that, even here, occupancy recovered to 94.1%. And the downtown submarket, which currently has supply pressure, has been stable at 95%, although rent declines are the most pronounced in this submarket. Overall, we are seeing strength in the suburban submarkets of L.A., which is about 45% of our L.A. portfolio. This strength is mitigating the rate and occupancy declines in Downtown Hollywood, Mid-Wilshire in West L.A.

While the high levels of competitive supply being delivered in the second half of the year, recent spike in COVID cases and the reversal of phased opening plans for the market are certainly potential short-term negatives, the content creation and technology job story in this large diverse market remains positive. We think jobs in L.A. have the potential to grow even more strongly coming out of the pandemic in order to meet the increasing demand for new online content.

Finally, Orange County and San Diego are both performing well with occupancy above prior year and very limited downward pressure on rates. These are beyond challenging times, but our business is demonstrating resilience and our teams have shown that they can deliver.

At this point, I will turn the call over to Bob.

Thanks, Michael, and good morning, everyone. Today, I will make a couple of brief remarks on same-store expenses, delinquency and bad debt and conclude with the balance sheet.

Same-store expenses declined for the quarter relative to prior year driven by the advancements in our technology initiatives that Michael mentioned and delay or deferral of certain expenses largely stemming from the pandemic. Page 16 of the release provides detailed color on specific line items. I do want to highlight that expenses in the quarter included approximately $1 million related to onetime bonuses for our frontline workers and another $500,000 from elevated cleaning and other health and safety costs.

As evidenced by our strong 97% collection rate for the quarter, our high-quality resident continues to pay their rent. That said, the combination of the small percentage of our residents that have been financially impacted by the pandemic and our conservative accounting policy has led to elevated residential bad debt in the quarter. Residential bad debt reduced revenue growth by approximately $9 million or 150 basis points in the same-store portfolio. That is about 100 basis points higher than the comparable period in 2019, which would have been a more typical level. For the next quarter or so, economic and regulatory uncertainties may lead to continued elevated bad debt.

Turning to our nonresidential business. I would remind you that the nonresidential business is a small part of our overall operations at approximately 4% of revenues historically, but it is likely to have a disproportionate impact on total same-store performance for the next few quarters. Retail tenant collections were about 60% for the quarter with collections trending slightly higher in June. Uncollected amounts that were deferred were almost entirely reserved against during the quarter from a financial statement standpoint.

About 2/3 of the decline in nonresidential revenues quarter-over-quarter stemmed from these reserves and other bad debt related items. Much like in residential, we have applied a relatively conservative accounting policy. This business is likely to continue to face challenges, and we expect that the third quarter could be even tougher given likely delays in reopening activity and the potential lack of additional government small business stimulus. If retail performance continues to be stressed, we expect that a significant portion of the straight-line nonresidential receivables, disclosed on Page 11, could be at risk and, therefore, could be written off.

Finally, a quick highlight on our fortress-like balance sheet. We entered the pandemic from a position of strength and have further enhanced that position through thoughtful refinancing activity and incremental debt reduction from disposition proceeds. By taking these steps, we have ensured sufficient liquidity and incremental debt capacity for any opportunities that may present themselves. We have limited near-term maturities, modest development spend and incredible access to capital.

With that, I'll turn it back over to Mark.

Thanks, Bob. And a final note, while we fully acknowledge that the next few quarters will be difficult, the cities in which we operate have shown great resilience over time. And while some of them are certainly challenged today, we believe that they will bounce back when we reach the other side of this pandemic. We expect that these cities will remain at the center of the knowledge-based economy and will continue to attract high-income renters. We think that the obituaries for the great urban centers have been written much too prematurely. The world's great cities have continued to adapt and thrive over time, and they will do so again.

We appreciate the continued support we have received from the investment community as we navigate the current storms and look forward to coming out of this pandemic well positioned for long-term growth.

Now I'll turn the call over to the operator for the Q&A session.

(Operator Instructions) And we will take our first question today, and that is from Rich Hightower with Evercore.

I hope everybody is doing well. So a lot of ground we could cover on this, but I'll try to limit it to a couple of questions here. But just to go back to the topic of renewal rents for a second. So I wanted to back up to one of Michael's comments. I guess, 20% of renewals for July and August you said included a slight increase. Does that imply that 80% roughly are flat to negative? And then are you sort of seeing increasingly bold asks among your tenants on the renewal side, specifically, given that it's probably a pretty well informed tenant base?

Yes. Hey, Rich, this is Michael. So I guess I would start and say, really, for the past couple of months, the performance in renewals has been relatively consistent. So the comment about 20% having an increase, that's the quotes going out the door. And you need to remember, we're still subject to a lot of various rent freezes in play. So you are correct, 80% of our offers that went out for July and August include no increase. The negotiation process has been very consistent. We're kind of quoting about a 1, and we're achieving about a negative 1, so about a 200 basis point spread on that performance.

And that negative 1, that's inclusive of any concessions, just to clarify that.

Yes. So we're not doing a lot of renewal concessions or we haven't been in the portfolio. I think we've seen a handful in the quarter in New York, but it's very insignificant dollar amounts.

Okay. That is helpful. And then just a quick one on capital allocation. Mark, I know that you said in your prepared comments that the pricing that was achieved on the dispositions in 2Q is not really reflective of, I guess, private market reality today. But where do you see that spread between private market today and EQR's implied trading cap rate? And then where does share repurchases potentially fit into the capital allocation strategy?

Wow, Rich, that's a compound question. Thank you for that. So we'll start by just talking -- that's all right. We'll just talk about values, and we'll start with the private market. I mean, in the quarter, there just hasn't been that much activity. We think activity in our markets for our kinds of assets, meaning assets with over 50 units that are of our type of quality, were probably down 70% in the second quarter. So what I'm about to tell you is based on pretty limited volume, but it seems to us that the private market values have held in there. So we've seen a few deals trade in Downtown Seattle, stuff in north side of the suburban Denver, a complex in Washington, D.C. on the Virginia side and then a couple of these New York deals that we've been watching but haven't closed, those are all trading at values that indicate to us that the pandemic has not taken private market values down or not taking them down very much at all. But again, very small sample sizes in fairness.

And then you asked about share repurchases. Well, certainly, the company rarely trades at this significant a discount to NAV. I mean this is very unusual for us. I'm not at all dismissive of share buybacks. I would just tell you that you start as a REIT with the inability to retain earnings. So -- and you start also with the ability to return capital through a pretty large dividend. Our annual dividend is $900 million of capital returned to shareholders every year. So I'd say to you that we're open to it. We have a $13 million share allocation on the share buyback side. That's a conversation we'll continue between the Board and myself, and we'll think more on that. But I will say this is pretty unprecedented for us to trade at this discount. And I think, again, as far as I can tell, private market value changes don't justify it.

And we will take our next question, and that is from Nick Joseph with Citi.

It's Michael Bilerman here with Nick. Mark, you had quoted an opportunistic mindset in the press release. And I wondered if you could sort of drill down a little bit about what you were implying about having an opportunistic mindset. Is it acquisitions? Is it sale of more assets? Is it strategic portfolio reallocations? You just talked about stock buybacks. What did it encompass?

Yes. Thanks for that question, Michael. It's sort of all of the above. I mean, again, not much going on in the transaction market. There's not much of an opportunity for us to demonstrate that opportunistic mindset. But historically, this company, as an equity company, has always been looking for opportunities to purchase assets at prices that we think would create long-term value. About 1 year or 1.5 years after the great financial crisis, you saw us buy a lot of assets. You were part of the industry then, so you remember that. We are only 4 months into the pandemic. It feels like a lot longer, but it's only been 4 months. I'd expect that, at some point, there would be opportunities. Maybe they're development deals that need to be completed or leased up, we're quite good at that. Maybe they're opportunities in retail where you've got outlots on existing retail or big boxes that have closed that we can knock down and reposition as apartments or whatnot. So we're open to all of that. I just answered a question on the share buyback. That's certainly something we'll keep in mind as well.

But it sounds being opportunistic is much more on the deployment of capital rather than trying to narrow the gap if you believe your stock is trading at a discount, selling off a substantial or maybe an insubstantial amount of assets and sort of narrow the gap that way. It sounds like you want to be more externally focused than internally focused.

I'll take your question to mean whether we could sell enough assets, for example, and buy enough stock back to close the gap on NAV. And I guess I'd say to you, I don't see that as possible. I think the company is just too large. And when you start selling assets and start implicating large tax gains, you start to create other issues. You also need to scale the business differently. So I'd tell you, I don't see it as likely that we would do a massive stock buyback in an attempt to kind of close that NAV gap. I think what you're likely to see if we do a share buyback is that we just think it's a good investment and a good trade and doesn't preclude other opportunities because that's the big thing on REITs. Because you're using capital that you're either borrowing or you're selling assets, you are changing your opportunity set. And you might make it harder a year from now to take advantage of some of those opportunities we just spoke about.

Right. The second question I wanted to ask was just in terms of your commentary around cities and urban versus suburban environments. And I think you made the comment that we shouldn't write off cities, at this point, urban environments. And I wanted to sort of drill down in terms of what's your sort of forecast on when cities start to recover because, clearly, there's been a substantial amount of home-buying in suburban markets. And generally, employers follow talent. And if that talent is leaving the urban environment as evidenced by your trends that you're talking about in New York City and Brooklyn and in San Francisco, why wouldn't the corporations ultimately then move to that over time? And the whole changing nature, too, of where people are living if they're exiting even at the wealthier aspect and moving where those decision-makers may move to. So what gives you the confidence that it may rebound quicker than what the market is expecting?

So we think about that as both a short-term and a long-term question. I mean, in the short run, in some of these dense urban centers, the ones that Michael just mentioned that are pressured, you're certainly seeing people say, "These aren't the urban centers I want to live in right now," because they're not energized, they're not as activated. Over time, the pandemic will go away. When is a really good question, but if isn't. I mean there'll be a point where this pandemic will go away or be lessened. And then these cities will open up, and there'll be an opportunity for people to move back. And I think our sort of resident who, again, is someone who has an average household income of $164,000, who -- a median age of 33 is going to work a long day in the biotech industry or as a lawyer or maybe even as a research analyst, and they're going to get home at 7:00 or 8:00 at night, and they're going to say, "I want to do something with my life. I want to be active and energetic in the market. I don't value just the sedentary lifestyle."

So I think the actions that we're seeing that are hurting us right now in our urban centers are all about the here and now. I think as this pandemic wanes, and again, I can't tell you when that is, but it isn't forever, then there'll be a term and there'll be interest in these markets again because I don't think anything's changed in the long run. There's still huge network benefits. If you're in the content creation business, there's a lot of benefits to being in Los Angeles. If you're in the technology business, there's a lot of benefit to being in Seattle or in San Francisco and the same in the financial field in New York. I think those network benefits, combined with the fact that our demographic tends to value excitement and energy in the urban centers a lot, I think they'll be there.

And work from home is a fair question and all of that. And I think I'd answer it by saying, Michael, you've been to a lot of our properties, even in the middle of the day on a Tuesday before the pandemic, there were plenty of people working from home. I don't think work from home and urban living are inconsistent at all. I think when you're done working from home, you're happy to wander off and do those exciting things that you like to do culturally and entertainment-wise in our markets. So I guess I'd tell you, I am very confident in the long run. What I can't tell you is, because it's a public health matter, is when the pandemic wanes.

Well, I was always jealous of those people sitting in their shorts and t-shirts while we are walking around in suits. So now I have a better appreciation for what they have.

Yes. But we'll see how much fun The Hamptons are in November and how great the Adirondacks are in November.

Don't get me wrong, Mark, I'm ready for an office environment. I can't live at work anymore.

There you go.

We'll take our next question, and that is from John Pawlowski with Green Street Advisors.

Michael, I appreciate the detailed thoughts on the markets. I wanted to talk a little bit more about just New York and San Fran, those markets which are being disproportionately impacted by just employers not coming back to the office. So based on what you see in terms of your scheduled move-outs today in New York and San Fran and just the leading demand indicators, what does the trajectory of occupancy look like in these markets these next few months and trajectory of rental rates as well?

Well, I guess I would say, right now, they've been very consistent, right? So the urban cores of New York and San Francisco and even Boston have been running at a 91%, 91.5% occupancy. And the rates, as I kind of alluded to it, they were bouncing around. We go a few weeks where we find that stability point. So I think our forward outlook for the near term is consistency on that front. We did see some shifts in, like, the migration patterns. So we're looking at forwarding addresses for those people that are leaving us. Both New York and San Francisco were the 2 markets that stood out that saw a change in behavior from Q2 of '20 over Q2 of '19. And New York, typically, we would see about 35% of those residents leaving provide us a forwarding address out of state. In Q2 of '20, that increased up to 50%. And the #1 state that they were going to was New Jersey.

And San Francisco was a little bit different in that we didn't really see a strong uptick in those residents that were leaving the State of California. What we saw is, in the City of San Francisco, we saw a pretty pronounced uptick in leaving the MSA. And really, the #1 place they were going to was Santa Clara County. So they were going down. So we're seeing some changes in the patterns, but I think, from a consistency and operation standpoint, we've been optimizing revenue at this 91.5%, and that's probably where we would expect to see it stay for a little bit.

And John, it's Mark. Just to add, there was something we put on Page 3 of the release that we just want to draw your attention to. We mentioned that the July 2020 results were about equal to the June results. We were trying to talk about the rate of change. So we talked first about stabilizing occupancy in April, and we did that. Then we talked about what's going on with new lease and renewals. And for the most part, Michael, at least for 2 months, we've stabilized. Now we're not suggesting it is a permanent plateau, but it feels pretty good. That's what Michael means by stability. Now we're fighting the concession battle, and we're working through that, and we're happy to talk about that. But it's sort of step by step. And I think the sense that things are in some sort of precipitous decline is not how we feel -- it feels like here at the company. It feels like one thing that we've got plenty of demand, so the occupancy feels okay. We feel okay on what our new lease rate and renewals are going to be, give or take, from July and June being about the same number. And then now we're going to address these concession issues. And again, the markets reopening are key to that.

Sure. I understand nobody knows when the market's going reopen. But I guess I struggle with the consistency tone because concessions are part of the game. And so somebody could argue a lot of folks, private and public operators, are buying that floor in occupancy right now. So I guess the concern is New York in the fall or San Fran in the fall, you start pushing up against occupancies with an 8 handle. So New York occupancy going from 94.1% in the quarter, it sounds like it's 92% in July but new leases declining and then concessions getting worse. So I just -- I'm struggling with the kind of floor consistency tone. It's not just this call, it's other public and private operators out there as well.

So maybe let me just address one thing just on concession use because I think the markets that we've been talking about, just to give you some color, I mean the portfolio as a whole, we have been very consistent. About 25% of all of our applications every single week have been getting some form of concession, and it's about equivalent to 1 month. When you look at New York, New York, we've been running about 50% of our applications receiving a concession. And for us, we're typically at about a 6-week concession in that marketplace and strategically going up to the 2-month concession. San Francisco, it's like 40% of the applications are receiving a concession. We're predominantly at 4 weeks. And every now and then, strategically, we go up to 6. And that's been fairly consistent in our platform for the last month or so, the use of concessions.

And I think as to your comment to the fall, I don't know where we're going to be in the fall. I was kind of alluding to the next kind of 30, 60 days as to how we think the portfolio will play out because we have a little bit of transparency into traffic application volume as well as renewals. At some point here, you're going to sit on the sidelines, so concessions continue to go up. You may just see us park ourselves right at the levels I'm talking about, and you may have occupancy kind of decline in the fourth quarter. But I don't know yet how to kind of think about that. I'm kind of forward-thinking for the next quarter and how we want to run the portfolio.

Great. Great. Last one for me. Could you share what economic occupancy is currently in L.A. versus the physical given the concerns around eviction moratoriums getting extended?

Yes. Hey, John, it's Bob. So for economic occupancy in Los Angeles specifically, and I'm going to give you the quarter number, so Q2 of 2020, we're at 93.7%. That's compared to 94.7% physical occupancy, and so about 100 basis point delta. You're correct that Los Angeles is where we've seen the higher delinquency pattern and that corresponded to the higher bad debt write-off. And while we're at it, if you want, I thought I'd also might talk a little bit about -- because I know in different notes, we've seen kind of comparability related to both kind of concessions, accounting for concessions and bad debt as well, if that makes sense, John, to kind of maybe walk the group through that. When looking at bad debt, because I think there's some comparability concerns or issues, I think it's important that we first kind of take our approach and understand what our policy is. So I wanted to take the opportunity to explain that.

On the residential side, we continue to apply the same policy we've applied for many years, and our policy is as follows. We write off all of our former resident account balances once they move out. So if you vacated the unit, we write it off 100% of anything that you owed us, and those accounts convert to a cash basis. For residents that continue to occupy the units but still owe us money, we write off 100% of their account balance once they reach 3x their monthly rents. So from that point forward, we convert to a cash basis. So we think that's helpful to understand. We also think it's helpful to understand what the net receivable balance is as of the end of the quarter, which we provided in the release.

For residential, our net receivable balance before security deposits was about $11.7 million and after security deposits, it's about $9 million or 150 basis points of quarterly revenues. So in the second quarter, same-store reported revenue growth, which I talked about in my prepared remarks, was reduced by about 1 percentage point overall, consistent with this policy. Going into the third quarter, we expect that the bad debt will remain elevated, as I mentioned, in our residential business. But if collection rates remain the same and consistent, the impact shouldn't be hugely different than the second quarter impact. We continue to remain diligent on writing off those delinquent accounts.

Now nonresidential is a little bit of a different story and is more of a tenant-by-tenant analysis. So we continue to account for that on an accrual basis. But this quarter, as you heard me talk about it, we reserved against pretty much all of the unpaid rent, so effectively converting it to a cash basis. And we also wrote off a portion of the straight-line receivable. We continue to monitor that straight-line, as I mentioned, and that's consistent. That's really more a function of the future prospects of those tenants. And we have a number of those on a watch list. And depending on future conditions that could write off, that could result in future write-offs. So I thought that would be a helpful kind of summary on bad debt because I know, as you guys work through the earnings season, you're going to see a difference in kind of how people think about bad debt, et cetera.

And then finally, kind of the other comparability item you might take note on is just concessions. So I wanted to be completely clear that in our same-store reported numbers, we report in line with GAAP. So what that means is that we run the straight-line concession through the reported revenue numbers. And we've done that for a number of years after a general SEC publication on kind of non-GAAP metrics and encouraging companies to do so. But I'm happy to give you kind of the cash basis numbers by market or in aggregate, like I mentioned earlier. So it was 120 basis points. So we -- so for residential only, we reported in the second quarter a 90 basis point decline. If that was on a cash basis, it would have been 120 basis points.

If you go to market by market, that relationship, so it would have been -- that relationship of being, call it, 30 basis points down, is pretty consistent overall, but I'm happy to kind of give you guys those numbers by market. So Boston would have been a negative 1.7%. New York would have been a negative 1.9%. D.C. would have been flat. Seattle would have been 1.5%. San Francisco would have been negative 1.4%. L.A. would have been negative 2%. Orange County would have been 90 basis points positive. And San Diego would have been flat. So hopefully, that gives you a little bit of color in the call, a little bit of color on comparability items.

Yes. No, that's great. It's very much appreciated.

We'll move on to our next question, and that is from Richard Hill with Morgan Stanley.

Thank you for the details on the bad debt. That was one of my primary questions, and I think that was a very helpful and efficient explanation. I did want to come back to allocation of capital and maybe some of the questions at the beginning. I think there is a case to be made in a lower interest rate regime and against a backdrop where apartment fundamentals probably still remain quite strong over the medium to long term that cap rates can compress. I know there hasn't been a tremendous amount of transaction volume, but I'm curious if you can talk about that. And maybe go back to the previous comments about external growth and maybe you being opportunistic about buying some properties. Does that sort of fit into your thesis on the way you're thinking about things?

Yes. Thank you for that question, Rich. We had a conversation, in fact, and it was a bit of an offhand remark on my part, in the last earnings call, about cap rates potentially going down with treasury rates with the 10-year at 60 basis points. When you look at the spread of the 10-year to prevailing cap rates, it's very high on a relative basis. So I do think a case can be made because of that and because of the very significant amount of capital that, to your point, because of performance long term, wants to get into the apartment business. So I think, again, as we talk to private folks, there seems to be no lack of capital, still interested. They're anxious about their underwriting. They're trying to figure things out. But I think there's a lot of people that when the dust settles will continue to want to allocate capital into the apartment side.

So how that impacts external growth. Well, to get more aggressive on your exit cap rate is what your comment implies. And that means that you got to feel comfortable for us that, 10 years from now, cap rates will continue to be low. So you just have to be thoughtful about that. So for us, the 2 main inputs and; being more aggressive in acquiring assets would be our thought about growth, growth rates of NOI and then thinking a lot at the end about exit cap rates. And right now, we're not in a situation where a lot of external growth is possible. We're certainly not issuing stock at this stock price. So for us, it'd be mostly recycling. And I think, again, we'll have an opportunity to do that because our assets will trade well. Some of them will have renovation possibilities that maybe we don't believe in, but maybe the buyer believes in, which is the case in some of the assets we've sold recently, and then we'll be able to get newer stuff with less CapEx and better growth prospects and, to your point, have opportunities on the capital -- on the cap rate side. I mean if cap rates compress, we're already sitting on $40 billion of real estate. I mean I would hope that, that would benefit us greatly.

Okay. Helpful. Maybe I can ask the question slightly differently or maybe take a slightly different perspective. But I could -- there's obviously a tremendous amount of money on the sidelines with private equity funds. I think, by our measure, it's around $370 billion globally. Would you ever consider partnering with a private equity fund that wants to take a longer-term perspective to maybe demonstrate that your net asset value, where your stock is trading relative to net asset value, is too cheap?

Well, I guess I'm going to have to ask you to be more specific. I mean the company doesn't lack capital. I mean if we had -- I lack, currently, opportunities to allocate capital. And we have a ton of debt capacity. If we could find, say, $0.5 billion of things to buy above what we could sell, we could easily issue debt to do that, and we feel very comfortable doing so. So I don't need anybody else's capital. And I feel on that, at least in the way you said it, we like joint ventures. We have a couple. We do more if they made sense in some way. Maybe it's a risk diversification play. Maybe it's because the PE firm has an opportunity lined up they can't execute on operationally. But I don't know that a PE firm would help us, for example, validate the value of the company. I think people know what the company is worth. I think folks just think that the next couple of quarters will be tough. And so that's what the stock price is reacting to. I'm not sure I feel like there's a lot of folks that are confused about the platform's long-term value.

Yes. No, understood. I was politely trying to ask a question about a take-private because I do think that there is a lot of discussions or a lot of interest from some investors about the lag in REITs and relative to private market valuations and replacement costs. But I assume that's not a question that you'd be willing to address on a public earnings call. So I do appreciate the feedback. That's very helpful.

We'll take our next question, and that is from Nick Yulico with Scotiabank.

Just I had a question first off -- I don't know if there's any way that you have these stats, but I'm wondering if you had an idea of how much of your renter base has a job that is actually an office-using job versus working in a hospital or some other type of industry, which you can't work from home.

We don't really have insight into that. Like, we capture the employer at the time of the application, but we won't have a sense right now. I think it's pretty clear when you look through the properties that a large percentage of our resident base are working from home.

Okay. And sorry, do you have that stat about how much of the portfolio right now you think employees are working from home?

I don't. I do not.

Okay. The other question was just how we should think about a typical summer leasing period, right? I mean you have -- in certain markets, you have students returning to school. You have internships that are created in the summer. You have jobs that are created in September. Sometimes internships turn into jobs, they start in September. A lot of that's happening right now, obviously. So is there any way to kind of frame out how much of that typical benefit from those factors you would get in the summer that probably is not going to happen this time around?

Well, I don't think that there's a way to frame it out. I guess I would tell you, in normal seasonal patterns, we right now are at a high point in rents. So if I look back over the past couple of years, this is about the time of the year where rents are the highest, and then we start a seasonal decline in rent. And on an occupancy front, you kind of have 2 peaks in a peak leasing season. You have this period right now. And then I think what you just alluded to, somewhere right around the end of August into September, you have that other high point in occupancy. And I think what we're trying to understand right now, given just the demand that we see, is we could be just shifting some of this demand. And we could just go longer through September, maybe even into October, where we would start to show greater gains on a year-over-year basis in applications. It doesn't mean you're not going to -- you're still going to be facing pricing pressure. You're still going to be facing concessions in these markets that I've just been discussing, but you still may see a longer runway of the demand profile. And I think it's too early to know if that really plays out, but that is clearly a possibility that could happen.

Okay. That's helpful. Just lastly, I know you guys provided some info on the move-outs in New York and San Francisco, which is interesting in terms of where people are moving. Do you have any stats on when residents are leaving, how many of them when you're looking at -- I don't know if you figure this out from a forwarding address, if you care or not. But how many are moving into a home, whether it's a rental home or a for-purchase home? And then I guess I'm also wondering how it's working right now within your own portfolio, if you're seeing any trends, if you're offering incentives that make it easier to move. The tenant wants to move to a suburban location, you can offer that. Any stats you have on those types of issues?

Yes. So first, I don't have insights as to whether people are moving out to go rent a home. I do get reasons for move-outs. So if somebody is disclosing that they're leaving us to go buy a home, we have that stat, and we have that stat going back in time. We typically run about 12% of those that are leaving provide that reason. Right now, I guess, I would tell you, in the second quarter, we actually went down a little bit for a reason for a move-out to buy a home. But a lot of that is just because, in April, nobody was leaving. And I also believe, in our markets, homes are really expensive to buy. So while kind of we're balancing the move-outs that are occurring, we're not seeing people kind of run out to go buy the homes. We did see an uptick in D.C. and Southern California markets, but it was a small increase in that percent on a year-over-year basis.

And we'll take our next question, and that is from Alua Askarbek with Bank of America.

Just a quick one. In terms of early terminations, I know you guys mentioned Boston, that was an issue early on in the quarter. But have other markets kind of -- recently as more companies announce they are working from home. Can you talk about early terminations?

So you were kind of breaking up on me, but I believe what your question is, is around early terminations or lease breaks. And then based on the recent announcements from a few employers, have we seen anything take place. Is that correct?

Yes. Yes. Yes.

Okay. So first, during the quarter, we did see an increase in early terminations or lease breaks, predominantly in New York and Boston and very much weighted towards the month of April. If I look at the performance for May, June and even through July right now, we really are not in this period of time where we're seeing more people kind of break their leases with us, but we did experience it in the quarter. As far as the recent announcements, I think it's too soon to understand. It's something we're clearly watching right now. As Google just made their announcement extending kind of return to the offices until the summer of next year, it's something that we'll be watching in the South Bay and the City of San Francisco to see if we see kind of those individuals kind of leave early. But it's also most likely going to put a little pressure on the renewal conversations. And I still think, in a week, it's too early for us to see any pattern from that.

Yes. I'll just add, and this is just anecdotal. There are a lot of folks that, as the summer wanes, is going to want to be back in their normal routine. It's certainly not a bad thing, especially when cities are this deactivated to maybe be in some other remote location for those who can afford or are able to do so. But it's a good number of people. And I can tell you I attest to a 20-year-old who lives in my house, who's very anxious to get out of mom and dad's house and go back to her life in one of the big cities. So I think that we're also going to see almost, no matter whether the employers want it or not, a stream of people that are our kind of residents slowly deciding that they've had enough of where they are, and they're interested in, again, trying to be in a little bit more activated environment to potentially see a little bit more of the city that they move to for a reason.

So again, I can't predict, maybe the pandemic gets worse and that slows down again, but we've had pretty steady demand. And I think Michael and I are of the general opinion, without certainty being associated with it, that the leasing season will extend itself, but it won't necessarily be vigorous going into the Q3, early Q4 period.

And we'll take our next question, and that is from Rich Anderson with SMBC.

So Bob, I just want to just make sure -- to simplify the talk about bad debt. There's 3 buckets every month or every quarter, right? There's the 97% collection rate. And then of the remaining 3, there is a deferral that is recorded as collected in the month and then the bad debt reserve. Those are the 3 buckets that we have to deal with depending on the period in question. Is that correct?

Yes, that's correct. And I would add that the bad debt reserve isn't just the allowance for doubtful accounts, it's also the write-off of any resident who would have moved out during the period as well.

Understood. Okay. I just want to make sure that was clean. Talking a little bit -- Michael, when you were kind of going through the offer of 1% and getting minus 1% on renewals, I'd like to maybe sort of throw out a word or the concept of maybe pushing too hard there. And if you think about the math, is it greedy to ask for 1% when, if you don't keep them, you lose the resident, you have downtime, you have cost of re-leasing the space, and then you take an 8% hit to that because it's a new lease and you need to do that to get somebody in the unit? So I'm wondering if you see equity residential becoming a little bit more willing to negotiate downward, so you avoid some of these dynamics and take your lumps by renewing at perhaps a lower lot number than you're doing so far today.

Yes. Well, I guess I'll point out. So first and foremost, the 20% that I cited that was receiving some form of increase for July and August, those are residents that are actually kind of below Street today. So that's why those increases are going out. And the willingness to negotiate, I mean, that is part of our renewal process. And we're going to make sure that we are always being cognizant of what that replacement rent is going to be. And as we're working through these negotiations, I mean, we go back to the fact that -- listen, the largest thing that people want to avoid is moving. The #1 reason. They tell it. They just don't want to move. So they want to work with us.

You want that, too.

Yes, exactly. So we're -- but we're being very sensitive to the situation right now, especially to those residents that have been financially harmed, and we're working with residents through this process. So I think right now, just looking into August and even into September, I think our increases are going to stay in this 1%. We have pockets in that suburban portfolio where we can actually start pushing rents up a little bit. And those increases will start to grow a little bit. But at the same point, you got pressures that are balancing this out. So I think the process is very fluid, and I agree with your point fully, and I think the way we execute is following the mindset that you just shared.

Okay. Fair enough. And then last question for me. To Mark, you sort of doubled down on urban in 2016 when you sold to Barry Sternlicht the suburban portfolio. And it is -- so now we're in this mess. And you're 55% urban, 45% suburban based on your definitions. I'm curious if EQR, being the opportunistic entity that you described, would be willing, if the market sort of allowed for it, if the transaction market looks attractive and that's not to see urban go down as a percentage of total but go up because you believe so fully that urban is going to come back because people want to be there, could that 55% go to 65% rather than to 45% is my question.

Yes. Rich, we're open to buying urban or suburban. We talked about selling Manhattan. We buy Manhattan. We bought 2 assets in the suburbs in New Jersey, and it's just got to make sense. I mean -- and it has to make sense 2 ways. The property has to make sense, the underwriting of the actual asset. And that has to make sense in terms of our total exposure. If there's any small regret we have, it's just in some submarkets, like the Upper West Side in New York, we just had a lot of units. We like New York. We didn't need them all to be in one little area, and so we're just trying to spread out a little. And that's been sort of the theme of the last few years is being in our markets but being spread out a little more. So if there was an urban asset that underwrote, we wouldn't hesitate to purchase it. It just has to make sense relative to our allocation in that submarket already.

Would you say 55% is more likely to go down or up in the next couple of years?

I was hoping that we would grow and that the urban wouldn't shrink as much as the suburban would grow. But I would think -- we'll get rid of a few urban assets here and there. And there's some older suburban stuff. In fact, this quarter, both the assets we sold were suburban properties. They were older, 50-plus year-old suburban assets that were renovation plays but weren't, from our perspective, ones that we wanted to undertake.

And we'll take our next question, and that is from Haendel St. Juste with Mizuho.

I'm running out of good ones left, Rich just took one of my better ones. Hey, I wanted to ask about the cost control. I wanted to ask you about cost control. You mentioned that there's just some things you're doing here in the quarter to help same-store expenses and expect that to continue beyond the COVID period. Can you add a bit more color commentary around that? And maybe on top of that, some comment on tech investments and just quantifying what the opportunity here is or how we should think about the potential savings either on a dollar or impact to same-store expense basis over the next couple of years.

Great. I'll start on the dollar piece, and I'm going to have to take you back a few months before COVID to kind of give you a good frame of reference, to be honest with you, I think, to give some color. But we had excellent expense control in the second quarter. And as I kind of mentioned in my remarks, a lot of that came from the initiatives that Michael has talked about. So it is the ability on our frontline, kind of leasing and admin and other things, to convert to a more digital platform, to do virtual tours, to be more efficient, to understand our employee utilization, et cetera. And that certainly helped in us achieving our goals in terms of our on-site payroll reductions, right, via attrition. So that was incredibly helpful.

We also, in R&M, experience benefits through the deployment of our mobility for our service personnel and our ability to use them as well. And so that impacts the payroll line and the R&M line because it helps your decision-making in terms of staffing. So you can staff internally as opposed to using contractors, et cetera. What gets a little bit tough, right, is that there were other things going on related to COVID in the quarter. And so there was some deferral of expenses and some incremental expenses that I mentioned in both of those categories. But overall, I think from a sustainability standpoint, we're running, call it, 50 to 75 basis points ahead or lower in expense growth than what we would have thought at the beginning of the year before COVID ever occurred. And that's a real positive, and it's really those 2 items that I was talking about.

Yes. And I think your other question was regarding tech investments. So I think, first, we are involved in 2 different tech funds, one with Fifth Wall and one with Davita's, which really kind of just helps us stay on top of the new technologies that are emerging, not only in our own industry but really other industries to see the applicability for us. And I think this is still an area that we're pretty excited about on a go-forward basis that there's still opportunities out there to improve the efficiencies of the operations in these platforms, and it will come from technology. I think later this year, we'll be deploying kind of our sales technology piece, which is moving 100% of our sales process to a mobile app, and we're beginning piloting that shortly. Similar to what we just did on the service side of the business, you'll see us continue to move forward and explore kind of building access, smart home access. So there's still a lot of opportunities for our industry to advance technology to increase efficiencies.

That's helpful. And Mark, you mentioned earlier, I understand there's a few transactions on the market that have closed here. They were likely done or they were negotiated pre-COVID. Curious if you're hearing or seeing anything in the shadow market. What buyers are underwriting right now, maybe what IRRs they're targeting? And then curious on when you think New York City NOI returns -- same-store NOI returns positive. Is that 2022? Or should we be looking at 2023 here?

Right. Well, in terms of what other folks are underwriting, I would say, the first question I had for the Chief Investment Officer over the course of the quarter was, are we seeing more from brokers? Is there actually shadow stuff going on? And the answer is there's very little going on right now. So there doesn't seem to be like there's this pent-up desire to sell assets in the apartment business. There's not a whole bunch of stuff that the brokers are looking at and hoping to get out soon to the marketplace. So I don't know if I have any insight into how other people are underwriting, except that when we talk to private equity sponsors and other private real estate investors, they continue to be very interested in the space. Now whatever turbulence we have right now, it's not dissuading them from long-term interest in our space. So I think that's good.

In terms of hazarding a guess on New York, that requires a couple of things. I mean, next year, you're going to be pretty aggressive on real estate tax appeals in New York because taxes in New York for properties are in part based on their incomes. And certainly, we're going to all have different incomes than we had hoped for, for 2020, and we'll be looking like we did in the Great Recession for relief. And we obtained that relief in our markets, and we would hope to do that again. I'm not sure that's going to change '21. I mean there's a certain trajectory, and your question implied it, these quarters -- because of the rent rolls deteriorating, the quarters will keep getting worse for a while. And then that sort of rate of change on some of these new lease and renewal numbers will change. And then the whole thing will turn around. And that just takes time. So I really can't hazard a guess on when New York changes, especially when you talk about NOI because that implicates for New York property taxes. So in New York, it's very hard for me to think about how that might, but I would hope that they would be less of an increase or a little bit of a decrease in '21.

We'll take our next question, and that is from Alex Kalmus with Zelman & Associates.

When looking at your concession results, are concessions consistent across a studio, 1-bed, 2-bed product? Or are they overexposed to the 1-bedroom products?

Well, I guess I would tell you in the urban cores, they're pretty much sitting on most of the unit types there. We are seeing the lowest occupancy in our studios, specifically in like Downtown or Manhattan areas, City of Boston. Those unit types are pressured. But the concessions right now are pretty much across the board on unit types. The ones that are being used, I think the demand coming in, we are seeing demand for 1 bedroom. We're also seeing demand for 2 bedroom. So I think the concessions flowing through to the revenues are probably slanted more towards the 1 and 2 bedrooms than the studios just because the application count on studios is not as high.

Got it. Makes sense. And just taking a 3- to 5-year view, considering the shifting demographics and the millennial, older cohort moving to the suburbs potentially for single-family homes because they're now having kids, and a softer Generation Z coming up, would you rather be overweight any one of these products in particular?

So it's Mark. I guess I like having a variety of these. I mean I think studios have an advantage of being the lowest-priced ticket. Though the pandemic, again, feels like it's gone on forever and will continue, at some point, it won't. And then people who are new to a market and new to their job and maybe working their way up as a professional will look to a studio as a great way to get entry into the big cities. So I'm happy to own a little bit of a variety of these products. I wouldn't want to own all 2s, all 1 bedrooms, all of anything. And so we've tried to be thoughtful about low tickets. So we do have a good number of studios and 1 bedrooms in the markets, but we do have plenty of 2s and few 3s.

These large-unit types are hard for us to clear. I'll tell you, consistently, we have a harder time renting 3- and 4-bedroom units in our buildings, and they tend to be competing against luxury product and condos and stuff. So I think studios, 1s and 2s are where it's at for us, and I'd like a nice mix of that, notwithstanding your comment. But I would point out, I mean, Gen Z is a very large group as well, and we don't know their preferences. But I have a few of them living with me, and they talk a lot about both moving out of my house and moving to a city.

We'll take our next question, and that is from John Kim with BMO Capital Markets.

You guys mentioned a limited amount of concessions that you're offering on renewals. I have noticed that you changed your definition on renewal rent growth to no longer be an effective growth number. And I'm just wondering why you changed that definition.

So we haven't changed the definition. We've always given renewal rate growth, excluding concessions. And we also have given new lease, excluding concessions, as well. What we gave you instead to give you a concept -- and in the past, to be honest with you, the concessions were so immaterial that neither one of those numbers or the blended rate would have been any different. What we gave you, in addition this quarter, is we gave you the effective blended lease rate, which is with the impact of the concession. So you can see the blended impact with and without concessions.

Is that something that you could break out going forward by market?

So your request is to see renewal rates by market, net of renewal concessions?

Well, I guess, just the effective rental growth rate by market, which would be...

The blended rate.

The blended rate, correct.

Sure. We'll take that one, John.

Yes, we can take that.

Have you discussed your plans for your retail or your nonresidential part of your portfolio? Do you plan to just lease kind of that as retail? Or is there a potential to convert this to other use?

Yes. I mean we're still working through things with our retail tenants. We're hopeful we're able to save a few of those folks as the cities try to reopen. But one of the conversations we've had as a group several times now is in properties, and this alludes to the question Michael just addressed a moment ago, in these markets where we do have buildings that have studio apartments, could we repurpose the retail as office space for those studio folks, as amenity space they could go to, a lounge of sorts, is that something that would be useful. You wouldn't need to put a lot of TI in that. That's just some lounge furniture and really good Internet connection. And again, not office space for the general public, but could you get a change of use in that retail. And that would likely require rezoning, and so it's kind of easier said than done. But that is intriguing to me.

As you see retail footprint shrink in general, the idea of having unsightly vacant retail isn't very appealing. And the idea of taking on additional retail risk isn't that exciting. So maybe there's an opportunity here to be of service to our existing residents, put our square footage to use. So that's one of the ideas we've been kicking around.

We'll take our next question, and that is from Alexander Goldfarb with Piper Sandler.

Mark, certainly appreciate your comments on the premature obituary for urban, certainly a healthy discussion. But you brought up an interesting point of your children living at home, looking to get out and live in the cities. Right now, you guys said your average age is 33 with average income of, I think you said, $160,000. If there's sort of a shift here where that older demographic sort of moves out and buys homes, and then the cities are still populated by the young singles, do you feel that your portfolio, as it's positioned right now, the price point is commensurate to, let's say, a late 20s crowd that's not earning that $160,000, that may only be earning, let's say, upper 90s or 100s? Just sort of curious if there's a generational shift, how you feel that your portfolio would line up to that from a price standpoint.

Yes. I'd start by saying, for example, in New York City, only 10% of our residents have children, so notwithstanding the age list you had. We also have people in their 20s who are earning a good living or people in our 1-bedrooms who are 2 people, right, they're a couple living there. So I guess that's certainly a theory, but it's not anything we've sort of seen. I mean these are really deep. When you look at the number of people in these markets making over $100,000 or $150,000, that's one of the things that's really exciting about our markets, is it's a really big group of people. When you go to some of the smaller markets, you have good growth of that number of high earners as renters, but it's just a small absolute number, Alex. And I worry that most of those folks are going to buy homes anyway. So I guess, I'd tell you, I appreciate the theory. I've not seen any evidence of it. And our demographic doesn't tend to be like seemingly that anxious to buy a home.

I mean we're seeing a little in New York, as Michael said, folks moving out of New York City and out of New York proper, but they're mostly moving in New Jersey. And I wonder if -- when they get the all-clear sign, some of them don't go back to Manhattan. So I just -- I'm not as convinced as you are that this is some sort of permanent change the pandemic has wrought. I think the pandemic has put a lot of people on their heels about living in an urban environment right at the moment, especially in the summer. And I think people will constantly reappraise that decision. I mean I lived in the city for a reason before.

Okay. And then the second question is just thinking to the November election. Clearly, New York underwent a change when Democrats took over Albany in 2018. Given some of the rhetoric on the progressive platform, do you guys have concerns about increased regulation on housing and moratoriums and rent control, et cetera, if the Dems win the Senate and the White House? And how do you think the industry is sort of preparing itself based on lessons learned over the past few years?

Yes. That's a good question. I put aside the party labels and the rest and just speak to policy. I mean I do think that additional regulatory burdens, and there are a fair number of those that are being added in our markets, some of them are related to this valid COVID emergency and some of us -- some of them seem almost opportunistic by activist groups to me. These are just going to restrict the amount of investment in housing. And that's the message we're trying to get across that these limits you're putting in place, which kind of feel emotionally good to some folks, are just not going to work, that they're going to end up with housing that's substandard, there's going to be less built, that it's all bad. And some of these ideas, again, and I think it's in the House package, so I believe it's a Democrat idea, is to give the states money in bulk grants for the states to pass out directly to landlords of folks that are under stress from COVID.

So again, I don't know what will end up in the final package. But I think the idea of upholding the system and encouraging it to produce additional units, so I'd say what the industry is doing right now is trying to do a little bit of an education campaign to have conversations with people about what's effective regulation and what isn't and then trying to help think that through. Could there be some zoning reform, could there be more affordable units built with market rate, could we address it that way as opposed to these sort of rent regulations, some of the other stuff that folks have floated, that economists universally say it's going to end up creating more problems than solutions for sure.

Thank you. There are no further questions at this time. I will now turn the conference back over to Mark Parrell for any closing comments.

We thank you all for your time on the call, and have a good rest of the summer. Good day.