Equity Residential (NYSE:EQR) Q2 2022 Earnings Conference Call July 27, 2022 11:00 AM ET
Company Participants
Marty McKenna – Investor Relations
Mark Parrell – President and Chief Executive Officer
Michael Manelis – Chief Operating Officer
Bob Garechana – Chief Financial Officer
Alex Brackenridge – Chief Investment Officer
Conference Call Participants
Nick Joseph – Citi
Chandni Luthra – Goldman Sachs
Steve Sakwa – Evercore ISI
John Pawlowski – Green Street
Joshua Dennerlein – Bank of America
Brad Heffern – RBC Capital Markets
Adam Kramer – Morgan Stanley
Nick Yulico – Scotiabank
Michael Goldsmith – UBS
John Kim – BMO Capital Markets
Rich Anderson – SMBC
Haendel St. Juste – Mizuho
Alexander Goldfarb – Piper Sandler
Pedro Cardoso – TCW
Operator
Good day and welcome to the Equity Residential’s 2Q 2022 Earnings Conference Call. As a reminder, today’s conference is being recorded. At this time, I would like to turn the conference over to Marty McKenna. Please go ahead.
Marty McKenna
Good morning and thanks [Technical Difficulty] to discuss Equity Residential’s second quarter 2022 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. Alex Brackenridge, our Chief Investment Officer, is here with us as well for the Q&A. Our earnings release is posted in the Investors section of equityapartments.com.
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 will turn the call over to Mark Parrell.
Mark Parrell
Thank you, Marty. Good morning and thank you all for joining us today to discuss our second quarter results. In a minute, Michael will walk you through a performance update by market, then Bob will discuss our guidance improvements, update you on how our innovation machine continues to hold expense growth down in an increasingly inflationary world, and then Bob will close with some color on our balance sheet and then we will take your questions.
Equity Residential had a tremendous quarter. Our business continues to benefit from terrific supply and demand dynamics, including excellent job growth and household formation. Our urban and dense suburban portfolio continues to be a magnet for our affluent renter demographic as demonstrated by our 96.7% same-store physical occupancy. We also believe that the desire for more space due to work from home and COVID-related health concerns has resulted in significant incremental household formation, creating additional demand for our properties.
Also, housing alternatives remain expensive and in low supply. Single-family home prices reached record levels in 2022 while rising mortgage rates have further stressed affordability, particularly for first-time homebuyers. Single-family housing starts are declining. Existing homeowners are more reluctant to sell due to low locked in mortgage rates, along with minimal and expensive for sale replacement options and competition for homes from investors remain strong.
The near-term apartment supply picture also remains favorable. Starts within close proximity to our properties in our coastal markets are still at or below pre-pandemic levels. In addition, it seems likely to us that over the next few quarters, new apartment starts should decline due to reduced availability and higher pricing of construction financing, increasing construction costs and continued supply chain disruptions, lengthening construction times and increasing developer risk.
Recently elevated inflation numbers are certainly a concern, especially if efforts to rein in inflation lead to much weaker job growth. On the positive side, our affluent renter base should be able to better weather rising inflation in part due to lower relative rent-to-income ratios and higher amounts of disposable income. As in the past, if inflation does persist, we would expect the apartment business to perform relatively well. As we look at our resident income, the average incomes for our residents who sign new leases with us in the last 12 months is 13% higher than the group who signed with us in the 12 months ended June 2021. These new residents are paying us approximately 19.8% of their incomes versus 19.2% last year in rent. They are not rent stressed and they are willing to pay these rents to live in locations that support the lifestyles they seek to enjoy.
On the larger topic of affordability, we see a continued need for more workforce housing and continue to support market-based affordable housing supply solutions, including zoning reform, public-private partnerships and other programs that assist in affordable housing preservation and creation. As part of this support and in addition to the more than 2,600 apartment units that we already operate in affordable programs, we have funded about half of our $5 million commitment to a privately held affordable housing preservation fund that expects to preserve approximately 1,600 affordable housing units when it’s fully deployed.
Now, switching gears to the investment side of our business, we saw a material slowdown in the transactions market during the quarter. Higher interest rates, especially for the floating rate debt used by many value-add buyers as well as general uncertainty about the path of the economy and evaluations led most buyers to pause. We did recently close on the sale of 2 properties in New York, 1 property for $266 million at a 3.3% disposition yield in the second quarter, and another New York property for $415 million at a 3.4% disposition yield this month. The properties are adjacent to each other on the Upper West side. Both properties represent pricing contracted for before the recent volatility in the apartment transaction market and our continuation of our stated strategy of lowering our New York market exposure.
As we have said before, we will continue to have a meaningful exposure to the New York area, but intend to better balance our urban versus suburban exposure in our established markets like New York, while adding over time to our exposure to our expansion markets, which are attracting increasing numbers of affluent renters and have lower regulatory risks. For our part, we are very comfortable letting the transaction market sort itself out and have reset our transaction guidance so it reflects only buys and sales completed to-date plus one smaller disposition that is under a long-term contract that should close in the fourth quarter. While apartment values are not immune from the more general revaluation of risk assets going on across all asset classes, we expect apartment assets to remain in high demand from institutional buyers and for rising NOIs to partially cushion increases in cap rates. We have the balance sheet and the team ready to take advantage of any opportunities we do see as we have done in the past.
Moving on to development, we started two new developments in the quarter. The first project is $153 million densification of an existing property we own in Santa Clara, California, about 1.5 miles from Apple’s headquarters. We will be demolishing 40 units in buildings built in 1972 in a highly desirable area, with little supply of high-quality rental housing and replacing them with 225 new units plus significant amenities that will benefit the remaining 224 units at the property that are undergoing renovation. We are very excited about this project and expect a 6% development yield when it stabilizes.
At a cost per unit of about $675,000, we also like our basis as compared to recent sales comps. We are also pleased to have started this quarter, our first development project with Toll Brothers. This $82 million, 362-unit project is being built just west of downtown Fort Worth, Texas in a rapidly gentrifying area with good access to job centers and to the increasing number of nearby lifestyle amenities like restaurants, bars and entertainment venues that are appealing to young well-off renters. We expect to build this property for about $225,000 per unit. We like our expected basis and we love working with a high-quality, financially strong developer like Toll that has the experience to capably manage construction and a climate with significant inflationary cost pressures. That said, this deal is approximately 75% bought out, reducing our risk. On current rents and costs, this deal has approximately a 5.5% development yield.
And with that, I will turn the call over to Michael.
Michael Manelis
Thanks, Mark. Let me start with a huge shout out to the entire Equity Residential team for their continued dedication and hard work. They remain relentless in serving our customers and working together to deliver the strongest results in the history of our company. As expected, we had a very good second quarter. Resident turnover remains at all-time lows with strong demand driving robust pricing power and high physical occupancy at 96.7%. Pricing trend, which is the net effective price of our units inclusive of concessions, has grown almost 10% since the beginning of the year, which is well above the 6% range that it historically characterized a very good year. This pricing strength has contributed to an unprecedented new lease change with July expected to be about 16.5% and a significant loss to lease of 12.5%.
July’s moderation in the new lease change is less than we expected and is caused by a more challenging 2021 comparable period, not a loss in operating momentum as our sequential rents continue to grow. Our current position will contribute to continued above-average second half revenue growth and strong embedded growth for 2023.
Our residents are well employed, and as Mark just mentioned, seeing their incomes rise. The unemployment rate for the college educated continues to be below 3%. And while we see the same headlines that you do about slowdowns in hiring or even layoffs, we are not seeing any impact on new leases or renewals. Our operating dashboards continue to flash green. Given the amount of hiring that the tech firms have done over the last few years, even with the moderation, they are still employing more people than they did pre-pandemic.
The tenure of our residents has also improved to 2.3 years on average compared to 2.1 years last year and we are losing fewer and fewer residents to home purchase as single-family homeownership gets more and more challenging. In fact, in the second quarter, we had a 22% decrease compared to the second quarter of ‘21 in the number of residents who moved out to buy a home. We remain aware of the economic headwinds and we will position the portfolio more defensively if need be. But given the significant loss to lease, strong retention and healthy demand we are seeing, we remain optimistic. That said, as is true every year in our business, we expect rent growth to peak and then moderate seasonally in the summer, but we are happy to report that has not yet occurred. In sum, our operating metrics and forecast for the balance of the year remain beyond historical norms and Bob will provide more color on the building blocks of our revised guidance in his remarks.
Let me take a minute and provide some color on market performance. In Boston, demand ramped up in both the urban and suburban submarkets driving a 90 base improvement in physical occupancy over the first quarter along with robust pricing power that came earlier in the season than usual. Rents have begun to moderate in this market. However, it is not uncommon to see modest reacceleration in August as students typically return then and are an important source of demand for our portfolio. We are definitely bullish on the second half performance, particularly in the suburban submarkets and remain cautiously optimistic on the city of Boston and Cambridge’s ability to absorb some of the new units that are scheduled to be delivered later this year.
The market continues to have strong employment with life sciences continuing to expand their footprint. New York continues with very healthy pricing power and demand. After significant impact from the pandemic, New York same-store revenue and NOI are now fully recovered back to 2019 levels. Physical occupancy is 97%. New lease change and renewal rate achieved were robust in the second quarter, with a vibrant environment continuing to attract our affluent renter demographic who is well employed and can afford to pay our rents. Despite these rental increases, our new residents are still paying us only approximately 18% of their income and our data indicates that our rents in this market have grown more slowly over the last 3 years of our new renters.
The Washington, D.C. market continues to perform well, with physical occupancy at 96.7% and good growth in both new lease and renewals in the quarter. The absorption of new supply was good in the first half of the year, but we are keeping an eye on it as the year progresses. There are more than 12,500 units being delivered in 2022 with over 7,000 of them coming in the back half of the year from a competitive leasing standpoint. The absorption rate slowed a little bit in the second quarter, but still remains very strong and at current level, should support continued pricing power.
While this market has historically shown high levels of supply, it is also one of the most resilient in the country during periods of uncertainty. The D.C. area unemployment rate has returned to pre-pandemic levels and sits below the national average with good growth in the professional services and education health categories, where many of our residents are employed.
Heading West, Denver has solid demand and good pricing power, stronger occupancy in the suburban portfolio and we expect some pressure from new supply in the downtown submarket. The Denver job market continues to enjoy healthy growth across a number of sectors, including the professional and business services.
In Seattle, continued improvement on the quality-of-life issues is helping drive the comeback in the city, which now has rents that are just over pre-pandemic levels. Physical occupancy is above 96% and we continue to see strength in new lease rates and renewals. Concession use is isolated to the city and continues to moderate with approximately 20% of our applications receiving just under a month. This is down from over 50% from the first quarter and occupancy in the downtown submarket is now just over 96% as compared to 93% in March. Supply impact for us in 2022 is limited to our high-rise communities in the city, while 2023 shows less direct competition from new supply overall. This market continues to demonstrate high wage job creation. And while job postings from the major employers did moderate this quarter, the number of available positions is still near all-time record highs.
The San Francisco market continues to improve with high occupancy supporting growth in both new lease and renewal rents. The issues around quality of life are improving, but Downtown San Francisco is still taking more time to return to pre-pandemic conditions than other markets across the country. Remember that the city was one of the last areas to ease COVID rules and just recently stepped up its focus on crime issues.
While rents continue to be below pre-pandemic levels in the downtown submarket, they are working their way back. All of our other submarkets in San Francisco are at or above pre-pandemic pricing levels. Overall, I would say we are very optimistic on current trends in San Francisco, but have an eye on new supply that is expected to be delivered in the back half of the year and could erode pricing power if demand slows. Finally, Southern California continues to perform well, with physical occupancy at nearly 97% driving strong rental growth in both new lease and renewal rates.
Specific to Los Angeles, the market is seeing elevated new supply as compared to the past several years, but the overall market remains undersupplied. Even in submarkets like Koreatown, where we expected pressure this year, the new supply is being quickly absorbed, leaving us better pricing power than we anticipated. On the delinquency front, we saw modest improvement in the second quarter in the payment behavior of our residents and continued rental relief receipts. As we look into the second half of the year, we don’t expect rental relief receipts to be as material, which will lead to revenue growth moderation despite strong continued fundamentals.
Before I turn it over to Bob, I just want to give a quick update on some of our innovation initiatives. Innovation is a major contributor to our ability to create operating efficiencies, while continuing to maintain a high level of customer service. Despite meaningful progress, we continue to have a lot of opportunity ahead of us as we integrate our initiatives, continue to leverage technology and advance our overall skill set. Just over half of our properties now operate without fully dedicated staff. We continued to invest in and implement software and processes that further enable the autonomous leasing experience, allowing customers to tour a community and interact with a member of our team or our AI leasing agent as much or as little as they desire. Self-guided tours continue to dominate as a preferred tour option, with just about 90% of all tours in the second quarter being self-guided. We are extremely excited about the future as we innovate to maximize revenue and minimize expense growth, while continuing to provide a great experience for our residents and employees.
I will now turn the call over to Bob.
Bob Garechana
Thanks, Michael. A quick comment on the quarter before moving to guidance on the balance sheet. Q2 normalized FFO was $0.03 above the high-end of our quarterly guidance range. This beat was almost entirely driven by better same-store NOI through a combination of better revenue growth, including lower bad debt expense and modest overall expense growth.
Now, for our revisions to full year guidance, as you saw in the release last night, we significantly revised same-store revenue and normalized FFO upwards while maintaining our existing same-store expense growth guidance. Starting with same-store revenue, strong first half performance, coupled with the constructive ongoing operating environment has led us to raise our same-store revenue projections above the top end of the prior range. We now expect our same-store revenue to grow between 10% and 11%. Our new 10.5% midpoint sits at 150 basis points higher than the prior midpoint driven by continued stable physical occupancy of 96.5%, record resident retention and earlier as well as stronger pricing power, both the new lease change and renewal rate achieved across all of our markets, but particularly in New York, where recovery from the pandemic has been a positive to the upside.
Our revised full year same-store revenue guidance implies a slight deceleration in same-store revenue growth in the back half of 2022. This is the result of the significant governmental rental relief payments we received in Q3 and Q4 of 2021 and the almost complete absence of relief payments we expect to receive from the rest of this year, not any expectation of a slowdown in the core business.
We expect third and fourth quarter same-store quarter-over-quarter revenues without the impact of rental relief payments to be more in line with the reported Q2 number. On the expense side, we left our already strong guidance unchanged with June year-to-date expense growth of 2.8% and a number of innovation initiatives underway, we feel confident in our ability to deliver second low expense growth for the full year.
As you can see in our reported results, both real estate tax growth and payroll are aiding in our ability to accomplish this goal with some offset in utilities and repairs and maintenance. We remain laser-focused on reducing or eliminating exposure to inflationary labor pressures, whether we feel the impact from our own employees through the payroll line item or from contractors through the repairs and maintenance line. We strive to reduce any pressure from higher efficiency and better decision-making along with utilization of technology that can eliminate or permanently reduce labor hours needed.
In a category like utilities, we do our best to maximize our resident reimbursement income, reduce usage through both education and technology initiatives and hedge our commodity exposure. Thus far, our approach has significantly buffered growth, but we acknowledge this is a long game if the current inflationary environment continues. Putting it altogether, the revenue and expense adjustments that I just outlined resulted in a 225 basis point increase for same-store NOI at the midpoint. For normalized FFO at the midpoint our guidance changes added nearly 3% or $30 million to normalized FFO growth, which results in an approximately 18% increase year-over-year for the company.
A final note on the balance sheet before Q&A. Equity Residential continues to have one of the strongest balance sheets in the REIT sector, characterized by low floating rate exposure and a long weighted average maturity. Subsequent to quarter end, we sent a notice to redeem the $500 million secured unsecured notes that are due in 2023 with proceeds from the dispositions of the two New York properties. This use of proceeds will mostly offset the normalized FFO impact of net dispositions for the year while also significantly reducing our refinancing needs in 2023. There is no prepayment penalty associated with the payoff, but there will be a modest write-off of historical discounts and costs, which is estimated on the guidance page. This write-off will be included in EPS and FFO, but not in normalized FFO.
With that, I’d like to turn the call over to the operator to begin Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And we will take our first caller from Nick Joseph with Citi.
Nick Joseph
Thanks. Mark, you touched on the transaction market a bit in the pause that you have seen there. If you were to estimate, how much do you think asset values have moved and maybe cap rates as well, obviously, NOIs are up? And then are you seeing any difference between markets maybe between expansion markets and some of your established markets?
Alex Brackenridge
Hey, Nick, this is Alex. Well, as you know, the market is certainly unsettled right now and there is a lot of a feeling out process going on. So, there have been some transactions that closed. Some of those though were hard prior to the rate hikes, some of those maybe a buyer had 1031 needs. So, it’s a little hard to get great clarity on that question. But clearly there is these countervailing forces that you mentioned interest rates up, economic uncertainty offset by just these tremendous property operations. So, I would say somewhere 5% to 8%, maybe up to 10%, where we are certainly seeing buyers scrutinizing things that might have a little bit of hair on them, maybe a lesser location, maybe a physical challenge that they might have overlooked before. So the range could get higher, but we also don’t see a lot of distressed sellers, which lot of people are happy to keep enjoying the great performance that their properties are generating. So, it’s a bit of a range, but we will see how it plays out, particularly come fall. It’s a little slow in the summer as it typically has been.
Mark Parrell
And just to supplement that for just a second is just talking a little bit about replacement cost. I mean, that’s a big differentiator. It’s a mark between the coastal markets where the premium to replacement cost and a lot of assets were sold at was not significant or even in places like New York, there was little bit of a discount. And in some of the Sunbelt markets where there was a pretty significant premium to replacement cost and you saw us really slow down our activities when we – acquisition activities, when we saw some of those premiums go up into the 20%, 25% and up range over current construction costs. So, I guess one of the things, Alex and I am going to be looking at as we think about starting to buy machine up again is those markets – those Sunbelt markets start to make more sense on a replacement cost basis. That maybe because construction costs keep going up, that maybe because values come down a little bit but that is another input that’s important. And it was one of the things that made us go a lot slower towards the end of last year and the beginning of this year, Nick.
Nick Joseph
Thanks. That’s very helpful. And then maybe just on operations, you talked about July rents accelerating in the more challenging year-over-year comps and kind of the normal seasonality that we have seen historically, but maybe not yet. How is guidance thinking about kind of pricing in or kind of contemplating seasonality in the back half of this year?
Michael Manelis
Yes, hey, Nick, this is Michael. So I think right now, where we sit and I said this in the prepared remarks that the moderation that we saw in some of the stats in July is actually kind of much less than we expected and that’s really just given kind of the speed of that concession burn-off and rate growth from last year. And when we started looking at the modeling for the back half of this year, we are kind of just assuming normal kind of seasonal trends. And we have data going all the way back to 2008 to benchmark this rent seasonality that includes like the exact week when rents peaked each week, each year. And when we went back and looked and I said this in the prepared remarks, our rents have not peaked yet. And you see it over the time where you have had years where rents peaked in early July, all the way until like the very first week of September, but the most common kind of peak week has been somewhere in that first or second week of August. So as we were modeling kind of we just assume we are going to have rents peak somewhere in this first or second week of August and then have a normal kind of trail off in rents until you get to that January period.
Nick Joseph
Thank you very much.
Operator
Thank you. And next, we will move on to Chandni Luthra with Goldman Sachs.
Chandni Luthra
Hi, good morning. Thank you for taking my question. Mark, could you talk about some early reads, give us a lens into 2023, how should we think about the earn-in given just really strong back half that you are seeing right now, especially if we go into a tougher economic scenario like how should we think about the business and the cadence in 2023, because we obviously have a very good starting point and a foundation, but what if things get really bad from a macroeconomic standpoint?
Michael Manelis
Yes. This is Michael. Maybe I’ll start, and Mark, you can kind of add on, if you’d like. But I think what you should expect is somewhere on our October earnings call, we will probably provide a little bit more of a range of the building blocks into 2023, that would include the earn-in. And by earn-in, for me, I use the term embedded and what that would mean is on 12/31 of this year, you would freeze the rent roll and assume that nobody moved in, nobody moves out and what does that revenue growth look like? I would tell you that in normal years, we would start January one-off with an embedded growth somewhere around 1% in the rent roll. And even with the forecasted moderation, it is pretty clear that our expected embedded growth is going to be well above kind of that average amount. So I guess I would point to the longer we go without having rents peak, right? It’s just adding more growth to this embedded as every new lease and renewal gets written here in August, September and even October. And as you think about turning the corner, just factor in moderation and then your views for what intra-period growth could look like in 2023, and that’s how we will be kind of doing the building blocks for our guidance for next year. But we’re not at a point yet where we’re willing to share those numbers because we still have a lot of transactions to write.
Mark Parrell
And you asked – it’s Mark, this time, Chandni. You asked a very good question of let’s say the economy does fall down a bit more and we do have a more – we actually have a set recession and how do we feel? Well, certainly, that would affect our numbers negatively. I mean job growth and economic growth are vital to the apartment industry’s success over the long haul. But the supply demand environment for us is very favorable right now. And so the fact that single family is pretty pricey, the fact that, that means to us that our older millennial demographics going to stay with us longer, and you see that in our retention numbers. This Gen-Z group that’s pretty large that’s coming through the system where there just aren’t enough jobs even right now. So if there is a few fewer because a lot of what we’ve seen about the job market isn’t that there is so many fewer jobs and people are unemployed. It’s more that the excess is being taken out of the system. So I guess our sense is the supply demand balance is pretty good for us, and it will likely be pretty good unless a recession – if a recession occurs, is very severe. So the setup for ‘23, it just really is quite excellent, even if there is a recession. It just won’t be as excellent, but on a relative basis, it will still feel, I think the revenue growth for us and for most of the industry really, really good.
Chandni Luthra
Very helpful. And if I could just get a quick follow-up. So obviously, the acquisition environment has taken a huge back seat here across the board. As we think about your expansion plans in the newer markets, how long do you think that gets pushed? And what are the levers? Can development at some point become a bigger tool in your arsenal as you think about getting scale in those newer markets?
Mark Parrell
Yes, it’s Mark again. Development is one of the tools in the toolkit. I mean one of the things that’s happening now that makes us happy not to have too large a development pipeline is if values do go down a bit here, Chandni, and there is portfolios for sale, and there is a discount available to us, you’ll see us be very active and very aggressive in going out and grabbing those deals. So I think you’re going to see it be pretty quiet for a few months here. My guess is that buyers and sellers will decide that this is the new market. And towards the end of the year, we might get considerably more active. We will continue to do development. We like a lot of the deals. We’ve got a couple more we’re likely to start this year. But I guess what I’m most excited about is to see some of these acquisitions come in at a little bit more reasonable price, to be able for us to act on that and act in volume on that. So again, to us, it seems like it’s going to be quiet kind of through Labor Day for sure, and then it might pick up a bit. Alex, what would you – I don’t have a deadline for completing the transformation of the portfolio. I mean we will be reactive to the market opportunity. Do you have any…
Alex Brackenridge
I would just add that in environments like this, we have a competitive advantage over some higher leverage buyers. So it’s been very competitive. Everyone’s bid was more or less the same in the last couple of years, now the ability to transact very quickly. We have our own management company, our due diligence is very fast, and we’re all cash. So – and we have great relationships. And that’s the thing we’re doing right now is maintaining our relationships with our brokers and with principles. And when the time is right, we will move quickly and the machine will get ramped up again.
Chandni Luthra
Great, thanks and congrats on a strong quarter.
Mark Parrell
Thank you.
Operator
Thank you. Now we will move on to Steve Sakwa with Evercore ISI.
Steve Sakwa
Yes, thanks. Good morning. I was just wondering if you could talk a little bit about where renewal increases went out for August, September, I assume October is maybe a little too far out. But maybe talk about that? And then could you also talk about maybe, Bob, what’s in guidance for the back half of the year in terms kind of blended spreads either by quarter or maybe for the second half in general?
Michael Manelis
Yes. So Steve, this is Michael. I’ll just start and talk a little bit about the renewals. So yes, we definitely have kind of renewal quotes put out into the marketplace through the end of September and even into October. I said in the prepared remarks, we have a lot of confidence in this renewal process that we put in place. So right now, the quotes that have gone out in July and August, on a net effective basis, we’re right around 12%. And we’re negotiating somewhere right under that 200 basis point kind of spread. So we expect to achieve around 10%. I think that’s a fairly good number to think about for the next several months. And even as you think about the balance of the year, you will see some moderation in that achieved renewal increase rate, but it’s not going to be this material drop off. It’s going to stay somewhere in that high single digit and maybe even to this low kind of double-digit range. But I think as we think about our process right now, we’ve centralized all of the renewal negotiations, which has really kind of helped facilitating these renewal conversations and giving us a lot of confidence as we put out these quotes to really be able to project kind of what to expect from them.
Mark Parrell
And Steve, before Bob just gives you a little more elaboration on blended spreads and such, One of the things that’s, I think, really interesting here on renewals is because in a fair number of jurisdictions, mostly in California, we can’t raise rents to market that we’re limited up to some jurisdictional limits, you’re going to have some energy even if rents do decline a bit as they will seasonally and as they may due to the economy, I think renewals will be another positive in ‘23 because we’re going to have markets where we continue to be significantly. In some cases, even 20% below the market even after an increase. And so if that 20% becomes 15%, it’s still a pretty good size increase. So I think the fact that we haven’t been able to meet the market on renewals probably leaves a little bit of gas in the tank in ‘23 too even if rents do moderate for both – and they will for seasonal reasons, but for economic reasons, I’m sorry, Bob.
Bob Garechana
Yes. So I think Mark and Michael kind of gave you the blended perspective, which is in our guidance, so maintaining that kind of high single-digit renewal component. So they gave you the renewal piece, and I’ll give you the blended, which really is the new lease. So we talked about the seasonality and the trend of seasonality in rents, coupled with that just hard comparable period in the back half of 2021 and that’s going to lead your new lease and as a result, correspondingly, you’re blended to moderate as you get into the back half of the year, which is what we’re including in our guidance. That’s very normal. I think the only abnormal thing here is what we’ve modeled is something that remains positive on the new lease side. In a normal year, kind of pre-pandemic, new lease change often would go negative in the fourth quarter, and that’s not what we’re incorporating in our guidance.
Steve Sakwa
Great. And then maybe just a second question, sort of following up on the transactions and sort of change in cap rates, either Mark or Alex, where do you guys think kind of unlevered IRRs are today or where do you sort of targeting? And what do you think the market is targeting, realizing that cap rates can kind of be all over the board, but where do you think the current hurdles are?
Alex Brackenridge
Yes. As I said, it’s a little bit tough to know because it’s pretty unsure footing right now. That is an answer we’re looking for. On our end, we look a lot about what we can sell properties for. So we have some transactions in the market that we’re considering, and we will see how pricing comes out on that, and that dictates it a lot. But clearly, it’s higher than it was. I don’t know if I have an exact number on that.
Steve Sakwa
Great. Thanks.
Operator
Thank you. And next, we will move on to John Pawlowski with Green Street.
John Pawlowski
Thanks. Alex, a follow-up question on the lack of price discovery, could you just help quantify the magnitude of the bid-ask spread right now kind of the ranges you’re seeing? Are sellers’ expectations 5% above buyers or 20% above buyers right now?
Alex Brackenridge
Yes. John, it’s Alex. As I said, it varies a lot and well-located, clean properties. I think it’s closer to the 5-ish on something that’s more complicated maybe as a physical issue, maybe got a lot of vacant retail. It’s going to be higher than that. But that’s the number people are feeling each other out and they really don’t know. And I think it’s a time just to be patient, which is what we’re doing and most sellers – most sellers and buyers are doing that right now. So there is some assets that have just been pulled off a market because there is not a lot of traction, but there is a whole bunch of money on the sidelines, as you know, and there is a lot of people that are, frankly, right now hiring up because they expect to buy more apartments in the future. So I think that this will settle itself out but there is a range right now to answer your question of pricing variance between the buyer and seller expectations.
John Pawlowski
Okay, thanks. Bob, one question for you on expenses, can you just give us a little bit of color on the real estate tax backdrop right now, basically 0% growth year-to-date. Is there any unusual appeals benefiting the expense line item in real estate taxes? And any color on what type of step changes we could expect going forward would be helpful?
Bob Garechana
Yes. To be honest with you, it’s less about appeals in 2022 than it probably has been historically and more about just lower assessed values we came into the year, particularly in a place like Washington state, where we had lower assessed values and where rate wasn’t particularly high either on the real estate tax side. So that’s really been the driver of keeping it more modest. The real estate tax market is typically a laggard. So it usually delayed relative to like market values in other places. So that’s what you’re seeing play out in 2022. As we look forward into 2023 and not giving guidance, we’re just setting the tone for the environment, I think it will become more about appeals because I think the recovery and what’s happening in the broader kind of valuation and market is more apparent. And so I think it will be more what I call hand-to-hand combat with the assessors of you think that value is X, I think value is Y and let’s appeal. So I think that’s going to change the dynamic in 2023 and going forward.
John Pawlowski
Alright. Thanks for the time.
Operator
Thank you. Next, we will move on to Joshua Dennerlein with Bank of America.
Joshua Dennerlein
Yes. Hey, guys. Thanks for the question. I just kind of wanted to hear your thoughts on the supply outlook for 2023 any kind of markets where you’re seeing more supply or less supply?
Alex Brackenridge
Yes, there is a range. I mean, certainly, New York is the poster child for lower supply. But there are other markets, too, like Orange County and San Diego that are seeing a drop off in supply. Markets that have continued high supply include Washington, D.C., Denver has a lot of supply, Austin and Dallas and more moderate are Atlanta, Seattle and Boston. So it varies a lot across the market. And overall, it’s pretty steady. Looking at 2024 though, it gets – ‘24, ‘25, it gets more complicated and harder to project. And we see a lot of permits that have been pulled. But we’ve looked historically, and when times get a little uncertain like this. There is a big drop off. I mean, historically, permits translate into starts like 80% to 80%, 80%, 90%. But when times get tough, that drops to 40% to 50%. So that’s what might happen over time here as the ‘24, ‘25 deliveries decrease.
Joshua Dennerlein
One follow-up on that with New York City, the 421a program expired. Just kind of curious if you’re hearing anything maybe if there is any kind of replacement program that might come to influence the supply outlook on a longer term basis or just how you might think about some of the projects that might have [Technical Difficulty] program and yes?
Alex Brackenridge
Yes. No, it doesn’t feel super optimistic. There was a proposal that got rejected. So at this point, there is some discussions, but nothing imminent.
Joshua Dennerlein
Okay, I will leave it there. Thanks, guys.
Operator
Thank you. And next, we will move on to Brad Heffern with RBC Capital Markets.
Brad Heffern
Hi, everybody. I was curious if you could talk about the use of the disposition proceeds to take out debt versus something else like a repurchase or an alternate use of capital?
Mark Parrell
Hey, Brad, it’s Mark. So we certainly have the capability to buy the stock back, and we get that. As we’ve talked about on these calls in the past, it’s a bit of a different thing for REITs than it is for most corporates because we don’t retain earnings. So to do a real buyback, again, it requires you to sell a bunch of assets, which we did do or incur a bunch of debt. And from our perspective, paying off the debt helped us address the ‘23 maturities. It gave us optionality to buy the stock back later. We used up really all of our capability. So we have a little bit of a flex each year in our ability to sell assets and retain cash. And we really used all of that up with these two sales. So we thought, you know what, we will pay down this debt, we will retain this capability. If the Board decides it wants to buy some stock back later, we will have that opportunity. But those opportunities are just so few and for REITs, you start to descale the enterprise. It’s just not as easy a decision as it is for, say, a big technology company with tons of retained earnings. And we got a big $900 million-plus dividend. And that’s really where we think the cash return to the shareholder is. A lot of these other folks that talk about buybacks more readily are corporates that don’t have dividends and do a lot more buyback activity as a matter, of course. So we did consider it, it’s an option by paying some debt off, we retain that option.
Brad Heffern
Okay. Got it. And then I was wondering if you could talk about what’s happening with sort of the deal seeker tenants in New York, the new lease change was 38% in the second quarter. I know across the portfolio, turnovers remain low, but are you seeing those people leave?
Michael Manelis
Yes. So I would say, look, our record low turnover, we had 11.1% reported tax turnover in the second quarter, which is the lowest turnover we’ve reported for a second quarter in the history. You are starting to see and we even said this, acknowledge this a little bit in June through some of the conversations we had. You are starting to see a little bit of price resistance from some folks that came in with the deal early on in this recovery, they were renewing at the exact same pace. And by deal seekers, I mean people that came in that received concessions, really discounted rent. What we saw right now when we looked at the move-out behaviors in the second quarter, we saw a slight uptick in people citing that the increase was too expensive, and that was the reason they were moving out. And I think specific into New York, we definitely saw some folks from Manhattan kind of give us that notice and then move over into kind of that Jersey City area and taking advantage of some of the rent arbitrage there, just at that lower price point. But overall, I would say the renewal percent, the percent of residents renewing remains really strong. We’re either at or right above like these historical averages for this time of the year. And we really just haven’t seen us bumping up against this kind of affordability question that’s been out there. And the rent as a percent of income in our portfolio remains very constant which means that the income for our residents is definitely keeping pace kind of with the rent increases that we’re seeing across the markets.
Brad Heffern
Okay, thank you.
Operator
Thank you. And next, we will move on to Adam Kramer with Morgan Stanley.
Adam Kramer
Hi, guys. Thanks for taking the question. I appreciate the time. I just want to maybe ask a bigger picture question a little bit. Look, I think when we kind of think about historical rent growth, right, it was kind of in a different – or potentially different inflationary regime. And look, I think we’re certainly not expecting inflation to kind of continue with these year-over-year levels. But even if we kind of do settle out a kind of higher year-over-year inflation increases than maybe what we’ve seen historically, maybe kind of walk us through how you would view rent growth in that type of environment relative kind of historical rent growth?
Mark Parrell
Yes. Hey, it’s Mark. I’m going to start, and I think some of us might – some of the others might supplement because we’ve been thinking a lot about this over time. So we went back and looked at periods of time when there was more significant inflation. So again, this will be more like the ‘80s and parts of the ‘70s and even into the ‘90s. And I guess I’d say our ability to reset rents every year, the pretty good supply-demand dynamic, in fact, very good we have currently. I don’t have a number for you. I would have normally said that normal trend growth for EQR on the revenue line is 3.5%. And I would tell you that with inflation the way it is, the numbers are likely to be a fair bit higher because supply and demand are still also good. We could have a ton of inflation. If you have a ton of supply in a submarket, you’re still not moving your rents. But we’ve got good demand, single-family sectors, not drawing residents away. So the way we’re feeling about it is that we’re going to be able to provide a pretty good margin to whatever the inflation numbers are especially as we expect them to sort of settle down. There is also this little bit of a circular reference thing where rent is something like third of the CPI. So we feed into that number, and that number feeds into our number. And so there is a little bit of that as well. But I think you should expect that apartments, especially our portfolio, are optimized in a way with our pricing engine that we can continue to have a real return that exceeds the rate of inflation. So if you think inflation is 5, then I think our growth is going to be a margin to that number, above it. I think the other part of that question or that answer, though, is what are you doing with your expenses, because we do feel the pressure on wages and other things. And that’s why we had both Michael and Bob address that issue with you because we need to keep our margins constant or growing and not just give it all the way on the expense side, and I think we’re doing an exceptionally good job of that.
Adam Kramer
That was really, really helpful. I appreciate all the color. I think just a quick follow-up, if I may. I think physical occupancy that says held in here with the market well and 96.5% in July is a pretty notable number. Just wondering how you guys kind of think about the renewal versus kind of occupancy kind of trade-off? Renewals have decelerated a little bit. It sounds like they can maybe kind of stay at this 10% growth here, but a little bit of a deceleration versus what they were in 1Q and 2Q. Just maybe walk us through kind of the trade-off between occupancy and pushing renewals a little bit more, maybe?
Michael Manelis
Yes. So well, I think we’re always pushing the renewal front because we’re quoting kind of where street rents are and then we’re having these dialogues and pretty much holding the line. When somebody does move out, so if you don’t renew that resident, you are absorbing vacancy loss. So that definitely starts to come into some of that equation. If you just step back and think about the occupancy of this portfolio, I mean, when demand is strong and the front door is strong, you have a lot more confidence to hold the line into kind of this renewal process because if that resident does move out, you’re able to fill them very quickly at these high rates. So for us, if the demand picture stays as strong as it is, I would expect our portfolio is going to maintain strong occupancy. I think we should allow occupancy to probably trail off a little bit into that fourth quarter, but I think it is going to remain relatively strong. So when we look at the difference between new lease and renewal, I mean, we want to retain our residents, we want to retain our residents at a fair price. If the front door is not as strong, you will see us start to negotiate more into that renewal process. But if the demand stays as strong as it is, you’re going to see us kind of hold the line with these renewals.
Adam Kramer
Thanks for the time.
Operator
Thank you. Next, we will move on to Nick Yulico with Scotiabank.
Nick Yulico
Thanks. I just wanted to touch on bad debt for a minute. I think you said that was part of the beat versus your guidance on the quarter. And I know you break that out and the supplemental I think was about 2.5% net benefit to same-store growth on a GAAP basis this quarter. How should we think about the back half of the year and that level of – is it still a benefit year-over-year just from a modeling standpoint, how we should think about that?
Bob Garechana
Yes. So I’ll start with the last part first and then highlight a couple of things about the quarter. So from a year-over-year standpoint, our guidance assumption is that it has no impact to growth meaning that we think that bad debt, net of governmental rental receipts and all of the above is the same in ‘22 as what it is in ‘21. What you’re seeing in the second quarter is really the volatility in timing because you will recall from the first quarter that we had a little bit of a harder time with bad debt and then we had a better time in the second quarter, etcetera. So this number can be fairly volatile. As you get into the back half of the year, and as I mentioned in my prepared remarks, the rental relief programs are winding down. So we don’t expect a lot more rental relief money in the back half of the year. We got a lot of it in the back half of last year. So it’s going to be a little bit of a headwind to year-over-year growth in the back half. But from a full year standpoint, again, shouldn’t have any impact.
Mark Parrell
Yes. Just – and Bob will correct my specific numbers here, but I think we got in the back half of last year, $34 million or so in the same-store set in rental relief. And our modeling is something like $2 million for the back half of this year. So when we talked in our prepared remarks about how we see the strength continuing, what obscures some of these numbers is just these pretty significant rent recoveries from the government that tend to be kind of lumpy. So to see in the back half of the year, a negative impact year-over-year on all this bad debt stuff but you’re going to see the continued strength, we think, in the underlying occupancy business. rate, all of that stuff, occupancy is staying high, that’s going to offset that and keep those numbers pretty consistent, Nick, going forward.
Nick Yulico
Okay. That’s helpful. Thanks. Just one other one is on renewals and just how to think conceptually about how you guys are thinking about that ability heading into next year? I mean you talked about right, high occupancy, not that much supply impact. It’s been low turnover in the business. So as you’re thinking about the numbers right around 10% right now on renewals, I mean, what pushes that number down at all, I guess, over the next year. When do you start thinking, hey, we’re pushing for too much of a renewal notice here?
Michael Manelis
Yes. Well, this is Michael. I think it’s really a function of where our market rents. So what happens to intra-period rent growth next year is really going to dictate a lot around where these quotes go out. But I think Mark mentioned earlier on the call, when you think about some of these regulations that we’ve been bumping up against this year, those regulations are actually going to help fuel renewal growth next year because it’s clear we’re going to be able to be quoting increases beyond what intra-period rent growth is just to catch up to the market through that. So in our modeling, yes, you’re going to have a little bit of this tail off in this achieved renewal increase because you have to assume that market rent prices seasonally do decline. They have declined every single year since 2008. At some point, you hit a peak and then you have some sense of moderation through 12/31 of the year, and then you start the cycle all over again. So that moderation is going to yield some softness in the quotes that go out the door. But again, it’s very marginal. It’s still going to be very high single digit of this low kind of double-digit. And then as we get into this October call, we will kind of give you our view as to how we think this is going to play out into 2023. But again, we got a little bit of a boost coming to us from just being able to catch up from all the regulation restrictions that we’re faced with today.
Nick Yulico
Thanks, guys.
Operator
Thank you. And next, we will move on to Michael Goldsmith with UBS.
Michael Goldsmith
Good morning. Thanks a lot for taking my question. As we look at the rent growth over the last several quarters and also looking forward, there is kind of three factors at play, which we’ve talked about, which is kind of the overall rental market, tougher comparisons and the presence or lack of government subsidies. So we’ve touched a little bit about the government subsidies through the back half of the year. But I guess, as we think about just going forward and the ability for rents to continue to grow on this tougher comparisons like the government subsidies, like what’s the thought process on the continuation of this and how much of the deceleration can kind of be expected just based on these tougher comparisons as you move past, as you lap some of the stronger growth?
Michael Manelis
Yes. I mean this is Michael. I think you are hitting on a couple of points. So, even when you look at the data and you see some of that rate growth deceleration that occurred like on the renewal quote. A lot of this is just a function of that comp period from last year. And just to remind everybody, last year, when we hit July, that was the first time that our new lease change went positive. June of ‘21, we were negative 50 basis points, July of ‘21, new lease change went to positive 6.9%. So, a huge 740 basis point improvement in one month in just that new lease change. And then from that point forward, it’s sequentially approved every single month that new lease change and then fuel blended. So, as we think about where we sit today, you have to, like I said before, we have to allow for rents to moderate. The price in the market will moderate between now and the end of the year. In a normal year, I would say it’s somewhere in that 3% to 3.5% range is where kind of the market rents after you peak whichever week you peak at, you will allow some moderation to the end of the year in the tune of about 3.5%. But then when you look at where we are at with the changes that we were seeing last year sequentially, that is what’s going to fuel this moderation in our blended rate that we will be putting up in the third quarter and fourth quarter. But all that being said, where we land after the moderation, where we land after these tough comps is still significantly above historical norms.
Michael Goldsmith
Got it. And my second question is on the kind of the expectation of expenses. You are coming off of – you have some of the lowest expense in the market. Your – the expense comparisons get a little bit tougher in the back half, and you have been able to manage it quite well. Just as we think about the sustainability of controlling the expense line in the intermediate term, especially kind of in an inflationary environment. Do you have any thoughts on how you can kind of sustain the strong performance over the intermediate term? Thanks.
Bob Garechana
Yes. I think the core driver that will be consistent throughout is kind of what I mentioned in my prepared remarks, which is just reducing our exposure to labor pressure, whether it’s in the payroll line item where it’s the most obvious, right, which you see us having put up were literally probably on the 4 years in a row of either sub-1% or negative kind of payroll growth, we still have opportunity there, right. And so I think that’s the engine of innovation and utilization and technology, and we will be able to completely or continue to sustain that kind of lower than inflationary growth going forward. That should also parlay itself into repairs and maintenance to a degree, too, because you get that benefit because there is a labor component embedded there with contractors, etcetera. So, I think that’s the driver of where I think we have the most containment opportunity. Clearly, as you move into future years, real estate taxes will get harder from a comp standpoint and probably won’t be as sustainable. But comps like utilities should get better, we hope hopefully that the commodity inflationary pressure that exists in the world today is more temporary than permanent. And so that should help us and hopefully offset other line items that might return to more normal growth. But again, the controllable part is really the labor hours, the payroll, the technology, the innovation, and that’s where we are focused.
Michael Goldsmith
And just a quick follow-up on that. How much more runway is there? Is this like another year or 2 years, or is this kind of a multiyear pathway where you should continue to benefit from that?
Michael Manelis
Yes. Well, this is Michael. I think from the operating efficiencies when we think about payroll benefits, I would say we are probably getting closer to the middle innings of our runway. And I said before, like when we talked about kind of we think we have identified $25 million to $30 million that’s going to roll in over the course of 2023 and 2024 front half-loaded with kind of more of the expense opportunities and then it kicks into the initiatives focused on enhancing revenue. So, I look at the expense stuff and I would say we are probably in the middle of the innings there, but we are in the very early stages of the benefits from the revenue lifts on many of the initiatives that we are focused on.
Michael Goldsmith
Thank you very much. Good luck in the back half.
Operator
Thank you. And next, we will move on to John Kim with BMO Capital Markets.
John Kim
Thank you. Hey, Mark. On your commentary on the market dynamics in the Sunbelt, with pricing above replacing cost, this dynamic continues and it seems like both public and private peers are very active in the market. How will that impact your repositioning strategy? Will you focus more on development, or do you perhaps look at suburban markets or other markets in Sunbelt?
Alex Brackenridge
Hey John, it’s Alex. In terms of pricing moderating, so that’s making acquisitions look relatively more attractive. If that continues, construction costs go up, then we would lean more towards acquisitions, but we are also focused on development, too, as an important component of fleshing out the portfolio. So, I would expect we would do a little bit of both depending on the circumstances.
Mark Parrell
And just to add, we are buying in suburbs of places like Dallas too. It isn’t mostly or even close to mostly in all urban portfolio. We are trying to construct in Atlanta or Austin or Dallas or Denver. So, we are spreading our capital out. And that’s where development can be really handy is in some of these suburban locations where it might be hard to find a property to buy.
John Kim
Okay. And then Michael mentioned in the Q&A about effective lease growth trending around 10%, give or take. I wonder 200 basis points in the next few months and maybe softening towards the end of the year. But my question is, is this already embedded in your same-store guidance, or have you accomplished this as upward bias to your same-store revenue?
Michael Manelis
Yes. So, this is Michael. Let me clarify. So, the numbers that I was quoting before is the achieved renewal rate off of the offers that we put out there, where we believe that is going to be around this 10% for the next several months. And when we think about kind of the midpoint of our guidance, Bob pointed to this earlier, we are allowing some moderation in the new lease change and we are factoring in fairly consistent achieved renewal rate increases based on what we can see with a little bit of moderation in the fourth quarter just based on kind of normal seasonal decline in rate.
John Kim
Great. Thank you.
Operator
And next, we will move on to Rich Anderson with SMBC.
Rich Anderson
Hey. Thanks. Good morning. I want to get back to what you said earlier about normal earning for the following year is 1%. And so you are thinking it will be something more than that. I guess that’s helpful. But maybe if we can dig into that a little bit more. So, how linear is the relationship between blended rate and their earning. In other words, like for the 1% typical for the earning that you described, what does that assume or what does that imply in terms of the blended rate in the previous year. And if we were to just do a ratio, would it be correct to assume that if it’s 5x more this year than the earning will be 5x more or is it not that simple?
Mark Parrell
Not that simple.
Michael Manelis
It’s not that simple, but I will correct you. I think I did say it’s going to be well above average. Well above that…
Mark Parrell
Then scratch the quarter.
Michael Manelis
Maybe that’s a little more helpful. Yes. Look, again, I said this earlier. We are still writing a lot of leases, right. You still got a lot of activity coming through the rent roll. I think it’s clear that we have got the right setup in place for a really strong year next year based on the fundamentals of loss to lease, looking at where this embedded growth is today, looking at the strength in the market, knowing that rents haven’t peaked out yet. So, I think you just got to hold off and give us until October, and we will give you a little bit more clarity into the ranges of these building blocks, but I don’t think it’s as pure as like there is a direct one-to-one relationship between blended rate and kind of where that embedded growth is on 12/31.
Rich Anderson
I am aware there is many more variables, I was just trying to get to perhaps a more precise number. And then the second question I have is you talked, Mark at the early stage of single-family rental – single-family home affordability helping the apartment business. Do you have your eyes on any sort of replacement competitive pressures. If it’s not buying a home or whatever the reasons are, top five reasons are the people move out. What we have this time around, which is somewhat new is single-family rental as an option for people that are – millennials that are – that have families that need more space and so on. So, do you have your eye on like kind of a change in the competitive landscape outside of conventional multifamily that is sort of on your radar screen right now is something to watch?
Mark Parrell
Yes, it’s Mark. Thanks for that – that’s a very insightful question. We thought a fair bit about it. We wondered if it isn’t similar to buying something you do as a lifestyle decision. I mean people mostly buy homes, not for financial reasons, but lifestyle. They have the second kid, they got married or had some other life change that requires them or makes them feel like, we will do the commute, we will do what we need to do to have the lifestyle we now need to have with the family situation we now have. I think that single-family rental does feels the same way that people will be similarly attracted to it, not because they have died them all along, but because they are really at a point where they have two kids and they are living in an urban environment, and that’s just more challenging for them or whatnot. So, I think about SFR as more of an additional competitor for sure, but having the same drivers as just purchasing a home. In terms of other competitive threats, we have definitely benefited from people wanting more space and decoupling. We do see that people will accept roommates and live in other situations. So, just switching to another thing that could be a demand negative for us, it’s possible that it will go the other direction. I mean it is certainly something rich that could happen where folks decide they will take on the roommate. They are not as afraid to the pandemic, and they will do that. We are not seeing any of that, but that would be another way you could see demand decline. But I don’t – these SFR homes are mostly, it seems to us a replacement for single-family owned housing, not a new – like an entirely new source of competition.
Rich Anderson
In the past, EQR got in front of some of these things. Whether it was rent-to-own programs or what have you. What do you think about single-family rental, I mean as a place where you and your peers might start to dip your toes in over time?
Mark Parrell
Yes. That’s a really interesting question. I mean we had a version of this conversation, if I remember a couple of quarters ago. But it’s part of our job. And your question implies it to be looking at every subsector in the residential space. I think single-family rental has certainly established itself as a very legitimate long-term business. A lot of our former executives worked in that space. We do pay attention to that space. It’s very interesting in that regard. Our primary focus right now is running this big apartment business we have. But we will keep our eyes open. And I guess if something wanders buy, we will act on it. But again, we are getting a lot of benefit right now and people moving into these cities again, and we are focused mostly on that at this point.
Rich Anderson
Thanks so much.
Mark Parrell
Thanks Rich.
Operator
Thank you. And next, we will move on to Haendel St. Juste with Mizuho.
Haendel St. Juste
Hey there. Thank you. Appreciate the time. A couple of quick questions for me. First one on the expenses. Certainly sounds like technology and operating efficiencies are helping offset their pervasive cost headwinds. A couple of questions on that. Maybe you can remind us or update us on how far along you are in the technology implementation and efficiency plan that you talked about in the last few quarters? And then secondly, I am curious if you are seeing any distinction in OpEx between your urban and suburban assets? Are you finding it more efficient perhaps to operate urban high-rise versus suburban assets given perhaps less acreage to maintain fewer HVAC? Thanks.
Michael Manelis
Yes. So Haendel, this is Michael. I guess I would just start – I think I just went through a little bit of this as to where we are, which is from the efficiency standpoint on the operating platform. I would say that we are probably getting close to the middle innings, midway through. We have got a lot of the base technology installed. We are still working through some of kind of the smart home technology or access into units that we will add to some more efficiencies. You got half the portfolio running today without fully dedicated teams there. So, we have still got a little bit of opportunity kind of left to layer in the technology and create more efficiencies in the property management side. But for us, we are more excited right now because we are still in the early stages of the lift that we see from layering in technology into the income side of our business, the revenue growth engine, and we are in the very early innings of that of laying out all of these initiatives. And that benefit really comes in, in late ‘23 and into ‘24. But I think what you will see is you are going to see us continue to kind of mitigate some of the inflationary pressures on OpEx by just continuing what we have laid out in course of leveraging technology to create the operating efficiencies that will mitigate some of the expense pressures in 2023. And then you will see the engine kick in and switch more to the revenue lift.
Haendel St. Juste
Any color on OpEx trends or comparisons between urban and suburban assets?
Michael Manelis
Yes. I mean I guess I would look into some of the high-rise portfolios and say, you typically would have more staffing there. You have concierge, you have more labor pressure. You clearly have more dependency on some contractors relative to elevators and things like that. So, I guess I haven’t looked at the number, but I would be surprised if we don’t see a little bit more growth in the high-rise portfolio than we did in the suburban garden style.
Mark Parrell
And Juste, its Mark. To add to that good question you have there. I mean the CapEx load, for example, and I know you referred to expenses, but the CapEx load is spread on a high-rise usually at much higher rent than the Garden one. So, you might be doing things with chillers and you might be doing things, but there is one roof, not a multitude of roofs. There is no landscaping. So, putting aside real estate taxes, margins I would think the labor only margin would not be as good in a high-rise because of usually higher service standards. But I bet just some of the CapEx with the higher rents is a lower percentage of each rent dollar in a high-rise. So, that’s typically what we have seen in the high-rises as you do the work and then you don’t need to do anything at all for quite a period of time. So, there is a little bit of an interplay there with expenses and capital.
Haendel St. Juste
Fair enough. Thanks for that clarity. One more, I guess a follow-up on the Toll partnership and new Fort Worth project that you are starting here. Is that 5.5% yield you outlined, is that locked in, or can that be adjusted at yields or cap rates moved significantly? And then you mentioned that 75% of the costs are locked in there as well. What about the remaining 25%? Are you insulated from that, or how would that work?
Alex Brackenridge
Yes. So, the 5.5% is just our projected yield. It’s not locked in. We have – we are a partner with them. We have 75% of the equity. They have 25% and then the property will yield, what it yields and they will get their promotes relative to that. And then the second part of your question, what was that again? I am sorry.
Haendel St. Juste
Locked in cost.
Alex Brackenridge
Lockdown with the cost, yes. So, 75% is what we bought out. We have got the – Toll has bought out from their contractor. They also have a guarantee to us that they will be able to perform at that 100% number. So, it’s just further surety that you have both the contractor and the developer had bought out 75%. Toll has a little bit more work to do to get it 100% bought out.
Haendel St. Juste
Okay. Thank you.
Operator
Thank you. And next, we will move on to Alexander Goldfarb with Piper Sandler.
Alexander Goldfarb
Hi. I guess still morning out there. But thank you. I got two questions. Well, a very efficient call. You guys have gone through a lot of people. On the residents, last year, clearly, the city benefited big time as people flooded back in and took to renting apartments. Are you seeing that same phenomenon this year? So, meaning the ability for you guys to push rents, is that really driven by people continuing to flood into the markets, or are you seeing this year more normal that most of your demand is from within the market with some move in? I am just trying to get a sense of how the new resident profile has changed last year versus this year?
Mark Parrell
Yes. Alex, it’s Mark. I am going to start and Michael is going to supplement, because he does have some good statistical stuff for you. As we kind of look at these markets, Seattle and San Francisco are less well recovered compared to New York and the East Coast markets. So, we still have that tailwind of people returning. And we have talked on some of these calls that if things and we do feel some improvement in the public safety situation in those two markets in the urban core, that is a possible tailwind for EQR towards the end of this year and going into next year, because there is relative value in Downtown Seattle and Downtown San Francisco on rents because they are still not really back. They are not – certainly, they are not evolved where they were when the pandemic occurred. And a lot of these suburban rents are crowding those rent levels, as we have said on calls. So, I will let Michael talk about where the people are coming from. But I think that red check being low on a relative basis still, it makes those markets attractive if public safety concerns continue to go away. So, I am sorry, Michael.
Michael Manelis
Yes. No. So, I will just remind everybody, we do receive that time of application, a previous address for our new residents coming into the portfolio. So, this is where kind of these stats come from. And I will tell you, this quarter, we looked at the trends for the second quarter move in, and we continue to see slightly more new residents coming into our portfolio from outside of an MSA or even the state than normal. And to just give you some stats, so in a normal environment, and this would be like 2018, 2019, like historical data, we would typically see about 60% of our new residents come to us from within the same MSA and about 64% come from within the same state. Our move-ins during the second quarter 55% came from within the same MSA, so about 5% lower and 59% came from within the same state. So, both of these metrics were down about 500 basis points. And when we drilled in to any one of these areas to say where are they coming from, is it concentrated? Like is everybody coming to Seattle from San Francisco or anything like that, it was not concentrated at all, it was very fragmented. And for us, we view this as a very good positive indicator that our markets are continuing to draw this and attract this affluent renter from all over the United States and even slightly more kind of from the foreign countries because we saw that number tick up a little bit, too.
Alexander Goldfarb
And you would say that was pretty – those stats are pretty uniform across all your markets? I mean obviously, you spoke Seattle and San Fran, but it’s pretty uniform across all or biased.
Michael Manelis
Yes. I guess I would tell you when we went into like Southern Cal, like Orange County and San Diego, the inbound or the new residents there. It was more like in line and California typically has a really high percent that comes from within the same MSA in the same kind of state, very loyal to that state in MSA. That didn’t have quite the same kind of shift as the whole portfolio, but it was pretty systemic across all the markets and even submarkets that we saw that trend.
Alexander Goldfarb
Okay. And then the second question is, on the asset sale, you only quoted the IRR for the second quarter sales. I don’t know what the IRR was on the July sale, but 6.6% unlevered IRR, how does that compare to your historic, I would have thought it would have been better just because of cap rate compression. And I think you guys have owned your New York asset a long time. You certainly bought the Macklowe assets that are really attractive cap rate. I guess I would have expected a better IRR, but maybe some perspective and then also your thoughts on the July 1?
Alex Brackenridge
Yes. So, Alex, this is Alex. We have a couple of things that work there. One is it’s a long time. We built those property – I am sorry, we bought those properties in 2005. So, you have got an IRR spread. Typically, IRRs go down over time just because they get diluted a little bit. So, there is that at work. It’s also New York went through some challenging times since 2005. There was the GFC and the recovery from that. Then there was the pandemic. And then there were the changes to the rent stabilization laws that had an impact particularly on one’s ability to convert a property in the condominiums, which was buttressing for a period of time, a lot of value in apartment buildings in New York. So, all of those things kind of combined to work against us. On top of which cap rates started out low in New York. So, there was less compression there. Because I think your question kind of implies there has been all this compression, why wouldn’t you see more value growth, and in New York, we just didn’t see that because it started so low and stayed low.
Alexander Goldfarb
Thank you.
Operator
Thank you. And next, we will move on to Pedro Cardoso with TCW.
Pedro Cardoso
Hi. Thanks for taking the call. Congratulation on the quarter. Just a quick one for me. I will be curious to know if you guys have been noticing any shift in tenant behavior, perhaps are they looking to shift to small units, or are they trying to find something a little bit more affordable. I will be curious to know if you re seeing any shifts in any way shape or form? I know that from a debt – from a rent income perspective, the portfolio is very healthy. But could you just know if you guys are noticing any shifts on those trends?
Michael Manelis
Pedro, this is Michael. So first, just on the reasons for move-out, I said this a little bit earlier, we did see a slight uptick and just the increase was too expensive as one of the reasons that they are citing for move-outs that did occur. But again, we are running off of a base of an 11.1% turnover, which is the lowest that we have seen in the second quarter. When you just step back and just think about the overarching behaviors of the residents, I will bucket this into like a decoupling, like are we seeing any changes in unit type preference, are we seeing any changes in kind of the average adult per occupied home. And I would say, in our portfolio, we really haven’t seen this material change. Pre-pandemic, we used to be at 1.65 adults per occupied home. Sitting here today, we are at 1.57. So, you can kind of see a slight decline in the average adult. And when you drill in – it’s actually a little bit more prevalent in our one-bedroom household, which is about 48% or 50% kind of our portfolio versus anything that we saw like in the larger unit type. So, I think when you just step back and you think about macro trends in our industry, there is potential decoupling, whether it’s explained by young adults making lifestyle decisions later, relative rent affordability that we saw during the pandemic, and now they are kind of moving on to something else or maybe starting to double up. We haven’t seen that in our own or even just the rising wages, allowing single dose to live by themselves. All of that is contributing probably to this incremental demand and strength in pricing power. But specific to like our affluent renter in our portfolio, I wouldn’t say that we have seen a significant shift in their behaviors.
Pedro Cardoso
Got it. That’s very helpful. And one follow-up, if I may. And again, I understand that it’s a very healthy rent to income portfolio for the New York portfolio around 18%. But I will be curious to know if there are – what are the extremes like, meaning how many tenants have rent income that are above 30%, that represents over the total tenant base that you have in New York?
Michael Manelis
Yes. I don’t have that in front of me. I will tell you, across all of our markets, we have a range of 18 to 24 specific to New York. It is very, very few, if any, that bump up against that because our underwriting criteria against a gross rent would kind of prevent that from being anything of a significant level.
Pedro Cardoso
Got it. That’s very helpful. Thank you.
Michael Manelis
Thank you.
Operator
Thank you. And there are no further questions. I would like to turn your conference back over to Mark Parrell for any additional or closing remarks.
Mark Parrell
Well, thank you, everyone, for your time today and enjoy the rest of the summer. Thank you again.
Operator
Thank you. And that does conclude today’s teleconference. We do appreciate your participation. You may now disconnect.
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