AvalonBay Communities made its big announcement before NAREIT's REIT Investor Week in Chicago even began.
Buoyed by a stronger than expected recovery, the Alexandria, Va.-based REIT raised its earnings per share estimate to $3.85 and $4 per share from $3.60 to $3.85 per share.
“After two years of declining fundamentals, the apartment market has turned the corner,” Bryce Blair, CEO of Avalon, said at NAREIT.
In fact, Blair admitted that the company’s original estimate in January underestimated both the speed and ferocity of this recovery. The REIT now says its economic occupancy is at 96.6 percent, and the company has seen its first sequential positive revenue growth since 2008. The only caveat is that rents remain 5 percent to 7 percent off of peak prices.
Blair credits four factors with driving this improvement: improving economic fundamentals; continued issues in the for-sale segment (its move-outs for home ownership have fallen from 30 percent to less than 15 percent); no real supply of new product; and the “unbundling” of households (mainly 20-somethings who have decided to move out of mom and dad’s basement or left their roommates behind).
Blair says the key is that, unlike past recessions, job growth isn’t the only driver. “The job data has been spotty, which is not uncommon in a recession,” Blair said.
Basically, there were so many unemployed people uncertain about their jobs that they doubled up. Now, feeling that if they would have been fired, it would have already happened, they’re moving out. The increase in consumer confidence, instead of just job growth, is leading to unbundling and pushing the rental recovery, according to Blair. “You can’t get this kind of improvement in fundamentals by just chasing job growth,” he said.
Taken together, these trends mean that AvalonBay will soon be adding more apartments to its portfolio. It turned on the construction spigot in the fourth quarter of 2009 but announced this week that it’s boosting its projected starts pipeline from $400 million to $600 million.
“We do believe that we’re past the inflection point [in the recovery],” Blair says.