After the recession, Arlington, Va.–based REIT AvalonBay Communities (AVB) jumped back in the development game before its peers did. In the first quarter, the company enjoyed the payoff for that gambit.
On today’s first-quarter earnings call, CEO Tim Naughton said AVB was currently in some form of lease-up at nine properties. Together, the assets were earning 4 percent, or about $100 more than pro forma rents.
“The development deals have trended market rent growth from the time they started construction,” Naughton said.
Though AVB started only one new project in the first quarter, it has $1.6 billion in development under way. Its pipeline is $2.8 billion, and the company plans to start more than $300 million worth of projects in the second quarter. Its average projected yields are around 7 percent.
“The next two to three years promise to be a great time to deliver new communities into the market,” Naughton said.
That said, some markets could pose challenges. In AVB’s home base in the Washington, D.C., metro, the firm expects supply to outstrip demand. In Seattle, often considered the second-greatest market, behind D.C., in terms of supply pressure, Naughton thinks supply won’t be a marketwide issue, with most new starts condensed in the downtown area. He puts San Jose, Calif., in the same category.
While it’s seeking deals all over the country, Avalon expects to make the bulk of its purchases on the West Coast. Now that it’s winding down its Fund I through dispositions, AVB’s focus on the acquisition and development front centers on balance-sheet transactions. Though AVB made no first-quarter purchases, it has $100 million worth of property under contract for the second quarter.
Naughton kicked off the earnings call saying that Avalon’s “exceptional results were driven by strong fundamentals.” The first quarter would back him up. AVB’s revenue for its same-store portfolio exceeded 6.5 percent. Northern California and Seattle led the way, with 8 percent to 10 percent rent growth. The company also saw expenses drop 1 percent, driven in part by the mild winter.
AVB saw 18 percent of its move-outs leave because of rent increases. A number of analysts peppered AVB management with questions about whether rents were exceeding customers’ ability to pay. But Naughton didn’t think that was an issue.
“Renters should have the capacity to pay high rents,” Naughton said.
AVB saw 13 percent of its renters move out for home purchases (the average is around 20 percent). But again, Naughton didn’t see that as a major issue. “A pickup in housing affordability doesn’t mean it will drive demand for homeownership,” Naughton said.