San Francisco—If you see an AvalonBay Communities, Inc., project under construction in the Bay Area, you can bet there's a train station nearby.

The national apartment firm is building three major developments with a total of 1,120 apartment units, and all are just a stone's throw away from public transportation. Two more transit-oriented developments (TODs) are in the company's pipeline.

AvalonBay leaders didn't predict that gas would hit $4 a gallon this year, but they knew early on that they wanted to build around public transportation.

“It was a strategy that we pursued starting about five years ago,” explained Stephen W. Wilson, senior vice president of development. “What you are seeing today is the fruition of that work.”

The strategy puts the national real estate investment trust on the leading edge of the TOD movement. The numbers back what AvalonBay and other developers are doing.

The region's population is expected to grow by 2 million people from 2010 to 2035, and it is believed that as many as half of these new residents can be accommodated in “priority development areas,” which are infill development opportunities typically about a half mile, or walking distance, from public transportation, according to the Metropolitan Transportation Commission, the transportation planning, coordinating, and financing agency for the nine-county San Francisco Bay Area.

With such figures in mind, AvalonBay is building 422 units at Avalon Walnut Creek at Contra Costa Centre next to the Bay Area Rapid Transit (BART) station in Pleasant Hill and another 438 units next to the BART station in Union City.

The firm broke ground on Avalon Walnut Creek in July. When taking into account all of the project's many components—residential, retail, office space, and parking—the price tag is a hefty $400 million. Approximately $135 million for the housing came from tax-exempt and taxable bonds allocated by the state and issued by Contra Costa County. It is one of the largest bond allocations that the state has made to a project in recent memory, said Tuan Pham, a partner at Goodwin Procter and AvalonBay's bond counsel. The project is an 80/20 deal, meaning that 20 percent of the units are designated to be affordable housing, with the rest being marketrate apartments. The apartments are scheduled to be completed in 2010.

TOD deals are often the result of public-private partnerships, and Avalon Walnut Creek is no exception. AvalonBay's partners in the project are Contra Costa County, Millennium Partners, and BART.

“We support these types of projects because [they are] good for the economy, good for ridership, good for the patrons, “ said Luna Salaver, BART public information officer. “People are able to live, work, and shop close to BART, and it's good for the environment because people are not using their cars.”

As part of the project, AvalonBay built a 1,500-space parking structure for BART riders, a sign of how complex TOD deals can be. Many housing developers would not have had the capacity for such a task.

Despite the scope of many of these projects, TODs are not limited to the larger national developers, said Allison Brooks, managing director of the Center for Transit-Oriented Development in Berkeley, Calif., citing how the small nonprofit Unity Council spearheaded Fruitvale Village, a TOD located next to the Fruitvale BART station in Oakland.

S.F. market conditions

In another move, AvalonBay is constructing 260 units in the third phase of Avalon at Mission Bay, the company's chic San Francisco community that is situated across the street from a train line and conveniently nestled in the city's South of Market neighborhood. The development, which has 563 units in the first two phases, is loaded with features, including a penthouse lounge with city views, a rock climbing wall, and an abundance of art decorating the buildings.

The $160 million third phase will be the grandest, with designer kitchens and high-end finishes. This phase is set to deliver its apartments in 2009, with rents expected to be in the $3-per-square-foot range.

Rent growth has remained healthy in San Francisco despite the economic downturn. Asking rents increased by 1.6 percent in the first half of the year, making the city third in the nation in terms of rent growth, according to Sam Chandan, chief economist at Reis, Inc., a New York City-based commercial real estate market research firm.

An area vacancy rate of 3.9 percent at the end of the second quarter is also significantly better than the 6 percent rate seen nationally, according to Reis.

“The fundamentals are strong, but be mindful that may be reflected in the prices that you have to pay,” Chandan said, noting that capitalization rates, which represent the income generated by a property as a percentage of the sale price, have been approximately 4.7 percent in the local area compared to 5.7 percent nationally.

An analysis conducted by Lakewood, Colo.-based risk management and screening services provider First Advantage SafeRent also showed that the credit risk of the area's renter traffic in the second quarter was among the lowest of any major market in the country, said company Vice President Jay Harris.