At $4.4 billion, AvalonBay Communities' development pipeline is the highest it's ever been in company history. Of that total, $1.4 billion is under construction and $2.98 billion is in the planning stages. How did the Alexandria, Va.-based apartment REIT make this happen? By buying in good times and bad, just like the smart long-term investor that the company is.

"When things weren't good–in '01, '02, and '03–we never took our eyes off the ball," says William McLaughlin, AvalonBay's senior vice president of development. "We said this is great real estate, and we are going to put it in place in a good market, in a bad market, and in a market someplace in between. We are going to own [the property] for 10 to 15 years, and therefore the goal is to put good real estate in place irrespective of the market cycles."

New REIT projects include UDRT's Mandalay on the Lake in Texas
David X. Tejada New REIT projects include UDRT's Mandalay on the Lake in Texas

The strategy is paying off. As rents and occupancies rebound, AvalonBay is delivering new units in strong markets such as Los Angeles and New York.

Of course, AvalonBay is not the only apartment REIT that has been thinking strategically about land. Despite several years of a weak rental market and ever-increasing land prices, a number of apartment companies have built surprisingly substantial development pipelines (which typically cover a five- to seven-year period).

During the last six months alone, public multifamily REITs have increased pipeline values for their projects under construction by, on average, about one-third, according to an industry report recently released by New York-based Moody's Investors Service. And, over the last 18 months, those values have nearly doubled.

"Certainly with today's lower acquisition yields, it makes sense at this point in the cycle for multifamily REITs to be engaged in some kind of prudent development," agrees Christopher Wimmer, a real estate finance analyst at Moody's.

AvalonBay's Avalon at Chestnut Hill in Massachusetts
AvalonBay AvalonBay's Avalon at Chestnut Hill in Massachusetts

While there are real advantages to developing versus buying, it still hasn't been easy for these public firms to find development opportunities–not even with today's improving apartment fundamentals. "There are a lot of factors working against you in this industry," says Brad Griggs, executive vice president and chief investment officer of BRE Properties, a San Francisco-based apartment REIT with a $1.1 billion dollar pipeline. "I've seen more impact fees ... higher construction costs, a lack of supply of new land available, and stronger NIMBY groups."

Numbers in millions (* Figures not adjusted to include Summit Properties, which Camden acquired in 2005)
Numbers in millions (* Figures not adjusted to include Summit Properties, which Camden acquired in 2005)

So BRE, like other REITs, has relied on creative strategies to find land, such as applying to city programs for redevelopment and transit-oriented sites. To compete against for-sale builders, AvalonBay will pursue deals too complicated for the average condo developer. And United Dominion Realty Trust, a Richmond, Va.-based apartment REIT, has partnered with private developers like Lincoln Property Co. and JPI.

Despite such robust pipelines, analysts generally aren't concerned about potential oversupply in the market. "When you look at it at the national level and at the submarket level, we see little markets where we have concern about supply issues at least for the next two or three years," says Craig Leupold, principal of Newport Beach, Calif.-based Green Street Advisors. "We think of this as an outstanding external growth opportunity for the apartment REITs. The greatest way to add value is through development."

–Rachel Z. Azoff

Welcome Back

Development talent returns to the rental market.

A talented development team is critical to building a strong construction pipeline, but finding such expertise hasn't been easy for apartment firms recently. As the condo market boomed, a number of development employees switched from rental side of the business to the for-sale side in search of better opportunities and more money. With the rental market rebounding, though, job candidates want back in on the apartment action.

"We were able to pick up a couple good players out of the home building flight of employees [back to the rental side]," says Brad Griggs, executive vice president and chief investment officer of BRE Properties. And the company now has the chance to choose from a second wave of former home builders. "We're seeing more and more guys coming back."

To maintain this newly refreshed development pool, apartment firms are focusing on employee retention through competitive benefits and internal growth opportunities. "We have tried to build good bench strength over the years by hiring freshly minted MBAs or people at entry-level positions in our development staff and have them grow over time with the company," says William McLaughlin, senior vice president of development for AvalonBay Communities.

–Rachel Z. Azoff