AvalonBay Communities, a large U.S. apartment owner that has been working to expand into Sun Belt markets, is benefiting from not yet having a big presence in the region.
The company's properties are mostly in suburban coastal markets, and the Northern Virginia-based company reported in its first-quarter earnings that occupancy and rent trends in its established markets are less volatile than those in the Sun Belt.
Ben Schall, AvalonBay’s CEO, told analysts during the real estate investment trust’s earnings call that the near-term supply picture “bodes well for the performance of our suburban coastal portfolio” in the Northeast, mid-Atlantic, Pacific Northwest and Northern and Southern California. Construction of new units in its established markets is about 1.6% of existing units, while the number is more than twice that, at 3.6%, in Sun Belt markets, Schall said.
Apartment construction boomed over the past year, especially in the Sun Belt, raising concerns that new supply will suppress rent growth further. Construction has been running at a record level over the past year and now stands at more than 1 million units in the pipeline. Sun Belt markets will account for about 41% of the new units coming online this year, said Jay Lybik, CoStar Group's national director of multifamily analytics.
Meanwhile, AvalonBay, ranked No. 4 on the National Multifamily Housing Council’s annual list of top owners with 80,325 units, has been on a strategic path to convert 25% of its assets to Sun Belt markets as North Carolina cities Raleigh and Charlotte, southeast Florida and Texas cities Dallas and Austin. Denver is another target market for expansion.
Schall said the company is finding land opportunities in its expansion markets where high-quality locations are falling out of contract, seeing a couple of deals where prices have dropped 30% to 35% from where they were nine months earlier. “If we can step in and control that land with relatively limited cost to look out a couple of years, and we think that will accrue some significant benefits,” he said.
AvalonBay's rental revenue increased to $673.6 million in the first quarter, up 9.9% from the same time last year. Revenue increased 11.7% at the REIT’s properties in the New York-New Jersey metropolitan area that represents the largest share of its net operating income at 21.1%.
Southeast Florida, however, was its strongest market for performance with revenue increasing 17.3% and net operating income increasing 23.6%. But it’s one of the smallest contributors to the company’s overall net operating income at 2.8%.
AvalonBay has four properties that started construction early in the pandemic being leased up now. Matt Birenbaum, the company’s chief investment officer, said on the earnings call that monthly rents on those have increased $485, or 17%, above initial underwriting.