AvalonBay Communities, one of the nation's largest owners of apartment units, is looking to buy in the Sun Belt in a bet that oversupply and stagnant rent growth will ease.
As a result, the company plans to cash in on expectations that revenue in its markets along the West Coast and Eastern Seaboard will grow at twice the rate of those in states like Texas and Colorado by selling properties in coastal areas such as Washington, New York and Connecticut and redeploying that capital.
Executives speaking Thursday on a fourth-quarter earnings call said they expect new apartment units completed in AvalonBay’s so-called established coastal markets to come in at 1.6% of existing stock in 2024, in line with historical norms. By 2025, the company expects that proportion to decline further to 1.4%.
“This is quite a contrast with supply dynamics in the Sun Belt,” Sean Breslin, AvalonBay’s chief operating officer, said on the call, pointing out that the region “will have twice the level of supply.” He predicted the elevated number of apartments in the Sun Belt to ”continue at least through 2025.”
However, the mismatch between supply and demand won’t last forever, executives said, and that means there's an opportunity to push further into the Sun Belt.
“Investment sales market activity levels are still low, but most market participants do expect a gradual increase in transactions as the year progresses,” Matt Birenbaum, the firm's chief investment officer, said on the call. “The dynamics of this trading activity look to be more favorable in 2024 than they might have been in the recent past, as some short-term operating challenges in our targeted expansion regions may present the opportunity to acquire assets significantly below replacement cost.”
The strategy is already playing out on the company’s balance sheet. In the final months of 2023, AvalonBay completed the sale of a 229-unit complex in Mamaroneck, New York, for $104 million. Over the same time, the company made two purchases in the Sun Belt, including a 203-unit property outside of Charlotte in Mooresville, North Carolina, and 568 units in Carrollton, Texas.
During 2023, the company sold a total of four properties consisting of 987 units, all in established coastal markets, for $446 million. It purchased 1,131 units across three properties in North Carolina and Texas over that time for $277 million.
Arlington, Virginia-based AvalonBay reported total revenues reached $704.7 million in the third quarter, a 5.2% increase from the last quarter of 2022 when revenues came in just shy of $670 million. Income reached $242 million over the same period, a 0.4% increase over the same quarter last year.
On a full-year basis, income dropped 18.5% from 2022 to $938.6 million, while revenue grew 6.7% to $2.77 billion.