Apartment owner AvalonBay Communities reported stronger-than-expected earnings in the first quarter driven by the increasingly high cost of home ownership and a relatively limited housing supply in the company’s coastal markets.

Residential revenue at the Arlington, Virginia-based real estate investment trust increased 4.2% from the same time a year earlier to more than $669 million. Growth in operating expenses outpaced revenue increasing 5.2% year over year to $205.5 million, but executives remained positive on the strength of demand factors in the company’s core markets that include much of the Northeast and Mid-Atlantic regions, along with California and Washington state.

The first-quarter revenue performance was better than the 3.3% increase AvalonBay projected at the beginning of 2024.

“Demand for apartments also continues to benefit from the differential in the cost of owning a home versus renting,” Ben Schall, AvalonBay’s president and CEO, said on the company’s first-quarter earnings call Friday. “This is true across most of the country but particularly pronounced in our markets.”

Schall estimated that increases in home values along with stubbornly high mortgage rates have pushed the per-month premium of homeownership versus renting in AvalonBay’s coastal markets to $2,150 — more than double estimates from 2022. The result has been higher occupancy and lease rates that boosted rents to start the year and a roughly 7% turnover rate from tenants leaving to buy homes.

“It wasn’t that long ago that we highlighted 12% to 13% of move-outs to purchasing a home as being low,” Sean Breslin, AvalonBay’s chief operating officer, said. “7% is extremely low relative to the long-term average of 16% to 17% and certainly reflects the favorable rent-verses-own economics in our established regions.”

Executives also pointed to higher-than-expected U.S. job growth as another factor propping up demand, but warned the effect was limited to the company’s older and lower-priced residences as job gains were concentrated in lower-paying areas of the economy.

“We feel well positioned as we enter the peak leasing season given low turnover, solid occupancy and positive rental rate momentum,” Schall said. “We also expect our suburban coastal footprint to continue to outperform given steady and improved demand drivers and the limited amount of new supply delivering in our markets versus the rest of the country.”

Projections of new supply as a proportion of existing inventory could reach 1.5% in coastal regions this year, the company said — that’s less than half of the 3.8% expansion expected in Sun Belt markets. Though AvalonBay sees a reduction in new apartments into 2025, it expects new inventory to be elevated in the Sun Belt at 2.5% of existing inventory compared to a 1.3% expansion in coastal markets. Given other factors such as lease-up times, AvalonBay said supply pressures in the Sun Belt will persist into 2026.

As a result, the company has increased revenue expectations for this year in New England, metropolitan New York, and particularly the Pacific Northwest, while dropping already suppressed expectations relative to those markets in Denver, Dallas, and Charlotte, North Carolina.

Among its own inventory, the company had 17 developments under construction at the end of the quarter with an estimated cost of $2.5 billion. The projects, eight of which are in its Sun Belt expansion regions, are expected to bring 6,064 new apartments to market along with 59,000 square feet of commercial space. The company looks toward the Sun Belt for expansion, with the aim of growing its holdings in the region from 8% to 25% of its portfolio, with a focus on outperforming suburban markets that it hopes will soon account for 80% of its total holdings across all regions.

Though the company remained an active builder, its acquisition operations have been relatively quiet. Executives said the company is ready with nearly $288 million in unrestricted cash and full access to $2.25 billion in credit that could be used for purchases.

The company is actively looking for deals in the Sun Belt where supply factors have decreased values, and newer vintage assets built in the past decade trading at 15% to 20% below replacement costs. But executives are still waiting for new developments to hit the for-sale market at reasonable prices.

“We haven’t seen kind of brand-new assets coming out of lease-up come to market yet at compelling prices,” Matt Birenbaum, AvalonBay’s chief investment officer, said. “I think people are getting extensions on their construction loans and there is a pretty active bridge lending space … the volume has been light.”

Birenbaum said he expects to see a pickup in the number of assets available deeper into the year and expects AvalonBay to be more active in accelerating its trading activity, something the company hasn’t done in the past four or five quarters.