Q3 2024 AvalonBay Communities Inc Earnings Call
Good morning ladies and gentlemen and welcome to Avalon Bay Community's third quarter 2024 earnings conference call. At this time all participants are in a listen-only mode. Following remarks by the company we will conduct a question and answer session. You may enter the question and answer queue at any time during this call by pressing star 1.
If your question has been answered or you wish to remove yourself from the queue, please press star 2. If you are using a speakerphone, please lift the handset before asking your question, and we ask that you refrain from typing and have your cell phones turned off during the question and answer session.
Operator: Your host for today's call is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference call.
Jason Reilley: Thank you, Melissa, and welcome to Avalon Bay Community's third quarter 2024 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements.
Jason Reilley: and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10-K and Form 10-Q filed with the SEC.
As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion.
Jason Reilley: The attachment is also available on our website at www.AvalonBay.com forward slash earnings and we encourage you to refer to this information during the review of our operating results.
Jason Reilley: and financial performance. And with that, I'll turn the call over to Ben Schall, CEO and President of Avalon Bay Communities, for his remarks. Ben?
Ben Schall: Thank you Jason and thank you everyone for joining us today. I'm here with Kevin O'Shea, our Chief Financial Officer, Matt Birenbaum, our Chief Investment Officer, and Sean Breslin, our Chief Operating Officer.
Ben Schall: Sean and I have some prepared remarks and then we'll open the line for questions.
For our practice, we posted a presentation in conjunction with our earnings release, which we'll reference on today's call.
Ben Schall: I'd like to start today's call with an update on the four strategic priorities we highlighted during our Investor Day last November.
As summarized on slide four of the earnings presentation, our organization has been laser-focused on executing our plans in each one of these areas, confident that they will continue to deliver superior growth for shareholders.
Ben Schall: First, as highlighted on slide 5, we continue to make meaningful progress in transforming our operating model and driving both operating efficiencies and incremental revenue.
Ben Schall: Last November, we raised our target to $80 million of annual incremental NOI to come as a result of these operating initiatives.
Ben Schall: We are tracking on plan, including further deployments of Avalon Connect and our Neighborhood Operating Model, as well as advancements in our utilization of AI.
By year-end, we expect to add another $10 million, bringing our total achievement to $37 million towards our $80 million target, highlighting both our strong progress to date and the significant runway of future earnings we expect to deliver over the coming years.
Thank you.
Second, we continue to optimize our portfolio's future growth through proactive portfolio management and our strategy to increase our allocation to the suburbs and our expansion regions as summarized on slide 6.
Ben Schall: Our portfolio is now 73% suburban, up from 70% last year, and well positioned in the near term to benefit from steady demand and low levels of new supply, and in the long term from shifting demographics, including aging millennials.
We also continue to make steady progress toward our expansion region target of 25%, having now reached a 10% allocation.
Thank you.
Ben Schall: The third area that we detailed at our investor day was our unique development growth engine and our ability to consistently drive accretive external growth
As highlighted on slide 7, our 2024 completions have meaningfully outperformed our original underwriting, achieving a 6.5% yield, or 50 basis points above PERFORMA, generating additional earnings growth and value creation.
We've increased our planned development starts for this year to nearly $1.1 billion, with a projected untrended initial stabilized yield of 6.3% on these projects, which we consider to be well within our strike zone of generating 100 to 150 basis points of spread to both underlying cap rates and our cost of capital.
Ben Schall: Looking forward we believe there could be an attractive window to further leverage our development capabilities and our cost of capital advantage to capture an outsized share of what's likely to be a lower overall level of new starts in the industry.
Which brings me to our fourth strategic priority, ensuring continuous access to cost-effective capital to fuel future growth.
Jason Reilley: As highlighted on slide 8, our balance sheet is as strong as it's ever been, among the strongest in the REIT industry, and supported further by our recent forward equity activity.
Jason Reilley: sourcing $850 million at an implied initial cost of approximately 5% to fund future accretive development.
Ben Schall: We're committed to providing this type of follow-up to you at our Investor Day last year, and we're pleased to report out on the strong progress that we've made in each of these four strategic priorities over the last 12 months.
Ben Schall: We're confident these strategies will position Avalon Bay for continued, superior growth in the quarters and years ahead.
Ben Schall: And as I transition to our Q3 results, I want to thank our 3,000 Avalon Bay Associates for their effort, collaboration, and commitment to these strategic priorities and for delivering another strong quarter of results.
Ben Schall: Slide 9 summarizes Q3 and year-to-date results and activities with the headline being that we exceeded core FFO guidance for the quarter by three cents per share.
Ben Schall: We also started $450 million of new developments this quarter as part of our planned $1.1 billion of starts this year, a vintage of projects that should face less competition when they open for leasing in a couple of years.
Based on our continued operating momentum, we increased our full-year core FFO guidance for 2024 for the third time this year to $11.04 per share, applying a peer-leading 3.9% core FFO growth rate as highlighted on slide 10.
Ben Schall: For our same-store portfolio, we continue to expect same-store revenue growth of three and a half percent. And we lowered the midpoint of our same-store operating expense estimate by 30 basis points to four and a half percent, which resulted in an increase in our same-store NOI guidance to three percent for the full year 2024.
Speaker Change: Sean will now speak to our performance in more detail, our momentum in Q4, and our building blocks as we head into 2025. Sean?
Sean Breslin: All right, thanks Ben. Moving to slide 11 to address recent portfolio trends.
Sean Breslin: Third quarter performance was strong, and our same-store portfolio is well positioned heading into the slow-releasing season.
Sean Breslin: Turnover continues to trend well below historical norms, which is typically around 55% on a full year basis.
Sean Breslin: driven in part by a substantially lower volume of move outs to purchase a home in our established regions, which remains at record lows.
Sean Breslin: Additionally, economic occupancy has increased from the mid-summer low point, and we expect it to remain relatively stable during Q4.
Speaker Change: Thank you for joining us. We appreciate it. Thank you.
Speaker Change: During our mid-year earnings call, I mentioned the possibility of a re-acceleration in asking rent and rent change given softer comps from Q4 2023.
Speaker Change: We're now starting to see that trend come to fruition. In the chart on the left, ASCII rent growth during the year has followed traditional seasonal curves and outperformed our experience throughout 2023.
Sean Breslin: Recently, the level of outperformance has widened.
Sean Breslin: And as of November 1st, the average asking rent for our same store portfolio was approximately 3% greater than the same date last year, with the East Coast roughly 4% higher and the West Coast about 2%.
Sean Breslin: The higher average asking rent will flow through to improved rent change, particularly for new move-ins as we look forward.
Sean Breslin: Currently we're forecasting rent change in November to be stronger than October and increase further as we move through December.
Sean Breslin: Pivoting to slide 13 and the outlook for 2025 revenue growth.
Sean Breslin: We expect healthy job and wage growth, a financially well-positioned renter, and relatively unaffordable for sale housing alternatives will all support steady demand for our apartment homes in the year ahead.
Sean Breslin: In chart 1 on slide 13, renters in our established coastal regions have experienced strong wage growth over the last several years, so rent-to-income ratios have actually declined and are currently about 10% below where they were at the beginning of 2020.
Sean Breslin: This is important in understanding the potential capacity of renters to pay higher rents, all else being equal. Moving to chart two, renting an apartment in our established regions continues to be much more affordable than owning a home, with the spread being the widest we've ever seen.
Sean Breslin: This lack of affordable for sale alternatives should continue to support a lower level of resident turnover and a greater propensity for new households to rent versus own.
Sean Breslin: Moving to slide 14 on the Outlook for Supply.
Sean Breslin: Our established coastal regions are expected to see new deliveries of 1.4% of existing stock in 2025.
Sean Breslin: Roughly 100 basis points lower than what's forecast for the Sun Belt, which is already facing a challenging operating environment given the record level of deliveries over the past year.
Sean Breslin: Our same-store portfolio will further benefit from being roughly 70% suburban, where deliveries are expected to be roughly 1% of stock in 2025. Overall, we believe our portfolio is well-insulated from the impact of excessive new supply in 2025.
Sean Breslin: Bye.
Speaker Change: Turning to slide 15, I'll address the building blocks for revenue growth in 2025.
Sean Breslin: First, we're projecting embedded revenue growth, or the earn-in, to be roughly 1.1%, or approximately 10 basis points greater than where we started in 2024.
Sean Breslin: Second, we've estimated that underlying bad debt from residents will improve by roughly 60 basis points from 2023 to 2024.
Sean Breslin: and it has improved on a year-over-year basis in each quarter so far this year.
Sean Breslin: Well, we haven't yet completed our forecast for 2025. We expect continued improvement in underlying bad debt throughout the upcoming year.
Sean Breslin: And third, we expect to again produce strong other rental revenue growth during the coming year. While we don't expect the growth rate to be quite as strong as the roughly 15% increase we're forecasting for 2024, it should still contribute meaningfully to overall revenue growth for 2025.
Sean Breslin: Moving to the Outlook for Operating and Expense Growth on slide 16.
Sean Breslin: We expect overall operating expense pressures to moderate as we move into 2025.
Sean Breslin: notably the 421A program in New York City will still be present but eased in 2025.
Sean Breslin: Additionally, given our Avalon Connect offering will be substantially deployed across the portfolio, the impact on our utilities expense in 2025 will be materially less than what we experienced in 2024. Most other categories are expected to grow modestly as we look to 2025.
Speaker Change: Now I'll turn it back to Ben for some more summary comments before we open it up to Q&A.
Ben Schall: Thanks, Sean. To quickly summarize, Q3 results exceeded our expectations and supported a further increase to our full year earnings guidance.
Ben Schall: Our outlook heading into 2025 looks healthy, particularly given the fundamentals in our established regions.
Ben Schall: We're leaning further into development, a powerful driver of differentiated earnings growth and value creation.
Ben Schall: And we will continue to execute as an organization on a set of strategic priorities that we are confident will continue to deliver superior growth for shareholders. And with that, I'll turn it to the operator to facilitate questions.
Speaker Change: Thank you. At this time we will be conducting a question and answer session.
Speaker Change: If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Speaker Change: To allow for as many questions as possible we ask that you each keep to one question and one follow-up. Thank you
Speaker Change: Our first question comes from the line of Eric Wolfe with Citi. Please proceed with your question.
Eric Wolfe: Hey, thanks for taking my questions. You mentioned that deliveries as a percentage of stock should be around 1.4% next year, which I think is down a little bit from this year. Just based on what you're seeing on the ground, your performers,
Speaker Change: Like, where do you think that percentage could go over the next couple years? I'm just trying to understand how supply risk might change, especially as you're increasing your sunbelt concentration.
Sean Breslin: Yeah, Eric, this is Sean. I can comment and then Matt or others can certainly speak to it as well. But as it relates to our established coastal regions, first for 2025, we're expecting a reduction in delivery across those regions with the one exception being New York City, which actually.
Sean Breslin: is forecast to have a slight uptick. It's not material, but a slight uptick in deliveries in 2025.
Speaker Change: As it relates to where it may settle beyond that, what I'd say is, and Matt can speak to this further, is the development climate certainly has been challenging for a number of reasons, given what we've seen in construction costs, what's been happening with capital costs, and the impact particularly on merchant builders across our region.
Speaker Change: Given the fact that starts have come down and the fact that the gestation period for construction in our coastal markets
Speaker Change: given what we've seen in terms of starts activity and the underwriting associated with new projects in those same regions. So, hopefully that answers your question.
Speaker Change: That's helpful. And then for the four Sunbelt Apartments...
Speaker Change: Projects you started this quarter. Can you just talk about the underwritten yields on those and how you're looking at the value creation or margin on those projects and I guess for Austin specifically
Speaker Change: It's certainly been a market that I think people expect supply to weigh on it for a little while, so I was just curious if there's something specific about that project that lets you get to a higher yield than maybe the overall market would achieve.
Speaker Change: Thank you for watching.
Speaker Change: Sure, hey Eric, this is Matt. I can speak to that one. So we did start four deals this quarter, all of which were in expansion regions.
Speaker Change: to North Carolina to in Texas and those deals are underwriting on today's rent to around a six.
Speaker Change: development starts for the year across the whole book is more like low to mid-60s, 6.3. So they'd be at the lower end of that range, but still well in excess of our cost of capital and well in excess of where we think.
Speaker Change: and Gordon Smetana.
Speaker Change: There are some unusual costs loaded into the first phase.
Speaker Change: Because we're front-loading a lot of the infrastructure and amenities
Speaker Change: a signature community for us in that market. And that's our first start, our first investment in Austin. We've identified Austin as one of our expansion regions, really, for four or five years, but have been pretty cautious about it up until now.
Speaker Change: But we're pretty bullish about the timing of that start, in particular.
Speaker Change: because we think it's a nice match between hitting the low point on hard costs, which have come down, on that deal, hard costs are down double digits compared to where they would have been 18 months ago when we could have started the deal, you know, when it was first ready to start.
Speaker Change: And, you know, when you think about that, I said it won't be in lease up until 26 and we feel by that point, we should be facing, you know, very little new competition and with the basis that we like quite a bit.
Speaker Change: Eric, I'll add a couple of additional comments to your question on relative positioning. As we think about leaning into external growth and development today, one is the cost-to-capital advantage. We've got a cost-to-capital advantage relative to our private sector competitors. And the second is we are increasingly able to drive incremental yield.
Speaker Change: from our new investments, both on acquisitions and development. And a lot of that goes from taking our operating model transformation and those initiatives and bringing those to new investments.
Speaker Change: And so, obviously, project-specific and sub-market-specific, but in a lot of these projects, we're able to generate 30 to 40 basis points of incremental yield by tapping into that strategic set of capabilities.
Speaker Change: Got it. That's helpful. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.
Jamie Feldman: Thank you.
Jamie Feldman: I guess
Jamie Feldman: Speaking with development, can you talk about your early thoughts on what's in the pipeline that you could possibly start in 2025?
Jamie Feldman: And I guess just kind of continuing with this similar discussion, you know with with the starts you've done all in the Sun Belt
Speaker Change: I mean clearly Sunbelt is recovering from a supply glut, but who's to say it can't happen again?
Jamie Feldman: The Austin project certainly sounds unique, but can you just talk through, you know, how you think you can navigate development in the Sun Belt better, differently than, you know, people who are facing a lot of supply here, as we just think about the longer term, based on the projects you're starting?
Speaker Change: Jimmy, I guess I can speak to that one. This is Matt.
Speaker Change: When we look at our 25 starts book, and we do think that we have an opportunity to increase our start volume further in 25.
Speaker Change: you know, could be a range and, you know, we're not providing guidance at this moment, but...
Speaker Change: You know, we could certainly see increasing our start activity next year to something on either side of a range of about a billion and a half.
Speaker Change: 50 this year.
Speaker Change: So we are ramping it up.
Speaker Change: A couple of starts on the West Coast where development economics have been under pressure for quite a few years. We're starting to see green shoots there both on the operating side.
Speaker Change: and on the hard cost side, some pretty significant savings. So, we have a large deal, we could start next year in San Diego. We might wind up starting a deal in the East Bay. We have a garden deal in Denver, that would be an expansion region. We have more kind of higher yield business to start in New Jersey.
Speaker Change: a deal here in the Mid-Atlantic.
Speaker Change: opportunities in Boston.
Speaker Change: a deal in Palm Beach County in Florida. So it's a mix. I would say the product tends to be lower density garden, kind of simpler construction. That's where it tends to be working better right now.
Speaker Change: you know, more likely it will be in...
Speaker Change: more in the expansion regions or some of our, I'm sorry, in the established regions.
Speaker Change: or some of our expansion regions.
Speaker Change: Denver and Florida in particular, Southeast Florida, assets are trading more generally above replacement costs there. There's probably a little more pressure in North Carolina and Texas, and that's where it really does depend on the product and the sub-market and the specific dynamics of the site you're looking at.
Speaker Change: Okay, that's very helpful. Impressive.
Speaker Change: One and a half billion number. I guess just switching gears to expenses
Speaker Change: We appreciate the detailed line-by-line view for next year. I guess two ways to ask the question. One is just focusing on insurance specifically. I mean, clearly a lot's happening in Florida. It happened in Florida. What gives you confidence that insurance can go lower?
Speaker Change: in 25, and then also just if you were to boil down this third column on the right, you know, do you think your expense growth rate is higher or lower in 25 than 24 if you're even, you know, able to answer that question?
Speaker Change: So, Jamie, this is Kevin. I'll start on insurance and Sean will probably follow on the broader look on FX for next year.
Jamie Feldman: So in terms of insurance
Jamie Feldman: You know, this year's expected insurance expense increase is about 10%, just to kind of give you some context. It's being driven primarily by increases in property insurance premiums and losses, where the premium increases from property relate to our May 2023 renewal. That continued to affect us earlier this year.
Speaker Change: But we had a roughly flat property renewal in May of this year, you know, very successful in that regard partly due to the
Speaker Change: and the abatement of the decline in insurance premium pressures in that property insurance market relative to prior years.
Speaker Change: And that flat property rule this past May provided some relief from the impact of higher premiums in this year's numbers.
Speaker Change: and into next year.
Speaker Change: as we move into 2025.
Speaker Change: We just see, based on what's going on in the various insurance markets that we have...
Speaker Change: continued movement towards stabilization and program costs.
Speaker Change: as we look to renew property and other types of insurance next year. We expect to generally renew those at more typical growth rates.
Speaker Change: Our property renewal is in May, and as you know, we have very little exposure to the high-risk areas where there have been problems, such as in Florida where we have limited exposure to southeast Florida where there's concrete construction.
Speaker Change: and generally have more of a coastal footprint. So we've been insulated from a lot of those pressures.
Speaker Change: as well. You know, the only exception we see with respect to insurance is liability insurance, which is seeing some above-average premium increases, but fortunately, liability insurance comprises less than...
Speaker Change: a quarter of our overall total insurance spend. So as a result, when you put it together and look at insurance costs for next year, while it's still early, we currently expect our overall insurance costs to be more in the mid to high single-digit range for next year, which is closer to more normal levels for us.
Speaker Change: Jimmy, as it relates to the broader question about the direction of OPEC's growth in 2025 relative to 2024's growth rate,
Speaker Change: Yeah, the purpose of this slide was to give you some general sense that we do expect.
Speaker Change: The main callouts as it relates to that are items that are relatively well-known. For example, the 421A
Speaker Change: and other pilot programs, you know, that's about an 80 basis point impact on the 2024 overall growth rate.
Speaker Change: You know the gross impact of that in 2024 on total OPEX growth was 120 basis points, that's the forecast. So, that will come down. Just those two items alone will lead to some easing there. We don't see pressure points.
Speaker Change: in the various other categories that would overcome the impact of those two items as an example. So we do expect the growth rate to come down to 25 relative to 24.
Speaker Change: Okay, great. Thank you. Very helpful.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Adam Kramer with Morgan Stanley. Please proceed with your question.
Adam Kramer: Hey guys, thanks for the time. I wanted to look at the kind of projection for improvement in lease growth in November and December.
Speaker Change: I guess just maybe kind of you know whether it's just easy comps or kind of what are the other maybe indications or things you're seeing in the portfolio today that kind of give you the confidence that hey things can reaccelerate here in the last two months of the year relative to October
Speaker Change: And so we started pushing harder as it related to rate growth.
Speaker Change: And we were able to do that through Q2 and most of Q3, which is the time when you want to do that given the heavy lease expiration volume. You know, roughly 60% of our leases expire during those two quarters.
Speaker Change: So that's when you want to get it. But in terms of overall strategy, then, as you get into September and October, you do want to sort of stabilize occupancy as you head into the slow releasing season. So as we move through September into October, you saw that in terms of the deceleration, particularly on the new move-in side.
Speaker Change: So that was part of the broader strategy. As it relates to where we are today, occupancy is relatively stable. And as I mentioned in my prepared remarks, given the softer comp in terms of we're asking rents were in Q4 of 2023.
Speaker Change: Relative to where they are as of now, asking rents are about 3% higher than where they were last year. So where we are signing leases currently...
Speaker Change: is presenting a nice spread on the move-in side. So as we look forward.
Speaker Change: You know, October blended rent change, you know, was 1.2 percent. We see it ticking up into the high 1 percent range for November and then the mid-twos in December. Our expectation is that all of that is really on the backs of new move-ins.
Speaker Change: which were down about 180 basis points in October, but we expect that to flip to be modestly positive in November and a little over 100 basis points in December. Renewals, renewal offers were already out.
Speaker Change: That's really helpful. Thanks for all that color. Maybe along similar lines, kind of a forward-looking question here, just on the bad debt improvement. So it looks like...
Speaker Change: I know it's early, I know it's a tough line item to maybe make the call or predict, but just maybe a sense of the
Speaker Change: And whether it's the level of bad debt that you can get to next year, or maybe the other way of asking it is just how long could it take, will it take potentially to get back to the pre-COVID kind of bogey level of bad debt as you think about next year and going forwards.
Speaker Change: Yeah, good question. And everyone has probably a different crystal ball on that one, of which probably none of ours are 100% accurate, just given the nature of the issue.
Speaker Change: which is really highly dependent upon various things outside of our control in the various regions.
Speaker Change: So obviously we've seen, you know, a nice improvement as it relates to the performance this year, coming down, you know, roughly 60 basis points year over year. From 2022 to 2023 it had come down 140 basis points, so a more significant improvement.
Speaker Change: of Skips and Evicts that we see through the portfolio. So for example, we saw 300 plus evictions in the third quarter.
Speaker Change: We have about 1,300 accounts that are still sort of sitting out there that need to be processed through either a SCIP or a VEC.
Speaker Change: Sean Breslin, Matthew Birenbaum, Sean Breslin, Matthew Birenbaum, Sean Breslin, Matthew Birenbaum,
Speaker Change: Thanks so much for all the detail.
Speaker Change: Yep.
Speaker Change: Thank you. Our next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.
Steve Sakwa: Great, thanks. Good morning. I think, Sean, you mentioned that renewals were out for November-December, but I don't think you quoted a figure on those. Could you share that and I guess just how much negotiation is going on, kind of on those renewals today versus maybe what's happened over the last, you know, six to nine months?
Steve Sakwa: Thank you.
Speaker Change: Yeah, I mean, what I can tell you is our expectation for November and December. I talked about the move-ins on the renewals. We're expecting renewal achievement to be in the high 3 percent range for both November and December.
Speaker Change: Based on what we already know today that signed as well as the expectation for a negotiation spread so You know where those renewals went out. It's kind of irrelevant at this point It's more kind of where they're trending and that's our expectation for November and December is high trees
Speaker Change: Okay, and then Kevin, I know you have the forward equity that's kind of sitting out there. Are we just assuming given Matt's comments about the accelerating development pipeline that the forward equity is basically used to partially fund development opportunities versus acquisitions?
Speaker Change: Yes, that's correct Steve. That was what our intention was when we executed the forward equity deal back in early September.
Speaker Change: It was intended to support an elevated level development starts next year. So, we don't anticipate issuing the shares under the forward this year, but expect to do so next year as we kind of ramp development starts.
Steve Sakwa: Great, thanks.
Speaker Change: Thank you. Our next question comes from the line of Austin Warschmidt with KeyBank Capital Markets. Please proceed with your question.
Austin Warschmidt: Thanks for taking the question. Just going back to new starts in the expansion markets and the fact that you underwrite on current yields, should we read into this that you think RENs have bottomed in those expansion regions, at least within the submarkets you're developing, or that I guess any additional pullback would be short-lived?
Matt Birenbaum: Yeah, Austin, it's Matt.
Matt Birenbaum: I think
Matt Birenbaum: Yeah, the reason why we underwrite on an untrended basis is we feel that that's pretty conservative that, you know, on average over time, rents grow. So, you know, we're not counting on that.
Matt Birenbaum: And then, you know, it's really everybody can have their own view on what happens.
Matt Birenbaum: going forward, I would say, you know...
Matt Birenbaum: Any deal we're starting now, we're probably not leasing it for two years or maybe a year and a half.
Speaker Change: Do you think that, in almost every case, we would think markets, by that time, should have positive momentum to them? What happens between now and then? It's going to vary from market to market. And honestly, that's probably more relevant for our acquisitions than our development.
Speaker Change: because there we are stepping into a rent roll and whether that existing rent roll has lost lease or gained lease in it.
Speaker Change: will affect our kind of short-term kind of year-one yield and, you know, that in turn weighs on the IRR of the investment. So it's probably subject to a little more scrutiny on acquisitions than on development, you know, just based on the, you know, the greater value creation margin there.
Speaker Change: Also, I'll emphasize a couple other components in terms of our lean-in. This expands on what we were talking about earlier on the call. As you know,
Speaker Change: As we think about development yields, both established regions and expansion regions, we're focused on 100 to 150 basis points of spread to both underlying cap rates and market rates and our cost of capital. So Kevin spoke to our cost of capital on next year's set of starts, right, we've locked that in at a five.
Speaker Change: We have over the last six months, not a huge amount of transaction activity, but we have gotten more visibility on transaction activity, which has given us more confidence around where underlying.
Speaker Change: values are. And then the third piece is we have seen construction costs come down, not everywhere, but in a lot of our regions. So when we think about our long-term basis or stepping in at this point at a time, that also has us leaning into net new external growth.
Speaker Change: Both of your responses appreciate the color there, and they kind of lead into the next question on the transaction market.
Speaker Change: You know, are you seeing more investment opportunities within expansion markets start to, you know, come forth and with the equity proceeds now to help fund the development capital commitments next year. Does that enable you to accelerate the paired strategy, the paired trade strategy, given I think there are some limitations on, you know, capital gains from annual, you know, dispositions?
Speaker Change: Yes, it's a good point, Austin. And I would say yes. To the latter question, yes. To the former question, not so much. So the transaction market, it's still pretty thin. There's still not much activity, and we're not seeing distress. In fact, a bunch of us were just at the ULI conference last week, and everybody was talking about that and the lack of kind of distress opportunities.
Speaker Change: If you had asked me 30 days ago, I would have said the transaction market seems like it's about to finally break free and get back to a robust level of volume.
Speaker Change: That was when the tenure was kind of in the mid-3s, 3.6, 3.7 range, and there was a lot of optimism and confidence.
Speaker Change: You know.
Speaker Change: It's a volatile time and obviously with the long rate moving up quite a bit I think that we've seen a pullback on transaction activity just in the last 30 days so we are we continue to be in this environment where
Speaker Change: select assets that meet the criteria that select buyers are looking for will trade and as Ben mentioned we've gotten a more confidence in where those asset values are and you know a lot of folks are looking for the same kind of stuff to buy including us.
Speaker Change: But, you know, we haven't seen kind of the large scale.
Speaker Change: Transaction activity that we would like to see because we would like to do more portfolio trading So it looks like this year, you know so far we've sold 590 million and we bought 325 million
Speaker Change: We're not done yet, you know, we will probably have at least one more disposition and hopefully another acquisition or two before year end, but we're going to end up the year net seller of
Speaker Change: Call it 150 to 200 million
Speaker Change: Our goal would be to be net neutral and to be able to buy at the same volume as we're selling. And as you point out, we don't need the net disposition capital to fund the growth through development. And we're happy with the trades that we're making.
Speaker Change: in our established regions for many years but which don't necessarily have the same growth profile as what we're buying and also kind of our regulatory exposure is part of that strategy as well. So all of those things continue and we certainly hope to be able to do more of that transaction trading in 25.
Speaker Change: Thanks for the time.
Speaker Change: Thank you. Our next question comes from the line of Josh Dunderline with Bank of America. Please proceed with your question.
Josh Dunderline: Hey guys, thanks for the time. Just looking at the lease rate growth across the markets, two kind of stood out to me. It was Pacific Northwest and Northern California. Any kind of a color you could give on maybe the decel going into October versus what you saw in 3Q?
Sean Breslin: Josh, this is Sean. I mean, what I'd say with sort of a broad brush is the new movement rent change pretty much came down in every single region.
Speaker Change: And as I mentioned, that was sort of the strategy to sort of help stabilize occupancy as we went into the slower leasing season.
Speaker Change: The one thing I would just point to is that Seattle tends to be more seasonal than average, and therefore, as you are attempting to build occupancy, any market that is more seasonal and average, you're going to take it a little bit harder on the new move ends. You're going to take it a little bit harder on the new move ends.
Speaker Change: relative to maybe some other markets that aren't quite as seasonal.
Speaker Change: That's really sort of the primary issue for Seattle.
Speaker Change: In Northern California, really nothing significant to note there, it's kind of a sub-market by sub-market decision based on availability and pricing and the occupancy target, so I wouldn't read too much into it other than in those particular sub-markets, we gave a little bit more to shore up on the new move inside.
Speaker Change: Okay, I appreciate that Sean. There's not a lot of volume in that, I'll keep it at mine.
Speaker Change: Okay, okay, but maybe on Seattle in particular, I think a competitor said they were hearing, it felt like they were seeing more traffic after Amazon's return-to-office announcement. Are you guys seeing that or anticipating any kind of benefit?
Speaker Change: Yeah, no, we've seen that really kind of starting back in Q2. Seattle is one of the regions that has performed much better than we originally anticipated.
Speaker Change: through 2024 in part due to
Speaker Change: Seattle MSA
Speaker Change: There are other employers doing the same thing, so I think overall, return to office and the trends return to office, whether it's Amazon.
Speaker Change: and the impact in Seattle or, you know, announcements from Salesforce about calling people back in January to San Francisco. All those things are a positive trend for those markets.
Speaker Change: I would say on the Salesforce side in San Francisco, we've started to see early signs of it, but there's probably still more to come. Whereas Amazon made that announcement quite some time ago, and we've seen movement throughout Seattle as a result of that for a good portion of this year.
Speaker Change: Our next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.
Speaker Change: Thank you for your attention.
Brad Heffern: Yeah, thank you. Yeah, maybe I didn't catch this, but could you guys give a lost police number?
Speaker Change: Yeah, Brad, this is Sean. We actually haven't, but overall loss of lease as of November 1st is about 100 basis points across the portfolio, slightly higher in the east than the west, and we're actually in a modest gain-to-lease situation in the expansion reasons.
Speaker Change: Thank you. Thank you. Thank you.
Brad Heffern: Okay, thanks for that. And then you mentioned in the slides that the DFP program now covers build to rent. That's new to me, at least. I guess, can you walk through that addition, especially given it isn't a property type that you develop?
Speaker Change: So on the build to rent, the BTR space, we have made a decision to more formally advance our plans there and we consider it an expansion of our existing business. We've been building townhomes, purpose-built townhomes, really since the beginning of Avalon Bay. We do it today. A lot of times we're building townhomes in conjunction with apartment flats and sometimes we're building full townhome types of communities.
Speaker Change: And so it feels like an opportunity for us to take what we do well on the operating side and on the development side and bring it into this, I'll call it, expanded
Speaker Change: set of opportunities.
Speaker Change: As we are organizing specific resources around the opportunity set, in the nearer term, you're likely to see more of our focus, one, be on townhome communities within the larger scope of BTR, and second, in terms of the growth channels, to be via acquisitions.
Speaker Change: And so we had an acquisition in Austin, which was a full townhome community, and through our developer funding program, which is the Plano project that you referenced. So we're excited about the opportunity set. I think we can really bring our strategic advantages to bear there and provide more growth opportunities going forward.
Speaker Change: Okay, thank you.
Speaker Change: Thank you. Our next question comes from the line of John...
Speaker Change: and Kim.
Speaker Change: with BMO Capital Markets. Please proceed with your question.
John: Good morning. On your building blocks for same-start NOI growth next year, I think the one item that you haven't addressed yet on this call is property taxes.
John: So you expect that to go down next year, and this is following the year where asset values have gone up, and you've increased your sunblood exposure where the rates are higher. Can you just comment on, you know, why you see taxes going down next year and maybe the quantum?
John: Yeah, John, this is Sean. The main driver, and we haven't settled all of our property tax budgets yet, but...
John: The main driver that will impact the growth rate for property taxes in 2025, particularly relative to 2024
Speaker Change: is a modestly diminished impact from the expiration of various tax abatement programs, notably the 421A program in New York City, which boosted overall expense growth.
Speaker Change: by roughly 80 basis points this year. We expect that to come down next year. So that would move the needle, all else being equal based on what we know today in terms of changes in assessed values or rates across the other markets when you have something that significant.
Speaker Change: Okay, that makes sense. And then on development yields, I know you typically outperform your initial projections once you stabilize the projects, but the yields on your current pipeline are now 5.9%, which is slightly lower than it was last quarter. Were there any projects that, you know, underperformed as far as
Speaker Change: run levels or budgeted costs versus your expectations?
Speaker Change: Hey John, it's Matt. No, I mean really that's just a mix change that we had two deals complete last quarter.
Speaker Change: whose yields were in the high sevens.
Speaker Change: which came out of the basket. They're no longer in the development bucket. They're now in other stabilized.
Speaker Change: and we added four deals that were around a six. So that's really, the change there is really just a basket mix.
Speaker Change: The deals that we have that are currently in lease up, which we don't have that many of, I think it's only five.
Speaker Change: they are running still ahead of Proforma.
Speaker Change: not as much ahead of pro forma as, you know, some of the deals we completed earlier this year.
Speaker Change: now moving into, we're now getting maybe a couple of years away from kind of 22 when we had pretty aggressive rent growth, but they're still running $175 per month ahead on rent and 20 basis points ahead on yield and that's at 5, 9 right now.
Speaker Change: What you'll see over the next couple quarters is that number will start to move up into the sixes, into the low sixes, and then probably by this time next year into the mid-sixes, as more of the deals that we started this year and in 23, which were underwritten into the sixes, start, and more of the deals that...
Speaker Change: started in 21 and 22 when cap rates were, you know, three and a half and yields were five. As those deals complete and roll out of that basket, you'll see it rise.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Anne Chan with Green Street. Please proceed with your question.
Anne Chan: Hi, thanks for taking my question. Going back to your comments on the built-to-rent communities, are you anticipating acquiring any detached single-family home built-to-rent communities as well or stick to the more townhome like product? And if so, can you give us a sense of the size of the pipeline you're evaluating?
Speaker Change: So on your first question, Anne, detached VTR product is in the possibility set. It's not where we're necessarily starting. We're going to, as I said, emphasize the townhome product a little bit closer to our regular activity, but purpose-built communities.
Speaker Change: generally in the unit range of, you know, 80 to 130 units.
Speaker Change: Thank you
Speaker Change: and many institutional large-scale operators in the space.
Speaker Change: In places where we can have both apartments and VTR, we feel like there are synergies that can come in and around that mix.
Speaker Change: We haven't defined the pipeline at this point. We haven't set a specific target in terms of the percentage of the overall portfolio, but we have dedicated resources and it will be an area of incremental emphasis over the next 12 to 18 months.
Speaker Change: Thank you. And moving over to construction costs that you were talking about earlier, you know, this has been shifting down. Could you also provide a sense for how land values have trended over the last few months and, you know, the construction, the labor costs in particular?
Speaker Change: Yeah, and it's Matt. Land values are usually the stickiest part of the equation in development, and it is, you know, completely local.
Speaker Change: So, it's hard to generalize on that. We have seen, and we highlighted actually last year on Investor Day how, you know, one of the deals we have under construction now in Quincy, Mass., you know, we were able to buy that land at 40% less than, you know, where it would have traded.
Speaker Change: at the peak of the frenzy.
Speaker Change: So, you know, there are situations where we've seen that kind of move. I say in California not a lot of land is trading because it's very difficult to get development to underwrite there.
Speaker Change: you know, to the extent it does, that's where we've seen some significant land retrenchment.
Speaker Change: And it's generally placed in those kind of markets where land represents a very high percentage of the deal cap. In some of the Sunbelt regions in North Carolina...
Speaker Change: you know, even in Texas, that the land is not that high a percentage of the deal cap. So, you know, whether you're paying 30 or 35 or 40 a door for the land, that's not really what's going to make the difference. So there is some give back there, but probably not as much.
Speaker Change: So it varies market to market but it's not been, with a few exceptions I would say, it hasn't you know kind of a major move across the board.
Speaker Change: Thank you all. Thank you.
Speaker Change: Great, thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Amy Provant with UBS.
Speaker Change: Thank you for your time. I appreciate it.
Amy Provant: Hi, thanks. What is the outlook for when the expansion markets could reach an equilibrium in terms of supply and demand and see a return to its pricing power?
Speaker Change: Our expectations for 2025 is
Speaker Change: particularly the high supply sub-markets in the Sunbelt regions are going to continue to face
Speaker Change: you know fairly meaningful pressure and then the impact on rent rolls and cash flows for those properties and those types of submarkets would then roll over into 2026.
Speaker Change: Start volumes, as we've all seen, are definitely coming down. I would emphasize they're coming down in both the Sun Belt and in our established regions.
Speaker Change: So as you get out into 2026, kind of all else being equal, you know, we do expect lower levels of supply, and I'd say sort of equal levels of demand as we think about demand drivers in our established regions relative to demand drivers in our expansion regions.
Speaker Change: Okay, and then a quick one. What assumptions are baked into the earning calculation? Does this include your prospective rents through the end of the year?
Speaker Change: Yes, Andy, it does, based on the numbers I described previously. So, yes, it does.
Speaker Change: Great, thank you very much.
Speaker Change: Thank you. Our next question comes from the line of Rich Anderson with Wedbush.
Speaker Change: Please proceed with your question.
Rich Anderson: Thank you.
Rich Anderson: Hey thanks and good morning still. So clearly you're
Rich Anderson: Sounding a little bit more upbeat on 2026 in terms of timing new deliveries.
Rich Anderson: What's the range of economic assumptions that you're using to get there, particularly for next year? You've obviously got some idea about where the broader economy is going.
Rich Anderson: employment and so on to get you comfortable with the year following. So I'm just wondering if you could give a picture of what the broader underlying assumptions are for the next year to get you sort of confident in 2026 deliveries. Thanks.
Speaker Change: Yeah sure Rich, I'll provide some color and context and really focus on our sort of economic outlook for 2025 at this point.
Rich Anderson: Consensus and you know we look to the National Association of Business Economics as a guide in and around consensus generally has job growth slowing in 2012 relative to 2024 going from sort of 2 million net new jobs down into the million and a half type of range.
Rich Anderson: Thank you.
Rich Anderson: A couple of call-outs, one is potentially the mix of jobs next year could look different than this year.
Rich Anderson: to be higher income jobs and jobs in what we would consider our knowledge-based economy, our core type of customer.
Rich Anderson: That's leaning a little bit. Wage prospects also for our core customer have continued to look strong. Those also look strong as we're heading into next year. And then generally this kind of connects sort of the job outlook to the supply outlook.
Rich Anderson: You sort of do a compare and contrast of 24 relative to 25. Maybe jobs are slowing a little bit, supplies are coming down a little bit. But across the country in a lot of markets...
Rich Anderson: seems fairly consistent from a jobs and supply ratio. And so, as we think about what are the types of markets that are going to outperform next year, they're going to continue to be the ones that have lower levels of new supply, and the ones that are going to continue to be under pressure are going to be those with higher levels of new supply coming online.
Speaker Change: Okay, so With that color. What's what's the bull case for owning multifamily next year? You know, it sounds like
Speaker Change: You know, you got some decent, you know, economic observations and you're, you know, you're feeling generally okay, but, you know, equity residential call describe things as good. And, you know, that's, I guess, good. But I just wonder if, you know, there's
Speaker Change: Is it sort of just a stable, sort of not sideways moving year next year to the bigger prize in 26 and 27, or do you think it's more optimistic than that for next year?
Speaker Change: Yeah, so for us, Rich, I'll highlight a couple of areas. One, we expect our suburban coastal business to continue to outperform. You look at the building blocks and the drivers that we've talked about going into next year and that Sean detailed, we feel relatively positive there. The other component is the lean-in in and around external growth.
Speaker Change: and we've talked about development activity and the build-up and the prospects there, and then potentially a transaction markets and, you know, I think...
Speaker Change: with some hopefully some enhanced visibility and stability around rates and cap rates that leads to some more transaction activity which when I think about the prospects for next year and going into 26
Speaker Change: Players with our scale, our cost of capital, our ability to generate more value by having assets on our platform, that should also allow us to lean further into external growth.
Speaker Change: Great. Awesome caller, Ben. Thanks very much.
Speaker Change: Got it.
Speaker Change: Thank you. Our next question comes from the line of Alexander.
Speaker Change: Goldfarb with Piper Sandler.
Speaker Change: Thank you for answering your question.
Alexander Goldfarb: Hey, good morning. Two questions for you, and maybe first just following up on Rich's question. You know, it's been five years since we've had a normal leasing market in apartment land.
Speaker Change: As you guys look to 2025,
Speaker Change: Do you think it will be back to a normal leasing market or do you think there will still be some anomalies in what we see as we go through 2025?
Sean Breslin: Hey Alex, it's Sean. When you say normal, just kind of normal seasonal patterns and pricing is what you mean, specifically, I assume? Yeah, I mean, we had, yeah, 2020 was COVID and, you know, it's been topsy-turvy, you know, since then.
Speaker Change: How the pricing curves are generated kind of follows the patterns of demand
Speaker Change: and our expectation is the traditional seasonal patterns for demand.
Speaker Change: aren't likely to shift any time soon in terms of...
Speaker Change: The reasons people move, when they want to move, what they're desiring in terms of apartments and things of that sort.
Speaker Change: The two things that are a little unusual that I think maybe still haven't fully played out, but are sort of in the background beyond what Ben talked about in terms of job and wage growth is in particularly in our coastal markets is the return to office trends and
Speaker Change: and Matthew Birenbaum.
Speaker Change: Salesforce bringing people back to San Francisco in January, that's certainly a positive.
Speaker Change: that helps sort of build confidence in the city.
Speaker Change: and other issues in LA and DC and places like that. So I think that's one factor. And then certainly the lack of affordable for sale housing in our established regions where the cost to own a home is, relative to renting, is the widest we've ever seen.
Speaker Change: Those two, it's hard to tell how those fully play out, but they are still playing out, I would say. You can see it on return to office trends.
Speaker Change: And on the for sale side, it's really, you know, showing up in lower turnover, which we think is going to be durable for a while.
Speaker Change: about the impact of new households being formed.
Speaker Change: and their options, you know, renting still looks like, relative to historical norms, a more attractive option. So how those play into the seasonal patterns may not look different, but it may just provide further support for growth in those established regions relative to what we've seen historically.
Speaker Change: The second question is on site selection, you know, clearly, especially here in the Northeast, lower Westchester, New Jersey have had a lot of floods.
Speaker Change: As you guys look throughout your existing markets and expansion markets...
Speaker Change: If, in fact, your site selection has changed based on how, you know, some of these rivers and such are overflowing with storms.
Matt Birenbaum: Hey Alex, it's Matt.
Speaker Change: For us, I'd say for at least the last six or seven years, we actually do have a pretty formal process for that, where every site gets run through a third-party...
Speaker Change: coastal risk model. It's actually a resiliency risk model, which tries to capture wind, flooding, fluvial flooding, fluvial flooding, excessive heat, wildfire risk, all those different things.
Speaker Change: So, I'd say we were early adopters of that.
Speaker Change: There are probably sites we've passed on that maybe today would be harder for somebody to get financed than would have been the case five years ago. And we did switch vendors to a more robust reporting format on that, but we've always been pretty mindful of that.
Speaker Change: Thank you.
Speaker Change: and Sean Breslin. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Handel St. Just with Missouho Security.
Speaker Change: Please proceed with your question.
Speaker Change: Hey guys, thanks for taking the questions.
Speaker Change: I have two quick ones here. First, I guess, is can you talk a bit about the year-to-date performance of your East versus West Coast markets versus your initial expectations and some thoughts on the relative opportunity ahead? The East Coast markets, Boston, New York, D.C., have been very strong this year but have tougher year-over-year compares than next year, while some of your West Coast markets, San Francisco and Seattle, have easier comps and some RTO upside, as you outlined, but less clarity. Thanks.
Sean Breslin: Yeah, this is Sean. Provide a little bit of color there. Yeah, certainly what I'd say for this year is we've seen better performance out of
Sean Breslin: Boston, New York City specifically of the New York, New Jersey region.
Speaker Change: and the Mid-Atlantic to a certain degree, and then also in the West Coast, Seattle.
Speaker Change: In terms of the outlook for those markets, yes, the earn-in, if you want to describe it that way, certainly is a little more robust in those markets relative to others.
Speaker Change: So all else being equal in terms of, you said everything else was equal in terms of rent change across the markets, those ones would outperform in 2025 relative to 2024.
Speaker Change: But, you know, to the extent you see significant momentum...
Speaker Change: due to other factors in the various other markets that haven't performed as well as those in 24, that can certainly overwhelm.
Speaker Change: and they're earning pretty quickly. So I think it's really a reflection of how you want to look at what the job growth expectations are for a particular market, how it blends with supply, and then these other trends in terms of for sale housing and return to office and how they play out that would really impact.
Speaker Change: the performance in 25 in terms of who's top of the leaderboard versus not.
Speaker Change: Would you care to quantify some of that earn-in for those East versus West markets or perhaps?
Wei Jin: Wei Jin
Speaker Change: Thank you.
Wei Jin: Yeah, we can look at it. I mean, I gave an overall number of 110 basis points. The earning on the East is about 130, and the earning on the West is about just under a point. It's around 94, 95 basis points.
Wei Jin: It's a forecast, so things can move around a little bit here. And then, as I mentioned earlier, as we were talking about lease-to-lease, loss-to-lease, or gain-to-lease, as it relates to our expansion regions, it's actually a little bit negative, around 20 basis points.
Speaker Change: Got it. Appreciate that. And then one more, if I could, just on the other income. I think it's up 15% or so this year, another 10% I think you outlined.
Speaker Change: for next year. I guess I'm curious on what's the remaining opportunity there, what's driving those numbers into next year, and then how should we think about the associated cost related to some of the initiatives that you'd be rolling out next year? Thanks.
Speaker Change: Yeah, yeah, no problem. Yeah, so we do expect it to, the growth rate for other rental revenue to do celebrate in 25 relative to 24 based on what we know today. There's a number of different categories that are producing sort of above-average growth.
Speaker Change: but the primary one that's driving it to that level has been our Avalon Connect offering.
Speaker Change: which will still be present in 2025 because we put the programs in place, it gets fully deployed, we'll be about 90% deployed by year end 2024 and then the revenue flows through as the leases expire in 2025.
Speaker Change: Since you can't push it through, people are already on existing leases.
Speaker Change: Thank you.
Speaker Change: And so that's the main driver. And then in terms of OpEx trends, as I mentioned earlier, the impact.
Speaker Change: for 2024 as a result of some of the initiatives.
Speaker Change: is around 120 basis points in terms of the impact on total OPEX growth in 2024. And we do expect that to diminish pretty materially as we get into 2025. Again, because the program is more fully deployed, not impacting as many units. So that will soften in 2025.
Speaker Change: Got it, got it. Appreciate the call.
Speaker Change: Sure.
Speaker Change: Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad.
Speaker Change: Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Linda Tsai: Hi, thanks for taking my question. Just on the view that like term effective rent is re-accelerating into year end, does this hold into January too? You know the chart on page 12 looks like the comparisons stay reasonable in January. Would you expect new lease growth to be positioned to be positive as well?
Speaker Change: We haven't provided a forecast yet for January as we're sort of still working through that. We felt comfortable doing that for November and December, just given the volume of these expirations in those months, what we already know about it, and the shift in asking rents, more importantly. So we're not providing that for January, but feel good about what we did provide for November and December.
Speaker Change: Yeah, he's going to do it to Matt.
Speaker Change: It's early to tell because, you know, it's still a relatively new and quickly expanding, you know, subsector of our business of rental housing more broadly, but I would say
Speaker Change: Our experience with the townhomes that we do own and, you know, what we've seen from third parties, the yields aren't really significantly different and for that matter probably nor are the cap rates.
Speaker Change: as it relates to who's the customer and is the customer different for a single family versus the townhome.
Speaker Change: or what have you and, you know, people developing townhomes at 10, 15, 20 of the acre. And as you get further out, you start to have more land where you're able to do...
Speaker Change: Sean Breslin, Matthew Birenbaum, Sean Breslin, Matthew Birenbaum, Sean Breslin, Matthew Birenbaum,
Speaker Change: You know, families with kids also, you know, would probably prefer the larger yard.
Speaker Change: A fair number of townhome BTRs that do have their own yard as well as their own garage. That is something that's important.
Speaker Change: and I believe the community we just started there in Plano has yards as well as garages, so but You know you so there are probably subtle differences in terms of life stage
Speaker Change: So the school district's probably more important for an SF, a single-family product than a townhome product. But, you know, this is all early days, and, you know, we'll certainly learn a lot more as we get, you know, more of this product out there.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Alexander Kim with Zellman & Associates. Please proceed with your question.
Alexander Kim: Hey, thanks for taking my question. I wanted to ask about your apartment renter base. Have you seen any demographic shifts recently as Millennials continue to age and move out to buy remains low? How are the younger age cohorts showing up in your portfolio?
Speaker Change: Um, you know, the percentage of roommates, you know, et cetera. I don't think there have been any significant shifts. I think as you look forward. Just giving.
Speaker Change: The Nation of Demographics and some of the development Matt was talking about I think.
Speaker Change: Being more heavily suburban some of the townhome products certainly fits the aging millennial profile where they want to
Speaker Change: Be a little more infill in our established regions, it's very expensive to buy a home.
Speaker Change: so they can get a nice quality townhome product.
Speaker Change: with a small yard or a nice deck.
Speaker Change: and being a good school district, that's highly attractive. So we are making sure our portfolio is well-positioned for the demand that's to come.
Speaker Change: which may represent, you know, slightly larger households when you include kids in some of these markets than what we've seen in the past. But looking at it over a short period of time, you get a lot of false signals in terms of just, you know, some noise in there that I wouldn't necessarily say has really resulted in anything significant in terms of shifts in the last few quarters.
Speaker Change: Got it. Makes sense. And then switching gears here to bad debt, you mentioned that you anticipate bad debt to continue to improve in 2025. I mean, can you talk about which markets are driving that change specifically or may have more runway for improvement as well? Thanks.
Speaker Change: Yeah, happy to do that. The regions with the greatest opportunities, I'll say, you know, top four or five, New York, New Jersey, particularly the New York City market, still running in the low 2% range.
Speaker Change: The mid-Atlantic, low 2% range as well, particularly the D.C. and Maryland being the outlier issues relative to Virginia actually doing pretty well. A little bit in Northern California, it's still running high relative to historical norms, but it's about 125 basis points.
Speaker Change: LA, you know, still running a little over 2% with LA and Ventura being the issues there.
Speaker Change: within Southern California, Orange County, San Diego.
Speaker Change: Getting closer to the norm at 70 to 90 basis points. Virginia, as I mentioned, around 70 basis points. Boston's back to 60. So it's really New York, New Jersey, the Mid-Atlantic, and then to a certain degree, Northern California and L.A. are the markets where we need to see more significant improvement as we move through 2025.
Speaker Change: Thanks for the color.
Speaker Change: Thank you.
Speaker Change: Thank you. Ladies and gentlemen, that concludes our question.
Speaker Change: Thank you for joining us in an answer session. I'll turn the floor back to Mr. Schall for any final comments.
Ben Schall: Thank you everyone for joining us today and we look forward to seeing many of you shortly at NARES.
Ben Schall: We'll get it.