Like its peer, Chicago-based REIT Equity Residential, AvalonBay Communities exceeded analyst expectations for the first quarter of 2024.

The Arlington, Virginia-based REIT’s core funds from operations of $2.70 per share beat consensus by five cents, powered by higher-than-expected net operating income and joint venture income. The company benefited from strong renewals and the performance of its new buildings in lease-up.

“AVB's suburban weighted portfolio and development program are playing to its advantage, aided by a healthier job market than management likely underwrote with initial guidance,” wrote Alexander Goldfarb, managing director and senior research analyst for investment bank and financial services company Piper Sandler in a report.

With the stronger-than-expected performance, AVB’s management team upgraded its same-store revenue growth guidance by 50 basis points to 3.1% for 2024. 

“The increased outlook is primarily driven by stronger lease rates, as higher occupancy at the start of the year has allowed us to begin to achieve higher rental rates than we originally anticipated as we move into the prime leasing season,” said Sean Breslin, AVB’s chief operating officer, on the REIT’s first-quarter earnings call in late April.

Here are three more takeaways from AVB’s earnings report and investor call.

Occupancy helps drive growth

Like many REITs, AVB worked to increase occupancy in the first quarter. At the end of Q1, the company’s apartments were 95.9% full, compared to 96.1% in Q1 2023 and 95.6% in Q4 2023. 

“While we expected occupancy to grow during Q1, it increased more quickly than we anticipated, reflecting strength in the underlying demand for our primarily coastal suburban portfolio and very limited new supply,” Breslin said.

AVB’s occupancy in Q1 was one of the primary drivers of its revenue growth improvement of 90 basis points over its prior outlook and accounted for roughly one-third of its total outperformance for the quarter, according to Breslin. This should set the stage for more rent growth in 2024.

“We now expect like-term effective rent change in the mid-2% range, about a 50-basis point increase from our original outlook,” Breslin said. “The second quarter should trend up into the low-3% range before decelerating in the back half of the year, consistent with seasonal norms.”

Momentum for the spring

AVB’s occupancy rate, combined with low turnover, has positioned the REIT to raise rents for the spring leasing season, according to AVB CEO Ben Schall. “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,” he said.

Schall is optimistic that better-than-expected job growth will continue to boost his portfolio. He cited new hiring as a tailwind for the company, though its impact could be muted by inflation and the types of jobs created.

“This better job outlook provides an incremental lift to demand, but not necessarily on the same trajectory as it may have in the past, given that a disproportionate share of these additional jobs may be part-time and seem to be more concentrated in lower-paying sectors of the economy,” Schall said.

The high cost of owning a home versus renting also helps AVB. Only 7% of the REIT’s residents moved out to buy a home in Q1 — much less than its long-term average of 16% to 17%. It costs more than $2,000 a month more to own versus rent a home in its markets, Schall said. “This differential translates into record low numbers of residents leaving us to buy a home,” he said.

Sun Belt opportunities

In AvalonBay’s coastal markets, new deliveries will be 1.5% of stock this year, which is in line with historical averages, according to Schall. However, new supply will come in at about 3.8% of housing stock in the Sun Belt.

“With the lease-up of a typical project taking an additional 12 to 18 months, the pressure on rents and occupancy in the Sun Belt will last at least through the end of 2025, if not into 2026,” Schall said.

With that weaker performance, property values are starting to fall in the Sun Belt, according to Schall. For AVB, which wants to eventually have 25% of its portfolio in the region, that presents an opportunity to buy at advantageous prices.

“We've got, in the near term, the ability to buy below replacement cost and be at a good basis and find that attractive from a long-term hold perspective,” Schall said. 

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