As apartment REIT earnings continued last week, a clear theme arose: Prospect traffic fell off a cliff in November and December. But as January progressed, visits picked up.

For Arlington, Virginia–based REIT AvalonBay Communities, the increase in visits translated to a modest lift in occupancy and rent changes. “Asking rents have increased about 100 basis points since the beginning of the year, which is beginning to flow into rent change,” chief operating officer Sean Breslin said on AVB's earnings call last week. 

AVB projects same-store revenue growth of 5% in 2023, with a 3% effective rent growth helping to power that increase, but AVB CEO Ben Schall noted that the environment is uncertain this year. 

“In a year in which we will need to be prepared for a wider set of potential outcomes than usual, there are a number of attributes of our portfolio, and particularly our concentration in suburban coastal markets, that we expect to serve as a ballast in a potentially softening economic environment,” Schall said on the earnings call.

Although the uncertain economic picture could limit rent growth, it could also help the REIT by limiting construction cost increases and assisting growth in its six expansion metros: Raleigh-Durham and Charlotte, North Carolina; Southeast Florida; Dallas and Austin, Texas; and Denver.

A boost in the Sun Belt

Over the past few years, AVB has been working to build 25% of its portfolio in its six expansion areas. In 2022, it increased its exposure to those metros to 7%. By the end of 2023, it expects to be at 10%.

“In addition to diversifying our portfolio, this shift reflects the reality that more and more of AVB’s core customer — knowledge-based workers — are increasingly in these markets,” Schall said.

The current issues in the lending world may allow the company to continue to expand in these metros. The REIT launched a structured investment business with over $90 million of preferred equity or mezzanine loan commitments, which have gone to assets in the expansion markets.

AVB also has a program to provide capital to third-party developers, which gives it a springboard to accelerate its presence in these growth areas. Already, it helped fund a project in Durham, North Carolina, and has another on the way in Charlotte. 

“We believe that both of these programs will be increasingly attractive to third-party developers in 2023,” Schall said. “We're also fortunate to be building these books of business now at today's economics and basis versus in yesterday's environment..”

Development growth

Early in the pandemic, AVB slowed development. As a result, net operating income from development should fall to $21 million, the company said. Usually, the company targets about 10% of its enterprise value under construction at a particular period of time, but it is below that now.

“New development communities are expected to increase significantly later in the year and into next year, which should set the stage for more robust NOI growth from development communities next year,” said AVB CFO Kevin O'Shea on the earnings call.

AVB increased its development rights pipeline to roughly 40 individual projects, according to chief investment officer Matt Birenbaum. Overall, AVB expects approximately $900 million in starts in 2023 across seven different projects. Half of those should be in its expansion regions. 

Birenbaum said the company is hopeful that it can “take advantage of moderating hard costs across its markets,” which is partially why it is staggering starts later in 2023.

AVB already saw construction labor cost moderation in projects that it started in Q3 and Q4 of 2022. “Once we actually start moving dirt and the subcontractors see the deal is real, they are coming back with more growth in pricing, and we are starting to see some savings,” Birenbaum said.

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