Avalonbay Communities Inc

NYSE:AVB

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities Third Quarter 2021 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. [Operator Instructions]

Your host for today's conference call is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference.

[Jason Reilley, VP of IR]

Thank you, Kathy, and welcome to AvalonBay Communities third quarter 2021 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 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, this 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. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance.

And with that, I will turn the call over to Tim Naughton, Chairman and CEO of AvalonBay Communities, for his remarks. Tim?

[Tim Naughton, Chairman and CEO]

Yes. Thanks, Jason, and welcome. Ben Schall, Kevin O'Shea, Matt Birenbaum and Sean Breslin. For our prepared comments today, Ben will provide a summary of third quarter results, an update on Q4 and full year guidance and provide some thoughts on why we believe AVB is well positioned to outperform. Sean will then elaborate on operating trends in the portfolio, where we continue to see strong momentum and healthy fundamentals that should support robust growth as we move into 2022. And then we'll conclude with an overview of development activity where development economics remain compelling and then offer a brief look at our new expansion markets, including our rationale behind our decision to enter them earlier this year. And then we'll all be available for Q&A after prepared remarks.

But before turning the call over to Ben, I did want to take a minute to acknowledge that I expect that this will be my last earnings call as I plan to step down at year-end as CEO, when I'll assume the role of Executive Chairman as we had previously announced last December.

I spent the last 32 years at AvalonBay and its predecessors. And over the last 20-plus years or so, I've had the opportunity to interact with many of you on this call on a regular basis. I just want to say that I appreciate your support for and engagement with the company and me over that time. And for the investors on the call, I simply want to thank you for entrusting us as a steward of your capital over the years.

It's something we've never taken for granted. And I know that will continue to be the case in the future on the leadership of Ben and this executive team. I look forward to being able to touch base with many of you more directly and hopefully in a little more personal way over the next couple of months.

And with that, I'd like to turn the call over and place in the very capable hands of Ben Schall and the rest of the executive team here today. Ben?

[Ben Schall, President & Director]

Thank you, Tim. We wanted to start the call today as a team and an organization by expressing our gratitude and acknowledging Tim for his contributions to the company and the industry over the last 32 years. AvalonBay would not be the company it is today without Tim's strategic leadership, which is deeply intertwined with the company's history and evolution into one of the preeminent real estate companies in the U.S., its exceptional track record of value creation and its inclusive culture focused on continuous improvement.

In addition to overseeing AvalonBay's tremendous growth and positioning us as an industry leader, Tim has also had a major influence on the evolution of the multifamily industry and the broader REIT sector during his career. And throughout all of these accomplishments and successes in what is one of Tim's most admirable attributes as a leader and a person, Tim never made it about him. His focus has always been on others, the positive impact he could have on people, the impact that AvalonBay could have in our communities and how he could lead by fostering and reinforcing our evergreen culture and strong organizational values.

On behalf of all of those that have been part of AvalonBay and all of us at the company today, thank you, Tim.

[Tim Naughton, Chairman and CEO]

Thank you, Ben.

[Ben Schall, President & Director]

As the next section and before turning to the presentation, we wanted to emphasize upfront a number of factors that we believe position AvalonBay for outsized performance over the coming quarters and as we look towards 2022. Our operating fundamentals continue to show very strong momentum with rents now above pre-COVID levels in 5 of our 6 large coastal regions with the strongest performance in our suburban communities, which comprise over two-thirds of the portfolio.

Our resident base with concentrations employed in knowledge-based industries are in high demand in today's labor market, setting the table for future rent growth as wages continue to rise. And for the segment of our resident base who would typically be seeking to purchase a home after a period of time with us, this alternative is challenging given the general lack of availability, further supporting our retention rates and demand fundamentals.

We also expect our portfolio and market allocation to generate strong growth over the coming quarters. Looking back over the last 18 months, while we've experienced an unprecedented trough and then an equally unprecedented recovery, our rents today are only 7% above October 2019 levels, equating roughly to 3.5% growth per year.

With an economy and growth mode, limited availability, low turnover, significant loss to lease and with one-third of our portfolio in urban areas that are recovering, but still held back by the pandemic, we expect strong operating tailwinds as we head into 2022. Our execution on our operating model initiatives also continue to pay dividends with our investments in technology and innovation, offering enhanced value to prospects and residents while also allowing us to improve operating efficiencies.

Through these initiatives, we expect to improve margin by roughly 200 basis points, with $10 million of this improvement already captured and with an additional $25 million to $35 million to be captured over the next couple of years.

Finally, we're also creating outsized value creation and earnings growth from our development platform with returns trending above pro forma, leading us to ramp development activity with very attractive spreads between our development yields and market cap rates.

We are definitely in growth mode, which is further supported by our access to a historically low cost of capital given the strength of the capital and transaction markets, all of which sets up for a strong end of this year and meaningful growth in 2022.

Turning to the presentation and starting on Slide 4. The rapid pace of recovery continued in the third quarter with core FFO coming in at $0.10 above the midpoint of our prior Q3 guidance and flat on a year-over-year basis. The outperformance relative to guidance was driven primarily by same-store revenue, which produced a 4% sequential increase in revenue on a cash basis.

Our growth orientation is reflected in our ramp in development starts with just under $1 billion of starts through the end of Q3. We've also completed $1.1 billion of projects so far this year at an attractive yield of 5.9%. In addition to development, we are growing through acquisitions, and Q3 marked our first acquisitions in our new expansion markets of Texas and North Carolina totaling $275 million. And subsequent to quarter end, we closed on an additional acquisition in Fort Lauderdale, Florida for $150 million.

Funding our growth with low-cost capital, primarily from asset sales and incremental debt proceeds, including a recent $700 million 10-year unsecured bond at a fixed rate of 2.05%, the lowest coupon and lowest spread in AvalonBay history and also our first green bond.

Turning to Slide 5 and given these strong operating trends, we have raised our guidance for Q4 and for the full year 2021. Q4 FFO guidance has been raised to a range of $2.19 to $2.29 per share, an $0.11 increase over our previous Q4 guidance at the midpoint. This improved outlook is driven by our improved revenue expectations with residential revenue now projected to increase in Q4 by 5% on a year-over-year basis.

In addition to occupancy and rate trends, the same-store revenue outlook assumes approximately $12 million of additional rent relief payments in Q4, relatively consistent with what we received during Q3. Other activity incorporated into our updated Q4 guidance includes $250 million to $300 million of dispositions from our Northeastern markets at an expected cap rate of sub 3.5% and $300 million to $350 million of acquisitions in our expansion markets, one of which is the Fort Lauderdale community and with the others under agreement.

Slide 6 shows the components of rental revenue change on a year-over-year basis, residential revenue growth being driven primarily by higher occupancy and rent relief recognized during Q3 leading to a 1% increase on a GAAP basis and a 4.3% increase on a cash basis. On a sequential basis, as shown on Slide 7, the rental revenue increase was driven by our momentum on lease rates as well as the recognition of rent relief payments, leading to a residential rental revenue increase of 3.3% on a GAAP basis and 4% on a cash basis.

With that positive backdrop, I'll turn it to Sean to discuss our operating performance more fully.

[Sean Breslin, COO]

All right. Thanks, Ben. I thought I'd share a few slides on the portfolio rent for the quarter and into October, both at the same-store level and across different markets and submarkets. Overall, we have continued to experience a significant rebound in the business. If you look at Slide 8, like-term effective rent change turned positive in June, has accelerated materially over the last few months. It is now running at roughly 11%.

If you turn to Slide 9, you can see what's supporting the improvement in our rent change, which is the growth we've experienced in average move-in rent value. Our average move-in value has grown by roughly 24% since the beginning of the year, including a 9% increase since the end of Q2 and is now about 7% above the level we achieved in the fall of 2019.

Moving to Slide 10. Improved performance has been broad-based with every region experienced an increase in average move-in rent over the past quarter. As noted in the chart, the recent flattening of move-in values reflect a normal seasonal pattern although the seasonal adjustment has only been about one-third of the amount we typically see moving from the summer into the fall.

Rents are now equal to or greater than 2019 levels in every region except Northern California, which has seen roughly 20% growth in move-in rents this year but still remains roughly 7% below the level we achieved in 2019. The time line for a full recovery in Northern California has been delayed in large part by major tech employers extending their return to office state into early 2022.

At the other end of the spectrum, the Southern California region has experienced strong growth in movement values, supported by very healthy job growth, including significant growth in the content-producing segment of the media industry. Limited supply and a very tighter sale market.

Turning to Slide 11 to address suburban and urban performance trends. The average October move-in rent for our suburban portfolio was roughly 12% above the rent we achieved in October 2019. In our urban portfolio, while demand has returned in a meaningful way and rents have recovered significantly. Move-in rents are still slightly below what we achieved in October 2019.

To provide a few examples, in Boston and New York City, urban move-in rents are now 1% above what we achieved in 2019. But the District of Columbia and San Francisco are lagging with move-in rents that are 3% and 13%, respectively, below what we achieved in 2019. Given the continuing adoption of vaccine requirements and steady climate vaccination rates, we expect urban office occupancy rates will continue to rise as we move into 2022 which is one of the opportunities we expect to benefit from next year.

In fact, moving to Slide 12. The macro environment should support healthy fundamentals in our markets over the next several quarters. Starting at the top left of Slide 12. While the labor market continues to improve, we're still almost 5 million jobs short of where we started. The demand for labor continues to be robust, which is putting material upward pressure on wages a key driver of rent growth.

Chart 1 shows job, wage and total personal income growth for the professional services sector of the economy, which is where most of our residents are employed. As noted in the chart, we've only experienced positive year-over-year growth across all 3 categories since Q2 of this year. And as many businesses are finding as they attempt to recruit and retain professional services employees, the market has only strengthened since Q2.

In Chart 2, office usage hit a trough in Q2 2020 at the onset of the pandemic. Since that time, while we've seen steady improvement, the gains have been modest. As we look forward into 2022, gains in office usage should support additional rent growth, particularly in our urban and job center suburban submarkets.

And touching on Chart 3 and 4 regarding the housing market, price appreciation in the for-sale single-family market and relatively stable multifamily supply, both support a healthy near-term outlook for rental rate growth. With that favorable macro outlook as context, turning to Slide 13, we also see terrific tailwinds in our portfolio as we move into next year.

Beginning in the upper left of the slide, the chart number one , we're starting from a position of strength with turnover trending lower and strong, stable occupancy, which brings with it unusually strong pricing power. Turnover has declined this year. It was down about 1,000 basis points or 15% in Q3 relative to what we would experience a normal year like 2019 and occupancy has been running above 96% for several months now, a point at which we can continue to push rents.

In Chart 2, given the very healthy rent change we've experienced a month, we'll be starting 2022 with built-in revenue growth of roughly 3%. The starting point that we didn't benefit from in any year during the last cycle. The strongest starting point in the last cycle was roughly 2.25% at the beginning of 2012.

In addition to the baked-in revenue growth in Chart 2, our loss to lease is currently running at roughly 14% and is depicted in Chart number 3. Providing plenty of opportunity to benefit from moving existing leases to market when they expire.

Moving to the bottom of Slide 13. There are 3 other somewhat unusual tailwinds that should also benefit revenue growth as we move into 2022. In Chart 4, the amortization of concessions associated with previously signed leases which should burn off as we move through the next several quarters.

In Chart 5, a reduction in bad debt, which we won't revert quickly to the pre-pandemic average but should begin to abate as the eviction moratoria expire and our legal remedies become more widely available to us. And then finally, on Chart 6, continuing receipts from the emergency rental assistance program for our same-store portfolio, we receive -- we have received $14 million from the program with $11 million of it coming in the last quarter.

Since less than one quarter of the roughly $47 billion authorized by the federal government have been distributed as of September 30, we expect to receive additional funds in Q4 this year and in 2022.

So with that summary, I'll turn it back to Ben to address development and our new expansion markets. Ben?

[Ben Schall, President & Director]

Thanks, Sean. As shown on Slide 14, these strong operating trends are also translating into outperformance for our 6 development projects currently in lease-up with lease rates up $180 per unit and with projected yields up 30 basis points to 6%, driving further value and earnings.

Turning to Slide 15. Our total current development portfolio is poised to deliver meaningful incremental NOI and NAV growth over the coming quarters. Specifically, these projects are projected to generate $145 million of NOI upon stabilization, of which only $26 million is in place today on an annualized basis.

These communities are slated to generate $1.2 billion of net value above our costs or close to $9 per share of NAV and meaningful earnings growth. As further highlighted on Slide 16, our industry-leading development platform has created significant value throughout various cycles with consistently strong spreads between development yields and market cap rates, which today sits at a spread of roughly 210 basis points.

As we look forward over the coming years, our existing development rights pipeline totals $3 billion of potential projects. Lining us up well for a strong pace of continued profitable development.

Turning to Slide 17. Our 4 new expansion markets in addition to our continued growth in Southeast Florida and Denver provide us with meaningful additional growth opportunities as well as the ability to optimize our overall portfolio over time. This slide provides the high-level framework we utilize to evaluate markets and that drive portfolio allocation decisions across our existing markets and our expansion markets.

At the top of the list, our focus remains on being a best-in-class developer and operator in markets that over-indexed to knowledge-based employment, which we expect to experience outsized job and wage growth. We also continue to believe that markets with a high cost of home ownership, create an attractive rent versus own backdrop for our product offering.

While our expansion markets generally have lower home prices than our existing markets, the rise in home prices, particularly in certain submarkets in these areas create similar positive dynamics for future rental growth. We remain closely attuned to the regulatory environment in each of our markets with local land use restrictions, creating certain favorable barriers to new supply in our existing markets, providing opportunities for our development teams to leverage our long-standing relationships to unlock development opportunities.

These coastal markets have, however, seen an increase in landlord tenant regulations, and our expansion into new markets is partially driven by our desire to diversify our regulatory exposure. And the fourth factor highlighted here, public infrastructure and cultural amenities is our proxy for the overall quality of life that large knowledge-based employers and our type of customers will continue to seek out.

This thematic framework is, in turn, supported by our proprietary market research, which shapes our market and submarket capital allocation decisions as we drive long-term value. Slide 18 highlights the characteristics supporting growth in our recently announced expansion markets and what we believe positions these markets well in the long term.

As we enter these markets, our focus is on creating long-term value by exporting our development and operational acumen as well as our culture to an expanded set of opportunities. And to wrap up, we believe that we are well positioned to outperform as we head into 2022, a favorable macro backdrop, including continued job and wage growth, declining affordability of for-sale housing, a full of return to offices, particularly benefiting the one-third of our portfolio in urban environments and a relatively stable supply forecast in overall AVB markets should provide a strong tailwind.

Our embedded growth in of lease along with the benefit of concessions and bad debt normalizing over time should be key drivers of revenue next year. Our operating initiatives are on track to deliver significant margin expansion and serve as one of our drivers of earnings growth over the coming 2 to 3 years.

Our development platform is also poised to deliver meaningful value and earnings growth with a development rights pipeline of $3 billion and with development yields substantially above stabilized cap rates and our cost of capital. Finally, our expansion markets provide a broader set of opportunities to leverage our platform for growth.

We're excited for the growth opportunities ahead of us. And with that, I'll turn it to the operator to open the line for questions.

[Operator]

[Operator Instructions] We will take our first question from Rich Hill with Morgan Stanley.

[Rich Hill, Morgan Stanley]

First of all, congrats on a really good quarter. It looks like you're showing some real inflection here. I wanted to maybe take a step back and think about '22 and '23 in the context of that loss to lease. Maybe you can help us frame can you get all of that loss to lease back in '22? Or is it some of it going to move back into '23? We've heard some different commentary from some of your peers. So I'm wondering how you guys think about it.

[Sean Breslin, COO]

Rich, it's Sean. And good question, of course. Yes, what I would say on the loss to lease is in a normal year, so to speak, as part of what you can say is that there's probably anywhere between 15% to 20% of our portfolio that's somewhat constrained in capturing that loss to lease or the delta between the existing rents and the market rent based on the regulatory environment that's in place.

And the typical examples are the rent rates in New York, in D.C., we have an asset in San Francisco, 1 in L.A., et cetera, et cetera. In the current environment, given the, call it, the COVID overlay, that total percentage of the portfolio that is somewhat encumbered at least for the short run, is probably closer to about one-third of the portfolio where there are some rent caps in place in various other jurisdictions that limit the ability to capture that.

The question is when some of those additional or incremental restriction -- restrictions expire, which is TBD at this point in time. The 1 that's probably the most significant is the state of emergency cap in California, which is constraining probably, for the most part, renewals in places like San Diego and Orange County, which have experienced pretty robust growth.

So the way I would think about it is you have the incremental piece that I talked about, so call it totally one-third that is probably constrained, at least in the near term, how that sort of burns off from one-third back to 15%, 20% during 2022 as a TBD. And then also just factoring in the distribution of lease expectations is the other fact that you have to consider as you kind of run through your model.

[Rich Hill, Morgan Stanley]

I think I understand that math. And maybe this is a question for Ben. I wanted to maybe understand a little bit better how you're considering development in the past development early in the cycle has been a big driver of your growth. How are you thinking about that this time? Is it any different than past cycles?

[Ben Schall, President & Director]

Our approach is similar, Rich. And you've seen that with our ramp of activity over the last 6 months, we definitely see it as a differentiator for us, definitely see it as a driver of alpha. Matt can maybe talk some more about our pipeline of activity but our track record and our development franchises in our existing markets, we have full confidence we'll be able to continue to unlock value. And now we have the expanded set of opportunities in the growth markets widen our total opportunity set. Matt, do you want to talk some more on the development pipeline?

[Matthew Birenbaum]

Sure. Yes. Just to give a little more color on the development pipeline. So we're -- we've started close to $1 billion so far this year. We are on track to start probably another $350 million here in the fourth quarter. And when you kind of look at the breakdown of the most recent starts this year, it's a nice mix geographically, about three quarters suburban, one quarter urban and maybe 25% of our starts this year and actually in our expansion markets in Florida and Denver and then maybe a little less than one-third in the Northeast and the rest, almost half on the West Coast.

As we look out to next year, we'd like to be able to start somewhere in the same range in that $1 billion to $1.5 billion range, depending on how things shape up. But as Ben mentioned in his remarks, we have a $3 billion development rights pipeline. And there's a lot working its way through the system now. We really started putting our foot back on the gas for new business development a quarter or 2 ago.

And we've got probably over $1 billion worth of new development rights in addition to that $3 billion that's working its way through the system now. So we will start some in this fourth quarter, but I'm hoping that at the end of the year, the development rights pipeline will actually grow to somewhere at or north of $3.5 billion. So we have a lot of opportunity in front of us.

[Operator]

We'll take our next question from Nick Joseph with Citi.

[Nick Joseph, Citi]

First of all, congratulations, Tim. Maybe just following up on development. Curious what sort of inflationary pressures you're seeing. I guess, obviously, it's coming through on the rent side, but also I would imagine on the construction side for the new starts, how you think about looking at those yields versus cost?

[Matthew Birenbaum]

Sure. Nick, it's Matt. There's definitely inflation and like you said, it helps on the rent side and it hurts on the cost side. What we've seen is the deals that we are starting this year the total development cost is probably 10% to maybe even as much in some cases, is 15% higher than where it would have been a couple of years ago. If NOIs are trending up, you do get some leverage on that.

And then the third part of the equation is asset values, which, of course, have been trending up more than the 10% or 15% costs have been going up. So when you combine the higher NOI with the lower cap rates, the value creation and the spread is probably wider than it was before. The yields probably pre-COVID, our development rights pipeline yields were maybe in the low 6s. Now they're in the high 5s. If you look at the stuff we're starting this year, it's pro forma to around 7 5 8 and that's where kind of the new business we're signing up or the stuff we might start next year based on today's economics looks to be as well.

[Nick Joseph, Citi]

And then -- you mentioned the regulatory side of the equation when you're looking at different markets. How do you think about regulatory risk in some of these expansion markets? Obviously, it's more favorable right now than some of the coastal markets, but how do you try to handicap any changes going forward in the future there?

[Sean Breslin, COO]

Yes. Nick, it's Sean. Good question. And I think when you talk about the regulatory environment, there are pros and cons to it. So if you maybe start with sort of our coastal market footprint that we've had for a long period of time. Part of the reason we have been so successful in creating value through the development pipeline is there is a very difficult regulatory environment to work your way through to actually get development entitled and delivered into those submarkets.

So it's been to our benefit historically. Obviously, the more active is the jurisdictions become as it relates to landlord tenants and rent-oriented things become slightly more risky for us, of course.

In terms of the expansion markets, there are not as many constraints on development, although there are places within those regions that are a little more sensitive to development and have somewhat more constraints, but in general, slightly -- were favorable in terms of development, of course.

And in terms of evaluating the risk on sort of the landlord tenant side and the rent side, it is a jurisdiction-by-jurisdiction assessment. For example, if you think of our legacy markets, we feel pretty good about Washington state overall, not so good about the city of Seattle. So when you go through some of these markets, for example, in Texas, you look at overall, feel pretty good generally speaking about that environment. Austin, there are some more regulatory constraints in the suburban environments as it relates to land use and the watershed and things like that.

So overall, we think the regulatory environment certainly is to our benefit in those markets, but there are places where you have to still work with -- and overall, the landlord tenant, the rent control side, we think the risk is definitely lower than our legacy markets, but it's not without any risk the way I describe it.

[Operator]

We'll take our next question from Rich Hightower with Evercore.

[Rich Hightower, Evercore]

And likewise, all the best of Tim in the next phase of his tenure with AvalonBay and beyond. So I just want to follow up on Nick's question there. I guess, look, if you bake it all together in terms of your outlook for job growth, supply growth, regulatory impact 1 way or the other. I mean, if you had to sort of gauge which group of markets is going to have superior rent growth over the next 3 to 5 years, again, taking all those factors kind of in hand. Where do you sort of peg your core coastal markets versus those expansion markets in that regard?

[Sean Breslin, COO]

Yes, Rich, good question. I'm not sure we're prepared to I'll call it a lead horse just yet. The way I think about it is kind of the way you described in terms of looking at job growth, supply growth, all the macro factors that we all consider. And I think what we -- the reason we're going into these markets is while we certainly see more supply growth in these markets, say, in the 3% range, if you talk about Denver Southeast Florida, they also produce a lot more jobs and have benefited from much more significant in migration as opposed to the coastal markets, which have typically benefited historically from immigration.

So I think when we look through it, I mean, at the end of the day, when we look at our portfolio, we still expect a very significant portion of our portfolio to be in our sort of legacy coastal markets. But for all the reasons that Ben talked about in his prepared remarks related to where we see kind of knowledge-based workers growing. It's growing in our legacy markets. It's also growing in some of these mid-cap knowledge markets, there's more supply, for sure, but you definitely see the demand that more that consumes that. So I think the question is really the supply get maybe too much in front of that in some of these Sunbelt markets where we've seen significant growth the last 18 months? Or does that come back in the check. I think that will dictate kind of how the rent growth equation comes out across the expansion markets versus our coastal markets.

But we believe in both, and they may not grow at the same pace at the same time. But over the long run, we feel good about the rent growth that we'll see across the entire footprint.

[Rich Hightower, Evercore]

And then maybe just a different twist on the development question, but this isn't so much a question on inflation as it is, the impact of labor and supply chain constraints on the timing of new deliveries, whether we're talking AvalonBay's projects or even competitive supply? What trends are you seeing in those factors?

[Matthew Birenbaum]

Yes Rich, it's Matt. It is -- I mean we have not yet seen a lack of availability, supply chain interfere with our ability to deliver apartments. We've had spot issues here and there where right now, we're struggling to get appliances in 1 asset, and so it might delay deliveries by a month or so.

But we haven't seen it in a more widespread way, but there is that potential. I mean there are certain commodities, drywalls on an allocation right now in some markets. So I think it has impacted the for sale inventory and ability to deliver some. I think for us, it's a place where we benefit a little bit by being our own general contractor and having repeat relationships with our subcontractors.

So honestly, the bigger constraint right now on getting units turned and delivered has been the local jurisdictions and their staff. A lot of these jurisdictions are still remote and they're down inspectors and you can't get people at City Hall to print out the documents you need.

So I wouldn't be surprised if some of the stuff that's in the pipeline takes a little longer to deliver if a deal that you thought you might done in 8 quarters might take 9 quarters instead. So there could be a little bit of delay over time on that, and it might extend the supply some just more broadly.

[Operator]

We will take our next question from Bradley Heffern with RBC Capital Markets.

[Bradley Heffern, RBC Capital Markets]

Looking at Slide 9, it doesn't seem like you've seen some of the seasonal falloff that other coastal names have. So the same chart for other people kind of peaks in August and goes down in September and October. I'm curious if there's an underlying reason you can point to as to why that would be the case.

[Ben Schall, President & Director]

Yes, Brad, good question. I mean, it is correct that we have seen a more modest seasonal adjustment, and we typically would experience historically. If you go back 2 or 3 years kind of pre-pandemic and kind of look at where September rents are relative to the peak rent during the summer in the various regions, which each one peaks at a slightly different time, but just call it the middle of the summer and kind of where it comes down to September relative to this year.

Historically, we see about a 2.5% decline from peak to September averages. This year, it's only about 90 basis points in terms of what we've seen in terms of that softness in asking rents, which ultimately impacts move-in rents.

So it's about one-thirds of what's normal. And it's pretty widespread across our markets as it relates to the seasonality being less than historical averages. It's hard to speak to the portfolio of our peers, specifically what may be impacting them. But certainly, as we look at our portfolio, we feel good about the fact that the rate of decline has been far less than historical norms.

So we'll see how it plays out as we get through the end of the year. It could be just timing differences among the different companies. And it's really a submarket-by-submarket issue that you have to look at. So it's hard to decide for the others in terms of what their real conclusion is.

[Bradley Heffern, RBC Capital Markets]

And then on the OpEx guide, I was noticing that the third quarter was in line with the guide then. And then the fourth quarter OpEx guide is really quite low, but the overall guidance went up. I was curious if you could reconcile that was the original fourth quarter expectation that OpEx would be down and then there's just been pressures on top of that? Or any help there.

[Ben Schall, President & Director]

Yes. I mean there's a number of different factors kind of driving the timing from quarter-to-quarter, which is a pretty kind of detailed road map. Why don't I ask Jason to follow up with you on that 1 offline as opposed to getting into the. I mean a lot of it is timing of different projects and when they hit what we expect turnover to be and various things like that to sort of come through leasing activity, the impact on bonus. There's a lot of different things that sort of drive that number in terms of the quarter-to-quarter cadence.

[Kevin O’Shea]

Brad, this is Kevin. Just to sort of reiterate, we do expect same-store OpEx to decline materially sequentially into the fourth quarter.

[Operator]

We'll take our next question from Chandni Luthra with Goldman Sachs.

[Chandni Luthra, Goldman Sachs]

And Tim, let me extend my congratulations to you on a glorious career and good luck on the next chapter. So this is for the team. As we kind of think about potential interest rate hike or a series of them going into 2022, how do you all think about the spread that you laid out in slides between projected stabilized yields and total cost of capital? I think you guys noted that it's about 210 bps, and it's fairly wide. How should we think about that spread in the event of a higher cost of capital?

[Matthew Birenbaum]

Matt, I can start and others can chime in. I'd say, first and foremost, we try and lock in that spread by. So we're generally raising and sourcing the capital when we start jobs. So that if there is a big change to the cost of capital, you think about the development yields we're putting up relative to the capital that we funded those with.

And so that's why you see -- we're generally anywhere between 70% and 80% match funded. When you look at kind of the remaining spend in our development book against our cash on hand and kind of the short-term free cash flow. So I think it probably starts there. And then beyond that, I guess you'd have to ask yourself why are rates rising? And if because it's an inflationary environment and NOIs are also rising, then hopefully, you can preserve most of that spread anyway. If rates are rising because it's an increase in real rates as opposed to nominal rates, then that does put downward pressure on the margin.

[Kevin O’Shea]

Chandni, this is Kevin. Just to maybe add to Matt's point, I mean the largest -- most relevant point with respect to the activities we're doing is what Matt outlined, which is we are substantially match-funded against our investment commitments when we start those developments. So at the moment, if you look at our current book on the way of development, we are nearly 80% match funded. But also importantly, you have to look at this on a holistic balance sheet perspective, when we are considering incremental investment opportunities in that regard, we are in terrific financial shape and have tremendous financial flex.

We're soon to be substantially match funded on investment commitments that we've made from a liquidity point of view, as you can tell from our lease, we have $300 million of cash on hand and nothing drawn a $1.75 billion line of credit.

And then from a leverage point of view, we're at 5 time against a targeted range for net debt-to-EBITDA of 5x to 6x and our EBITDA is rising. And so we have increasing leverage capacity as well. So when you kind of put that all together, to the extent we get into a where there's a little bit of volatility in the capital markets, we do have a lot of financial flexibility to choose our time in which we enter a market and try to choose when we source capital to those moments where it's most attractive.

So Altogether, we're in terrific financial shape with respect to our existing commitments, and we have a lot of flexibility to think about how we might finance our future investment opportunities in a volatile and potentially rising rate environment.

[Unidentified Company Representative]

The last piece I would add is just that the macro level, obviously, interest rates can have an impact on asset values but also be very mindful of fund flows, right, which you think about the correlation of asset values over time tend to be more correlated to asset values. And so as we look out, what we're seeing today and look out over the coming years, we expect fund flows into the real asset space and particularly in the multifamily space to remain strong.

[Chandni Luthra, Goldman Sachs]

My second question is slightly more housekeeping in nature. Could you all provide an update on what percent of leases are receiving in concession today? And what that average concession, if at all, is looking like?

[Unidentified Company Representative]

Sure. Happy to answer that. As it relates to the third quarter, about 10% of the new move-in leases that we've signed, received a concession and the average concession was about two-thirds of a month's rent for that 10% population of move-in pieces.

[Operator]

We'll take our next question from John Pawlowski with Green Street.

[John Pawlowski, Green Street]

Sean, I'm not sure if you can glean this from your leasing data, but just curious about 1 aspect of rent or behavior. So as the impacts of the pandemic fade, are you seeing any structural shift in the propensity to have rates?

[Sean Breslin, COO]

Good question, John. At the portfolio level, it has not changed materially going through COVID, but has dipped a little bit, which is something you might expect. In terms of sort of recent quarter leasing activity, -- That 1 I have to follow up with you on. I don't have that off the top of my head. But the overall percentage of the population with the third quarter, I think it was down maybe 150 basis points from historical averages. So not a material move. But it doesn't mean that it hasn't changed in certain submarkets.

We have heard about that a little bit, particularly in the context of major urban cities that are home to significant university where they've tried to sort of densify the dorm, so to speak. So there's not as many roommates and pushing people out to sort of market rate housing which is helping to support demand in these markets. But the specific nuance the last couple of quarters that I have to back.

[John Pawlowski, Green Street]

No, I appreciate the details. And the last question for me is a little bit longer term in nature about what's the right -- or what's the needed capital expenditure load to operated apartment portfolio? So in the near term, you obviously have supply issues. But little bit longer-term regulatory issues, balcony inspections in California, green emissions. You go down the list. But the direct question is, do you think there's a step change coming in the capital expenditures needed to operate an apartment portfolio?

[Sean Breslin, COO]

Yes. Good question. I can take some of that, and there's some ESG things that Matt can talk about that potentially out there on the horizon in the context of the regulatory environment, there are definitely some issues. I wouldn't call it really broad-based, John, that are sort of getting into how we operate buildings.

There have always been issues about checking things in New York City as an example, in terms of a inspections and stuff like that. That's ongoing. The balcony issue in California has come at some expense. But mainly, it's an inspection issue. That was originally pushed by the unions. And so yes, people are spending a little bit of money on inspections, but it's not clear that there's a mandate that you have to do X, Y or Z repairs within a very short time frame.

So over a longer period of time, it may move the needle a little bit. But at least based on what's out there today, as it relates to physical inspections and ongoing remediation, I wouldn't expect it to be a big driver probably the bigger issues are more on the construction side as it relates to some of the green things that may come through ESG efforts that are sort of a broader envelope of other things that are coming through in various jurisdictions.

[Matthew Birenbaum]

Yes, John, it's Matt. I'll just add to that. I think that's right. Honestly, if you look back over the last 5 or 10 years, probably the thing that's driving up CapEx more is just that we're putting more into these buildings, the amenities are a lot more elaborate. And when it comes time to redo those, it's a little more expensive.

Going forward, it's an interesting question. you could make an argument that as a regulatory load increases, it may be an advantage for institutional owners like ourselves who have better capacity to manage that and deal with it in some of the smaller private owners.

So over time, it might contribute to more consolidation in our space, which is incredibly fragmented. But we certainly are trying to manage on an asset-by-asset basis and our CapEx exposure, and it's one of the things that forms our kind of asset trading strategy and the things we've been really pleased by is our ability to sell assets that are 30 years old that have definitely significantly more CapEx liability embedded in them at basically the same cap rates as buying almost brand-new assets. So that definitely informs our strategy on the margin.

[Tim Naughton, Chairman and CEO]

John, last quarter, we spent time talking to our new concept called on right, which is targeted to a customer segment who don't believe places a lot of value, right, on those additional amenities. But there's definitely aspects there in terms of for both upfront and go-forward operating expenses, right, that provide benefits from the growth opportunity with that brand.

[Operator]

We will take our next question from John Kim with BMO.

[Unidentified Analyst]

This is Larry Valeria Lee calling for John Kim. Just a question on dispositions, like where they were located this quarter? And then just moving forward, where are you looking at kind of term exposure?

[Matthew Birenbaum]

Sure. This is Matt. I can speak to that a little bit. So we didn't actually close anything this past quarter. We've closed a number of dispositions in the second quarter. But as Ben mentioned, we have about $300 million that we expect to close here in the fourth quarter. All of that is in the Northeast, which is where we've been heavily over-indexed in terms of our disposition activity.

A couple of years ago, we sold a significant chunk in New York City into a joint venture, and then we've been balancing that out the last couple of years with more dispositions in the New York suburbs. And a lot of that is just driven by our overall portfolio allocation, given that we have a pretty deep development pipeline in many of those kind of suburban New York areas as well. So as we look forward, we're going to look to continue to rotate capital out of our coastal regions into these expansion markets, and it will probably continue to be a little bit disproportionately in New York, other parts of the Northeast and maybe over time in the Mid-Atlantic and a little bit in California as well.

[Unidentified Analyst]

Okay. Appreciate the color. And kind of moving to Southern California, it doesn't appear to be softening seasonally kind of like your other markets are. And how sustainable do you think that this is?

[Sean Breslin, COO]

That's a good question. It hasn't softened as much. We've seen a little bit of softness. It's probably hard to tell on that chart, but it has been less near the market. It's going to be less than historical norms. I mentioned there's a number of reasons that we've got out there. I mean it's been a pretty robust market in terms of job growth the last 6 months. A lot of the travel, entertainment businesses coming back online. The content producers in the media space have been on overdrive producing content. So the market has had a pretty robust recovery. So how long that is sustainable, we'll wait to see how things kind of play out next year as it relates to all the macro variables that we think about.

But the outlook for Southern California is pretty healthy given very low expected volume of multifamily supply next year, the lowest of any of our coastal markets, pretty healthy job growth and a very tight for-sale market -- both for rent and for sale. So there are a number of reasons why the general outlook for Southern California is pretty good.

[Unidentified Analyst]

Okay. And my last question was around the Kanso product. Do you see more opportunities to develop this? And if so, like do you think it's going to be harder to push a brand there versus your typical product with more amenities?

[Matthew Birenbaum]

This is Matt. We are certainly out there looking for opportunities to grow the Kanso brand. Again, our market research would indicate that there is a large untapped segment of customers that are looking for what Kanso offers. So I do think there's a great opportunity out there and that it's going to take us a little time to get at it, but we're very focused on it.

In terms of future rent growth, I mean, I don't see any reason to think that it would -- rent growth in the Kanso product would be materially different than the submarket to which it's a part. Maybe it's a little less exposed to new supply because it's competing at a little bit lower price point. And typically, we found that the more modest price points have a little more rent growth kind of over a full cycle. So we think that it should be well positioned both for initial return and long-term growth.

[Sean Breslin, COO]

Just to add on to that, maybe one other comment. Based on what we've seen at the test community, the concept community we have today, rent-to-income ratios are pretty similar to our portfolio in the Suburban Maryland market. And so if you think about -- if you get equivalent rent growth, higher margins because you don't have the same operating costs, you don't have the same, ultimately, CapEx costs as well, NOI growth could potentially be even stronger to the extent you have similar rent growth.

[Operator]

We'll take our next question from Austin Wurschmidt with KeyBanc.

[Austin Wurschmidt, KeyBanc]

There's been a lot of discussion this quarter around the embedded loss to lease across portfolios, and the benefit is you're able to capture that mark-to-market. But you guys highlighted the fact in the presentation that rents are 7% above pre-pandemic levels across the portfolio or up around 3.5% in the past couple of years. So do you think as we kind of get through to the back half of next year that pricing power could then exceed the inflationary level given some of the positive variables that you identified like the strong single-family housing market, personal income growth and then the fact that rent-to-income ratios aren't overly stretched today?

[Sean Breslin, COO]

Yes. I mean the key point is there room beyond the existing loss to lease. I mean the macro environment is such that there is good pricing power. And as Ben pointed out in his prepared remarks, there's still a number of things out there from a macro standpoint that should continue to benefit rental demand in both our urban and suburban submarkets.

I mean if you think about it, that 7% is kind of a blended number. But as you pointed out, in the urban submarkets, it's still trending slightly below 2019 levels. Urban occupancy rates and job center suburban occupancy rates and offices are still very low. They've been ticking up, which is great, and we're starting to see signs of that in terms of people moving back into the cities. That we were still a long ways to go in terms of a full recovery.

So should there be incremental pricing power beyond what we've experienced in our portfolio, as all those macro factors have been alluded to start to come together? I think the answer is yes. Obviously, if we see some reversal, it may impact certain markets differently. So one of our expansion markets is Southeast Florida, as an example, and when you look at where the loss to lease is relative to historical norms and kind of long-term trend lines, is it well above historical norms? Yes. So we're going to be buyers there and developers there, but we're going to be careful about the bets we place.

Might some of that revert back to New York? In that case, you see a little more softness there, yes. So those are the types of things that we talk about. But at a macro level, there's a reason to be optimistic, for sure.

[Austin Wurschmidt, KeyBanc]

No, that's helpful. And then, Kevin, just last quarter, you had ranked kind of the most attractive source of proceeds, and with debt and dispositions, I think we're at the top of the list. And here recently, you dusted off the continued equity program with a small issuance. Any change in the preference or ranking today and willingness to use equity as you think about growing the development pipeline over the next year?

[Kevin P. O’Shea]

Austin, yes, so it hasn't changed tremendously. I guess probably if we had the heat map out right now and looked at things, probably asset sales would be at the top, pretty close to about the 100th percentile when you look at the historical precedent for that source of capital, particularly so for suburban asset sales. So that would still be our most attractive source of capital. But -- it would be followed pretty closely by unsecured debt, which would probably be in the mid- to high 90th percentile, call it, 95th percentile. And common equity would be not far behind, pretty much in that kind of 90th to 95th percentile, if we had -- again, if we had the heat map in front of us.

So I mean, the broader message today is similar to the one that I spoke to a quarter ago, which is each of our 3 primary markets for capital asset sales, unsecured debt and common equity are attractively priced, and they're open and they're available to support funding our investment activity on an accretive basis. And so when you look at what we've raised to date, $1.4 billion, it's been primarily a mix of asset sales and unsecured debt. There has, as you noted, been a little bit of common equity issuance, but only $30 million, so call it 2% of the overall mix, give or take.

And so I think where we stand today, obviously, it's a phenomenal position we're in right now from a financial flexibility standpoint, given where the balance sheet is positioned, as I mentioned a moment ago, and where pricing stands in the capital markets today. Obviously, we really can't comment about what we might do in the future for kind of the obvious reasons that the capital market conditions can change and our investment uses can as well. But certainly, we're in a position to tap all those sources accretively on a leverage-neutral basis to try to -- to drive the business forward and drive NAV and earnings growth. And with rising EBITDA, as I mentioned before, there is that -- we have an increasing capacity to issue debt to do so as well.

So maybe I'll just stop there and say that it's a luxury being in a situation where we can look at all those choices, and it's a good time for us to be able to drive the business forward and be forward-facing in terms of the investment markets.

[Operator]

We will take our next question from Rich Anderson with SMBC.

[Rich Anderson, SMBC]

And Tim, congrats. The leadership at AvalonBay has kind of been constant, and you're no small part of that, so good luck in the future.

The first question for me is on Northern California. Your peer Essex thinks that's going to be the best growth story in their portfolio in 2022. Part of that is tech, returning their employees back to the office next year, and I know that was mentioned fairly in this call. But how impactful is that into your thought process towards Northern California for next year? I know you're not providing any 2022 color. But is it at least possible that Northern California could snap back in a way that it could be the leader in your portfolio in 2022?

[Sean Breslin, COO]

Yes, Rich, good question. I think one way to think about that is the potential opportunity there just given that it is one of the markets -- or is the market that has not yet recovered to kind of pre-COVID levels. So if you look at it and judge it just by what is left to come, if you believe that all markets would revert back to their pre-COVID levels and continue to grow, that is the region that has the most to rebound, if you want to describe it that way.

So to the extent you see demand come back in a way that supports that, then it certainly could be a leading market as you move into '22 and beyond. Obviously, you have to move through the lease expirations to capture the benefit, but you can certainly see a more meaningful acceleration based on where it's positioned today in terms of rents versus peak as compared to the rest of the portfolio.

[Rich Anderson, SMBC]

Okay. Great. And then second question is on the expansion markets. It's quite clear why you're doing it, and no argument there. But as it relates to how it impacts the stock, 12 of the 15 development projects are in your kind of core gateway markets. So assuming you won't -- no matter what happens to the market, won't associate AvalonBay with the Sunbelt until you kind of have a reasonable amount of your business in those markets, relatively speaking. So with that in mind, what's the time line do you think where you can get like a 5%-ish type number in each of those expansion markets where you're at 25% or 30% of the total portfolio is outside of the core gateway markets and you really have yourself tethered to what might happen in the Sunbelt as it relates to stock performance, I should say?

[Benj Schall]

Rich, this is Ben. I would guide you towards our experience in Southeast Florida and Denver as a decent proxy, right? So we've put out a target of each of those being 5%. We're at a point now with our teams on the ground with those franchises building where we are starting to see some accelerated activity, right, and increasingly our own development.

So as we think about the new 4 expansion markets, probably on a similar type of process, our growth, just to orient everyone, it's acquisitions, which, obviously, you can get to the quickest. It's our own development, and we do have resources on the ground in each of these markets, spending time developing the relationships that are going to be necessary to unlock that land.

And then the third vehicle is through the funding of other developers. And that's been an approach we've been utilizing in Denver and Southeast Florida. That will be -- one of our first projects in North Carolina will be of that approach. And a lever that we expect to pull sort of balance the -- getting some of that development profit, maybe not the full development profit, if we were executing our own, but working with people who have sites that are entitled and ready to go.

[Operator]

We will take our next question from Alexander Goldfarb with Piper Sandler.

[Alexander Goldfarb, Piper Sandler]

And congrats, Tim. Hopefully, it means more golf in your future. And I also want to say congrats to Bill McLaughlin, your Development Head, on his retirement as well. So certainly talking about ramping up development, Bill has been responsible for a lot of that. So congrats.

Two questions there. First, on the development part. You guys do not trend your rents, so that when you guys have in your development page your 5.9% yield that's based on escalated costs but rents as they are. As you guys underwrite new projects, given how rents have grown, do you expect the yields that we see in the supplemental to come up, meaning our rents outpacing the cost of construction, timing delays, et cetera, where we will start to see higher yields in the supplemental? Or we're not yet there yet?

[Matthew Birenbaum]

Yes, Alex, it's Matt. So you're right, we -- when we start a job, it's based on today's rents and today's costs, and we basically locked in a good amount of the cost when we start the job. So we have an excellent track record of delivering on the cost side. So what you see is -- and then we don't remark the rents to market until we have 20% leased, give or take. So the rents will kind of stay where they are for the first year plus, and then we'll mark to market. And so the materials that we've shown earlier, what Ben was talking about how our rents are running $170, $180 above pro forma, that's based on those 6 jobs, which are now coming to market.

So the first thing is there's jobs that are on that schedule that were started 12 or 18 months ago that have not yet been mark to market. So there should be some lift out of those. And again, that's what we're seeing on that basket that we have currently, and lease up, they're beating pro forma by 30, 40 basis points on the yield.

On the deals that haven't yet started, what we're finding is that the greater rent and NOI definitely helps. The higher cost hurt, and it falls through to land value pretty darn quickly. And it's a very competitive market in terms of there's a lot of merchant builders out there. And where it all takes your yield, new business we're signing up today, reflecting today's rents is in that kind of mid- to high 5s yield that I mentioned. So where those yields settle out when you actually start the job in a year or 2, that's the bet what will grow faster from this point, kind of rents or costs. But I feel pretty good that, that kind of mid- to high 5s is probably a pretty consistent number you'll see for a while.

[Alexander Goldfarb, Piper Sandler]

Okay. And then the second question is, in your expansion markets, like in Dallas, I think your entry is out towards Grapevine area and, at $275 a door, would suggest pretty efficient pricing. Charlotte sounds like it's a little bit more infill at $350 or so. But based on your experience in the coastal markets and then looking at companies like Mid-America and the Sunbelt, is your Sunbelt focused more on the outer rings? Or do you think that you will target infill?

[Sean Breslin, COO]

I think it's a little bit of both, Alex. I mean, ultimately, we'll have a diversified portfolio. Some of it is where we want to buy versus where we want to build. So if you look at what we've done in Denver, the assets we bought have tended to be more of the garden assets on the perimeter. And where we're developing, we have a deal in RiNo. We just started a deal in Westminster, which is kind of a second-ring suburb, but we're -- we have a deal that will start here shortly in the City of Denver.

So we're trying to balance out the development which tends to be at the higher price point with -- particularly in these Sunbelt markets, where historically, over time, more of the rent growth probably has come in more of the moderate price point. So we are more focused on acquisitions that are younger assets but not necessarily kind of the downtown $350 a foot-type rent.

So we like the position. The Charlotte acquisition was a little bit different just because it was an opportunity to pick up a 3-community portfolio in the South end, which is an incredibly dynamic part of Charlotte, where there's just tremendous amounts of growth, retail, employment as well as residential. But I think the Grapevine or the Flower Mound acquisition that you referenced is probably more in keeping with what we bought in Denver and what we've mostly been buying in Florida and where we're looking.

[Operator]

And we'll take our next question from Haendel St. Juste with Mizuho.

[Haendel St. Juste, Mizuho]

And Tim also, it's been a pleasure. Good luck on the next phase of your career. My question here is on the technology platform and how you feel that can help you manage some of the chunkier, controllable expenses across the platform, given the inflation and costs that we're seeing across just about every aspect of life here. And maybe you can just make some comments on the benefits that you outlined. The $25 million to $30 million that you project for the next few years, what's the key driver there and some of the core assumptions?

[Sean Breslin, COO]

Yes, Haendel, good question as it relates to technology and just for the inflation. And most of what we're focused on relates to, in simple terms, kind of digitizing the business and creating a more self-serve model for customers, which, just so you know, they have expressed a desire for that -- a continuing desire for that to be able to self-serve like they do with any other major brands across the country.

And I would say that for the most part, the impact on the P&L will show up predominantly in payroll, probably a little bit in R&M just in terms of the efficiency of in-sourced and outsourced activity. But a lot of the things that we're doing relate to digitizing the application lease and move-in process, as an example, that a customer can self-serve and complete that entire process and move into a community without ever talking to anyone who's an AvalonBay staff member. AvalonBay staff may be available on a centralized call center or other locations regionally to be able to support that activity. But to the extent that they like to do it on a self-serve basis, they can.

The same thing applies to the maintenance activity, lease renewals and then what we call the live journey, which is all the interactions that a customer has with us when they live with us. And that relates to all kinds of different things that get into the [indiscernible] about transferring apartments, adding a bed, adding a roommate, et cetera, et cetera. So most of it is focused on digitizing the business.

The second piece of it is really around data science and leveraging data science that makes different types of decisions related to a number of different aspects of the business. Probably one use case to mention specifically is lease renewals. And the more we know about customer behavior and various other things will help us how to create a choice to customers and also try to optimize the renewal capture in terms of the process, but also the renewal value in terms of at what rent they renew with us and for what duration.

So there's a lot of data science world that will be coming to fruition as well. But the heavy emphasis as it relates to the benefit that Ben mentioned is on the digitization of the business and the various processes that are related to customer interactions, and most of that benefit will show up via payroll.

[Haendel St. Juste, Mizuho]

Got it. Got it. Appreciate that. And incremental investments on that tech platform from here, or is the money effectively has been spent? Or how much more are we -- are you looking at in terms of the required investment?

[Sean Breslin, COO]

Yes. So the total investment that we expect for the activities at least that we have sized up for the next 2 to 3 years is an incremental roughly $20 million to $25 million. We have incurred some costs to date, about $7 million, as it relates to our automated leasing agent and various other things that have already resulted in about an 18% reduction in the frontline sales staff at our communities, which is [indiscernible] payroll. But going forward, there's still some investment to come.

[Haendel St. Juste, Mizuho]

Got it. Got it. One last one, if I could, on the rental assistant payments year-to-date. I appreciate the color you guys provided there. I'm curious what's left in that receivables bucket, what's the remaining opportunity for, say, next year, and how much has been reserved against that.

[Kevin P. O’Shea]

Haendel, maybe I'll start, and Sean may want to jump in. In terms of the rent relief payments that we received, as you can tell in the same-store portfolio, we received $11 million in the third quarter. It's obviously a difficult line item to predict. Certainly, it's true, as Sean pointed out in his opening remarks, that nationwide, there's $47 billion that's been approved, and less than 1/4 of that has been distributed nationwide.

So -- and we certainly have done an awful lot to apply for more proceeds from the various governmental agencies that are involved in that. And so to have our residents, it is hard to predict with great precision when it's going to come in for 2022, for example, but for -- and even for the fourth quarter of '21. But for purposes of guidance, what we have assumed in the fourth quarter in terms of incremental rent relief payments that we'll receive in the fourth quarter, we've assumed about $12 million in our same-store portfolio.

[Sean Breslin, COO]

Yes. And I can add on to that. Certainly, Kevin can address the kind of gross versus net receivables and what the total part is. But just to provide a little color on what we've received, out of the funds we received, about 1/3 of it relates to applications that we submitted on behalf of the resident in jurisdictions where we are allowed to do so. About 2/3 of it has showed up via resident applications where we have had no knowledge of the applications submitted by the residents until we were notified by the jurisdiction that they were approved for payment and payment would be transferred to us.

In terms of the percentage that we received relative to what we've applied for, again, what we can apply for independent of what the resident may have applied for, we've only received about 30% of the total pot that we have applied for. We've applied for, rough numbers, about $24 million in rent relief, and we've only received about $6.5 million or so to date. So to the extent that we recovered most of that is pretty significant opportunity to come independent of what we may receive in gross volume from either current residents who remain occupied in units but not paying or in some jurisdictions where we are allowed to recover it, payments associated with residents that have left us but left outstanding balances.

So still a pot there to come. It's hard to determine exactly what may come through resident applications, again, because of the limited line of sight on those applications being submitted and processed.

[Operator]

[Operator Instructions] We will take our next question from Alex Kalmus with Zelman & Associates.

[Alex Kalmus, Zelman & Associates]

Given the 210 basis point spread between your development yields and the cap rates that are very low and that's despite the cost inflation and sourcing is very, very favorable, what's your sort of medium-term outlook on the supply notwithstanding the timing of specific markets, how that plays out? It seems like development is clearly winning out in this market, and it can create some supply down the line.

[Sean Breslin, COO]

Yes. As it relates to total supply -- this is Sean. I can touch on that. In terms of our markets, our supply expectations for 2021 has come down for the beginning of the year as a result of various things, whether it's some of the supply chain issues that I've described, capacity in local jurisdictions as it relates to inspections and such, et cetera. But we expect 2021 to land at roughly about 1.7% of stock in terms of the deliveries. And based on what we can see in 2022, probably it's going to be relatively similar.

There'll be a couple of regions where we expect a little bit of increased supply, and that includes the New York, New Jersey regions, some stuff in New York City that's pushed into next year, as an example. We also expect an uptick in Seattle. There's been pretty heavy volume under construction. Some of that has been delayed and pushed into 2022. Markets that will be relatively flat include probably the Mid-Atlantic and Southeast Florida, just based on supplies working its way through. And then we do expect to see a decline in supply in Boston, Northern and Southern California and Denver, just based on what we can see working its way through the construction process and the various delays.

So that's the lineup as it relates to overall supply. And again, keep in mind that a heavy influence on the supply side here is in urban submarkets. And kind of looking out over the course of next year, we still expect about 100 basis point spread between percentage of stock that's delivered in urban environments as compared to suburban. Suburban came down potentially into the 1.3% or 1.4% of stock next year versus 240, 250 basis points in the urban submarkets. So there is the distinction there.

[Matthew Birenbaum]

Alex, let me just add to that. It's Matt. I mean if you're talking longer term, I think what we're seeing is, to your point about the dynamic of the spread, development is a very profitable business. Supply tends to respond more quickly in the Sunbelt markets than in our coastal markets. So you've seen this year starts nationally are up. But in our markets, they're actually kind of level or a little bit down. So that is one of the factors. I -- and supply can respond more quickly in urban than in suburban submarket in our footprint because the supply -- the regulatory supply constraints are definitely more meaningful in the suburbs than in the urban areas.

So across our coastal regions, what I'd say is development in the urban submarkets doesn't work today. And so you're seeing very, very little urban starts because the rents there are not above their prior peak, for the most part, as Sean had mentioned, and costs are up. So my guess is you'll see a relatively muted supply response in our urban markets once we get beyond the stuff that's currently underway, as you look out 2 or 3 years. Suburb is probably a little bit more slow in today. But I think the supply response to the favorable economics is going to be more aggressive in the Sunbelt.

[Alex Kalmus, Zelman & Associates]

Really appreciate the color. And earlier today, there's discussion about potential cost inflation and labor pressures driving some problems and lease-up for some developers. Does this seem like a reasonable expectation for potential opportunities to take over struggling lease-ups in the future for acquisitions?

[Matthew Birenbaum]

We haven't heard that. I mean we haven't seen any lease-ups having particular issues. We've seen assets being sold during lease-up, just people trying to take advantage of the incredibly robust asset sales market. But frankly, not at discounted, to us, we're all that compelling relative to buying stabilized assets.

[Operator]

We'll take our next question from Joshua Dennerlein with Bank of America.

[Joshua Dennerlein]

I had a question on maybe your Northern California strategy going into the fall/winter months. It seems like that, that softening starting in August was the delay in the return to office and something a lot of people pushing back to maybe January 1. Do you think we might see a turn higher as we get closer to the January 1? Kind of how are you guys thinking about that?

[Sean Breslin, COO]

Joshua, just to be clear, when you say turn higher, are you talking about occupancy rents just kind of the overall fundamentals of the business or...

[Joshua Dennerlein]

Yes. I guess I'm looking at Slide 10 of your presentation. So that, right, is what I would be focused on.

[Sean Breslin, COO]

Yes. So I mean, as it relates to Northern Cal in general, in my earlier comments sort of reflect the view that particularly in these tech markets that are probably concentrated job centers like San Francisco and San Jose to some degree as well, of course, the return-to-office delays certainly have had an impact. We are starting to see people come back to those environments. We had an uptick in people moving to San Francisco and San Jose from more than 150 miles away in Q3 compared to not only last year, of course, but a stabilized year. So we're starting to see some movement just maybe not as much as I think we all would have anticipated post Labor Day. Delta kicked in and kind of created the issue.

So is it likely that San Francisco, as an example, which probably has one of the lowest office usage rates in the country, will come back more strongly early next year as people come back to work? I think the answer is yes. The question is the pace at which that occurs and the flexibility that people are provided as it relates to work from anywhere, based on what we understand and trying to track that as best we can, most of the work-from-home policies that have been adopted, people might live maybe slightly further out or something. But they still need to be within a reasonable commuting distance of their office to be in there 2 to 3 days a week depending on the company. And therefore, given the traffic and the commuting patterns in a place like Northern California, people are -- they're going to be within the MSA that they work in as opposed to some place that's a 3-hour drive away.

So we would expect it to come back. And again, the pace really will be dictated by the work-from-home policies based on what we see in vaccination trends, the vaccination requirements coming out and already seeing the uptick in people coming back to those markets. It's just a matter of degree as we move into 2022.

[Operator]

There are no further questions at this time. I would like to turn the conference back to Mr. Tim Naughton for any closing remarks.

[Tim Naughton, Chairman and CEO]

Yes. Thank you, Casey, and thanks, everyone, for being on the call today. I know we've been at it for a while here, and look forward to seeing or talking to you at least virtually at NAREIT here in a couple of weeks. So enjoy the rest of your day. Thank you.

[Operator]

That concludes our presentation. Thank you for your participation. You may now disconnect.