Avalonbay Communities Inc

NYSE:AVB

Earnings Call Analysis

AvalonBay's Q3 Strength Drives Positive 2024 Projections

In Q3, AvalonBay exceeded core FFO guidance, raising its full-year projection to $11.04 per share, reflecting a 3.9% growth rate. Same-store revenue is expected to grow by 3.5%, with an improved 3% NOI forecast. The average asking rent has increased by about 3% year-over-year, supporting healthy demand for apartments due to strong wage growth and the affordability gap between renting and owning homes. Looking ahead to 2025, AvalonBay anticipates further revenue growth driven by job stability and moderation of operating expenses, projecting a bad debt improvement and continued demand for their suburban portfolio.

Strong Q3 Performance and Revised Earnings Guidance

AvalonBay Communities reported robust performance in the third quarter of 2024, outperforming expectations by exceeding the core funds from operations (FFO) guidance by $0.03 per share. This strong showing prompted the company to revise its full year core FFO guidance for 2024 to $11.04 per share, reflecting an impressive 3.9% growth rate. This marks the third consecutive increase in guidance for 2024, underscoring a solid operational momentum.

Portfolio Trends and Improved Occupancy Rates

The company’s same-store portfolio is performing well, especially in light of the slower leasing season. Turnover rates are below historical averages, which typically hover around 55% annually, thanks to reduced move-outs toward home purchases. Additionally, occupancy rates have stabilized after reaching seasonal lows earlier in the summer, and there is optimism for a stable Q4.

Rent Growth and Future Revenue Outlook

AvalonBay is witnessing a notable uptick in asking rents, now approximately 3% higher than the same time last year. Particularly, the East Coast has seen asking rents rise by about 4%, while the West Coast has experienced a 2% increase. Looking forward, the company projects a healthy job and wage growth, coupled with a sustained demand for rental units, especially given the lack of affordable housing alternatives. For 2025, AvalonBay expects revenue growth driven by rental increases and improved collection rates, forecasting same-store revenue growth of 3.5% and an increase in same-store net operating income (NOI) guidance to 3%.

Development Initiatives and Future Growth Strategies

AvalonBay is increasingly focusing on its development strategy, with planned new starts of nearly $1.1 billion in 2024, targeting stabilized yields of approximately 6.3% on these projects. The company recorded a 6.5% yield in 2024 completions, indicating effective management and execution in its project pipeline. This emphasis on development is expected to further enhance earnings growth and shareholder value.

Cost Management and Operating Expense Outlook

While AvalonBay anticipates continued moderate growth in operating expenses, it expects improvements in certain areas, especially concerning bad debt levels, which are predicted to decline further in 2025. Tax abatement expirations and efficiencies achieved through the deployment of AvalonConnect are expected to help relieve some of the expense pressures experienced in 2024.

Real Estate Market Dynamics and Future Considerations

AvalonBay believes its well-positioned portfolio—currently about 70% suburban—will benefit from low levels of new supply and steady demand. As such, the expected delivery rate in established coastal markets for 2025 is projected at about 1.4%, which is down from previous years, further shielding the company from potential oversupply issues. The firm remains cognizant of market conditions, particularly in the Sunbelt regions, and aims to continue optimizing its portfolio through strategic asset trades and acquisitions.

Strategic Positioning and Shareholder Value Focus

Overall, AvalonBay's strategic focus on development, operational efficiencies, and cost-effective capital access is designed to drive long-term growth. By embracing a balance sheet noted as among the strongest in the REIT industry, AvalonBay aims to enhance shareholder value through differentiated earnings growth while navigating the complexities of the real estate market.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities Third Quarter 2024 Earnings Conference Call. [Operator Instructions]

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, executive]

Thank you, Melissa, and welcome to AvalonBay Communities 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, 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. 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'll turn the call over to Ben Schall, CEO and President of AvalonBay Communities for his remarks. Ben?

[Benjamin Schall, executive]

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. Sean and I have some prepared remarks, and then we'll open the line for questions. Per our practice, we posted a presentation in conjunction with our earnings release, which we will reference on today's call.

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 4 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.

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. Last November, we raised our target to $80 million of annual incremental NOI to come as a result of these operating initiatives. We are tracking on plan, including further deployments of AvalonConnect 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.

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. 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. This year, we sold almost $600 million of assets, all from our established regions, half urban and half suburban, and reallocated that capital predominantly to suburban assets in our expansion regions at a very attractive basis as we look to further optimize and diversify our portfolio for the future.

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 pro forma, 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.

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.

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, sourcing $850 million at an implied initial cost of approximately 5% to fund future accretive development.

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 4 strategic priorities over the last 12 months. We're confident these strategies will position AvalonBay for a continued superior growth in the quarters and years ahead. And as I transition to our Q3 results, I want to thank our 3,000 AvalonBay associates for their effort, collaboration and commitment to these strategic priorities and for delivering another strong quarter of results.

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 $0.03 per share. 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 it 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, implying a peer-leading 3.9% core FFO growth rate as highlighted on Slide 10. For our same-store portfolio, we continue to expect same-store revenue growth of 3.5%, and we lowered the midpoint of our same-store operating expense estimate by 30 basis points to 4.5%, which resulted in an increase in our same-store NOI guidance to 3% for the full year 2024.

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, executive]

All right. Thanks, Ben. Moving to Slide 11 to address recent portfolio trends.

Third quarter performance was strong, and our same-store portfolio is well positioned heading into the slower leasing season. Turnover continues to trend well below historical norms, which is typically around 55% on a full year basis, driven in part by a substantially lower volume of move-outs to purchasing home in our established regions which remains at record lows. Additionally, economic occupancy has increased from the mid summer low point, and we expect it to remain relatively stable during Q4.

Turning to Slide 12. During our midyear earnings call, I mentioned the possibility of a reacceleration in asking rent and rent change given softer comps from Q4 2023. We're now starting to see that trend come to fruition. In the chart on the left, asking rent growth during the year has followed traditional seasonal curves and outperformed our experience throughout 2023. Recently, the level of outperformance has widened, and as of November 1, 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%. The higher average asking rent will flow through to improved rent change particularly for new move-ins as we look forward. Currently, we're forecasting rent change in November to be stronger than October and increase further as we move through December.

Pivoting to Slide 13 and the outlook for 2025 revenue growth. 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.

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. This is important in understanding the potential capacity of renters to pay higher rents, all else being equal.

Moving to Chart 2, 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. 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.

Moving to Slide 14 and the outlook for supply. Our established coastal regions are expected to see new deliveries of 1.4% of existing stock in 2025, roughly 100 basis points lower than what's forecast for the Sunbelt which is already facing a challenging operating environment, given the record level of deliveries over the past year. 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.

Turning to Slide 15. I'll address the building blocks for revenue growth in 2025. 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 2024. Second, we've estimated that underlying bad debt from residents will improve by roughly 60 basis points from 2023 to 2024, and it has improved on a year-over-year basis in each quarter so far this year. While we haven't yet completed our forecast for 2025, we expect continued improvement in underlying bad debt throughout the upcoming year. 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.

Moving to the outlook for operating expense growth on Slide 16. We expect overall operating expense pressures to moderate as we move into 2025. In terms of some of the key drivers, the impact from the expiration of tax abatement programs, notably the 421-a program in New York City, will still be present but eased in 2025. Additionally, given our AvalonConnect 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.

Now I'll turn it back to Ben for some more summary comments before we open it up to Q&A. Ben?

[Benjamin Schall, executive]

Thanks, Sean. To quickly summarize, Q3 results exceeded our expectations and supported a further increase to our full year earnings guidance. Our outlook heading into 2025 looks healthy, particularly given the fundamentals in our established regions. We're leaning further into development, a powerful driver of differentiated earnings growth and value creation. 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.

[Operator]

[Operator Instructions] Our first question comes from the line of Eric Wolfe with Citi.

[Eric Wolfe, analyst]

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 pro formas, like where do you think that percentage could go over the next couple of years? I'm just trying to understand how supply risk might change, especially as you're increasing your Sunbelt concentration?

[Sean Breslin, executive]

Yes, 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 is forecast to have a slight uptick. It's not material but a slight uptick in deliveries in 2025.

As it relates to where they 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 cost and the impact, particularly on merchant builders across our region.

So given the fact that starts have come down and the fact that the gestation period for construction in our coastal markets is fairly lengthy given the product type it wouldn't be a surprise to see deliveries for our, again, coastal established regions to continue to trend down over the next couple of years. 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.

[Eric Wolfe, analyst]

That's helpful. And then for the 4 Sunbelt apartments project you started this quarter, could 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, it's certainly been a market that I think people expect supply to weigh on it for a little while. So 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?

[Matthew Birenbaum, executive]

Sure. Eric, this is Matt. I can speak to that one. So we did start 4 deals this quarter, all of which were in expansion regions, 2 in North Carolina, 2 in Texas. And those deals are underwriting on today's rents to around a 6%, which would be on the tighter end of our range of development yields, I think our development starts for the year across the whole book is more like low- to mid-6% ,6.3%. So it'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 cap rates or assets would be trading.

Every deal is different. So there are unique characteristics. The deal that we started in Austin, that's a parcel of land that we've owned for a couple of years and it's the first phase of what could be eventually 1300 or 1,400 unit garden deal. So it's -- there are some unusual costs loaded into the first phase because we're front-loading a lot of the infrastructure and amenities of what's really going to be kind of 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 4 or 5 years but have been pretty cautious about it up until now. But we're pretty bullish about the timing of that start in particular 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 when it was first ready to start. And when you think about that asset won't be in lease up until '26. And we feel by that point, we should be facing very little new competition and with the basis that we like quite a bit.

[Benjamin Schall, executive]

Eric, I'll add a couple of additional comments to your question on sort of relative positioning. As we think about leaning into external growth and development today, one is the cost of capital advantage, right. We've got a cost of capital advantage relative to our private sector competitors. And the second is we are increasingly able to drive incremental yield 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.

And so obviously, project-specific and submarket 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.

[Operator]

Our next question comes from the line of Jamie Feldman with Wells Fargo.

[James Feldman, analyst]

I guess sticking with development, can you talk about your thoughts, your early thoughts on what's in the pipeline that you could possibly start in '25? And I guess, just kind of continuing with a similar discussion with the starts you've done all in the Sunbelt, I mean, clearly, Sunbelt is recovering from a supply glut, but who is to say it can't happen again. The Austin project certainly sounds unique. But can you just talk through how you think you can navigate development in the Sunbelt better differently than people who are facing a lot of supply here as we just think about the longer term based on the projects you're starting?

[Matthew Birenbaum, executive]

Yes. Jamie, I guess I can speak to that one. This is Matt. 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, could be a range, and we're not providing guidance at this moment. But we could certainly see increasing our start activity next year to something on either side of a range of about $1.5 billion from $1.050 billion this year.

So we are ramping it up, partially in response to what Ben was talking about where we think we can get a greater share of a lesser number of starts given our balance sheet and our capital position and the capabilities we bring to it. And it's really a mix.

So I think this year, our start activity will be about 40% to 45% in the expansion regions. Probably be similar to that, maybe a little less as a percentage next year. So we do have 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 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 in an expansion region. We have more kind of higher yield business to start in New Jersey, a deal here in the Mid-Atlantic, opportunities in Boston, 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. And more likely it will be in more in the expansion regions or some of our -- I'm sorry, in the established regions or some of our expansion regions Denver and Florida, in particular, Southeast Florida assets are trading more generally above replacement cost 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 submarket and specific -- the specific dynamics of the site you're looking at.

[James Feldman, analyst]

Okay. That's very helpful, impressive, $1.5 billion number. I guess just switching gears to expenses. 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 is happening in Florida -- that happened in Florida. What gives you confidence that insurance can go lower in '25?

And then also just if you were to boil down this third column on the right, do you think your expense growth rate is higher or lower in '25 than '24, if you're even able to answer that question.

[Kevin O'Shea, executive]

Jamie, this is Kevin. I'll start on insurance and Sean will probably follow on the broader look on OpEx for next year.

So in terms of insurance, this year's expected insurance expense increase of 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 related to our May 2023 renewal that continue to affect us earlier this year. But we had a roughly flat property renewal in May of this year, very successful in that regard, partly due to the kind of the abatement or decline in insurance premium pressures in that property insurance market relative to prior years. And that flat property renewal this past May provided some relief from the impact of higher premiums in this year's numbers and into next year.

As we move into 2025, we just see based on what's going on in the various insurance markets that we have a continued movement towards stabilization and program costs, as we look to renew property and other types of insurance next year, such that we expect to generally renew those at more typical growth rates. 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 and generally have more of a coastal footprint. So we've been insulated from a lot of those pressures as well.

The only exception we see with respect to insurance is liability insurance, which has seen some above average premium increases but fortunately, liability insurance comprises less than 1/4 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 cost to be more in the mid- to high single-digit range for next year, which is closer to more normal levels for us.

[Sean Breslin, executive]

Jamie, as it relates to the broader question about the direction of OpEx growth in 2025, relative to 2024's growth rate. Yes, the purpose of the slide was to give you some general sense that we do expect the growth rates to ease in 2025 relative to 2024 and the main callouts as it relates to that are items that are relatively well known.

For example, the 421-a, the pilot programs. That's about an 80 basis point impact on the 2024 overall growth rate that will diminish somewhat as we get into 2025. In terms of our operating initiatives, AvalonConnect will be pretty much 90% deployed by year-end '24. There'll still be some roll-through of leases in '25, but 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 2 items alone will lead to some easing there. We don't see pressure points in the various other categories that would overcome the impact of those 2 items as an example. So we do expect growth rates to come down '25 relative to '24.

[Operator]

Our next question comes from the line of Adam Kramer with Morgan Stanley.

[Adam Kramer, analyst]

I wanted to look at the kind of projection for improvement in lease growth in November and December. I guess just maybe kind of 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 things could reaccelerate here in the last 2 months of the year relative to October?

[Sean Breslin, executive]

Yes, Adam, this is Sean. I can take that one. So first, in terms of high-level strategy for us, as I mentioned on the midyear call, we had a nice run up in occupancy at the beginning of the year kind of throughout the first quarter. And so we started pushing hard as it related to rate growth 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. Roughly 60% of our leases expire during those 2 quarters. 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 in the slower leasing season. So as we move through September into October, you saw that in terms of the deceleration, particularly on the new move-in side. 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 where asking rents were in Q4 of 2023, 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 is presenting a nice spread on the move-in side.

So as we look forward, October blended rent change was 1.2%. We see it ticking up into the high 1% range for November and then the mid-2s in December. Our expectation is that all of that is really on the backs of new move-ins, 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.

Renewal offers were already out. We negotiate with residents. So for the most part, what you're going to see is the improvement coming on new move-ins as we move through November and December, given where asking rents are today.

[Adam Kramer, analyst]

That's really helpful. And maybe along similar lines, kind of a forward-looking question here just on the bad debt improvement. So it looks like 170 basis points is kind of the forecast for this year. I know it's still early. I know it's a tough line item to maybe make a call or predict but just maybe a sense of the -- and whether it's the level of bad debt that you can get to next year or even the other way of asking it is just how long could it take -- will it take potentially to get back to the pre-COVID of bogey level of bad debt as you think about next year and going forward?

[Sean Breslin, executive]

Yes, 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, which is really highly dependent upon various things outside of our control in the various regions. So obviously, we've seen a nice improvement as it relates to the performance this year coming down, roughly 60 basis points year-over-year from 2022 to 2023, it come down 140 basis points. So a more significant improvement.

My expectation is that by the time we get through 2025, we're probably not back to a fully stabilized or normalized level, but we're making good progress towards it. And what we use to sort of estimate that is the volume of skips and evicts that we see through the portfolio. So for example, we saw a 300-plus evictions in the third quarter. We have about 1,300 accounts that are still sort of sitting out there that are needed to be processed through either a skip or evict situation. So it's certainly -- at that run rate, it's certainly at least a year. My guess is more likely a little bit more than that. So it's probably as you get into 2026, that we would start to see some normalization as opposed to expecting that to occur in 2025.

[Operator]

Our next question comes from the line of Steve Sakwa with Evercore ISI.

[Steve Sakwa, analyst]

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 6 to 9 months?

[Sean Breslin, executive]

Yes. 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% range for both November and December based on what we already know today, that signed as well as the expectation for negotiation spreads. So 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 as high-3s.

[Steve Sakwa, analyst]

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?

[Kevin O'Shea, executive]

Yes, that's correct, Steve. That was what our intention was when we executed the forward equity deal back in early September. 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.

[Operator]

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

[Austin Wurschmidt, analyst]

Just going back to new starts in the expansion markets and the fact that you underwrite on current yields, I mean, should we read into this that you think rents 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?

[Matthew Birenbaum, executive]

Yes, Austin, it's Matt. I think the reason why we underwrite on an untrended basis is we feel that, that's pretty conservative that on average, over time, rents grow. So we're not counting on that trending of the rents to make the deal work. We wouldn't start a deal that only works because of trended rents as opposed to the current rents. So we're comfortable with our yield and our basis on those deals we're starting now in today's environment. And then it's really -- everybody can have their own view on what happens going forward.

I would say any deal we're starting now, we're probably not leasing it for 2 years or maybe 1.5 years. So I do 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 in our development. Because there, we are stepping into a rent roll and whether that existing rent roll has lost lease or gains lease in it will affect our kind of short-term, kind of year one yield and that, in turn, weighs on the IRR of the investments So it's probably subject to a little more scrutiny on acquisitions than on development just based on the greater value creation margin there.

[Benjamin Schall, executive]

Austin, I'll emphasize a couple of other components in terms of our lean in. This expands on what we're talking about earlier on the call. As you know, 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 and next year set of starts, right? We've locked that in at a [ 5 ]. We have over the last 6 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 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.

[Austin Wurschmidt, analyst]

Yes. Both of your responses, I appreciate the color there, and they kind of lead into the next question on the transaction market. And just curious, are you seeing more investment opportunities within expansion markets start to 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 pair trade strategy given, I think there are some limitations on capital gains from annual dispositions?

[Matthew Birenbaum, executive]

Yes. It's a good point, Austin. And I would say, yes. To the latter question, yes, so 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 distressed opportunities.

If you'd 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. 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. 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 continue to be in this environment where select assets that meet the criteria that select buyers are looking for will trade. And as Ben mentioned, we've gotten more confidence in where those asset values are, and a lot of folks are looking for the same kind of stuff to buy, including us.

But we haven't seen kind of the large-scale transaction activity that we would like to see because we would like to do more portfolio trading. So it looks like this year, so far, we've sold $590 million, and we bought $325 million. We're not done yet. We'll 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, call it, $150 million to $200 million. 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. So -- and we're happy with the trades that we're making.

We feel like we're selling assets that are significantly older, that are a much higher price point that we had -- that were good investments 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.

[Operator]

Our next question comes from the line of Josh Dennerlein with Bank of America.

[Joshua Dennerlein, analyst]

Just looking at the lease rate growth across the markets. Just you kind of stood out to the Pacific Northwest and Northern California. Any kind of color you could give on maybe the decel going into October versus what you saw in 3Q?

[Sean Breslin, executive]

Josh, this is Sean. I mean what I said was sort of a broad brush is new moves and rent change pretty much came down in every single region. As I mentioned, that was sort of the strategy to sort of help stabilize occupancy as we went into the slower leasing season.

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 in a market that is more seasonal on average, you're going to take it a little bit harder on the new move-ins relative to maybe some other markets that are quite as seasonal. That's really sort of the primary issue for Seattle.

In Northern California, really nothing significant to note there. It's kind of a submarket by submarket decision based on availability and pricing and the occupancy target. So I wouldn't read too much into it other than in those particular submarkets. We gave a little bit more to shore up on the move-in side. It's not a lot of volume, keep that in mind.

[Joshua Dennerlein, analyst]

Okay. Okay. Maybe on Seattle, in particular, I think your competitor said they were hearing -- it felt like they were seeing more traffic after Amazon's returned to office announcement. Are you guys seeing that or anticipating any kind of benefit?

[Sean Breslin, executive]

Yes. 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 through 2024 in part due to Amazon's call back and people sort of slowly and steadily getting closer to or in the Seattle MSA. There are other employers doing the same thing. So I think, overall return to office and the trends to return to office, whether it's Amazon and the impact in Seattle or announcements from Salesforce about calling people back in January, San Francisco, all those things are a positive trend for those markets.

I would say on the Salesforce side in San Francisco, we 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.

[Operator]

Our next question comes from the line of Brad Heffern with RBC Capital Markets.

[Brad Heffern, analyst]

Yes. Yes, maybe I didn't catch this, but could you guys give a loss-to-lease number?

[Sean Breslin, executive]

Yes, Brad, this is Sean. We actually haven't. But overall loss-to-lease as of November 1, is about 100 basis points across the portfolio, slightly higher in the East and the West, and we're actually in a modest gain-to-lease situation in the expansion [ regions. ]

[Brad Heffern, analyst]

Okay. And then you mentioned in the slides that the DFP program now covers build to rent. That's new to me at least. So I guess can you walk through that addition, especially given it isn't the property type that you develop?

[Unknown Executive]

Yes. So on the build to rent, the BTR space, we have made a decision to more formally advance our plans there. And we consider an expansion of our existing business. We've been building townhomes, purpose-built townhomes, really since the beginning of AvalonBay. We do it today. A lot of times we're building townhomes in conjunction with apartment flats. And sometimes we're building full town home types of communities. 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 set of opportunities.

As we -- 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. 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. We think we can really bring our strategic advantages to bear there and provide more growth opportunities going forward.

[Operator]

Our next question comes from the line of John Kim with BMO Capital Markets.

[John Kim, analyst]

On your building blocks for same-store NOI growth next year, I think the one item that you haven't addressed yet on this call is property taxes. Do you expect that to go down next year? And this is following a year where asset values have gone up and you've increased your Sunbelt exposure where the rates are higher. Can you just comment on why you see taxes going down next year and maybe the quantum?

[Sean Breslin, executive]

Yes, John, this is Sean. The main driver -- and we haven't settled all of our property tax budgets yet. But the main driver that will impact the growth rate for property taxes in 2025, particularly relative to 2024, is a modestly diminished impact from the expiration of various tax abatement programs, notably the 421-a program in New York City, which boosted overall expense growth by roughly 80 basis points this year. We expect that to come down next year. So that will 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's significant.

[John Kim, analyst]

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 underperformed as far as rent levels or budgeted costs versus your expectations?

[Matthew Birenbaum, executive]

John, it's Matt. No, I mean, really, that's just a mix change. We had 2 deals complete last quarter, whose yields were in the high-7s, which came out of the basket. They're no longer in the development bucket there now in other stabilized. And so -- and we added 4 deals that were around a 6%. So that's really -- the change there is really just a basket mix.

The deals that we have that are currently in lease-up, which we don't have that many of, I think it's only 5%. They are running still ahead of pro forma. Not as much ahead of pro forma as some of the deals we completed earlier this year, as we're 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. So -- and that's at 5.9%.

And what you'll see over the next couple of quarters is that number will start to move up into the 6s into the low 6s and then probably by this time next year into the mid-6s as more of the deals that we started this year, and in '23, which were underwritten into the 6s start and more of the deals that started in '21 and '22 when cap rates were 3.5% and yields were 5% as those deals complete and roll out of that basket, you'll see it rise.

[Operator]

Our next question comes from the line of Ann Chan with Green Street.

[Ann Chan, analyst]

Going back to your comments on the build-to-rent communities, are you anticipating acquiring any detached single-family homes build-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?

[Benjamin Schall, executive]

So on your first question, Ann, detached BTR product is in the possibility set. It's not where we're necessarily starting. We're going to, as I said, emphasized the townhome product a little bit closer to our regular activity. But purpose-built communities, generally in the unit range of 80 to 130 units per community, places where we feel like we can bring our -- if we're going to buy an asset, particularly bring our operating heft and operating scale to these communities, which is when we think about the space, one of the opportunities is there are many institutional large-scale operators in this space. And so in places where we can have both apartments and BTR, we feel like there are synergies that can come in and around that mix.

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.

[Ann Chan, analyst]

And just moving over to the construction costs that you're talking about earlier, it's been shifting down. Could you also provide a sense for how land values have trended over the last few months and the construction and the labor cost in particular?

[Matthew Birenbaum, executive]

Yes, Ann, it's Matt. Land values are usually the stickiest part of the equation in development, and it is completely local. So it's hard to generalize on that. We have seen and we highlighted actually last year at our Investor Day how one of the deals we have under construction now in Quincy, Mass, we were able to buy that land at 40% less than where it would have traded at the peak of the frenzy. So there are situations where we've seen that kind of move.

I'd say in California, not a lot of land is trading because it's very difficult to get development to underwrite there. But to the extent it does, that's where we've seen some significant land retrenchment. And it's generally places -- those kind of markets where land represents a very high percentage of the deal cap.

In some of the Sunbelt regions in North Carolina, even in Texas, the land is not that high a percentage of the deal cap. So 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. So it varies market to market, but it's not been -- with a few exceptions, I would say, it hasn't been kind of a major move across the board.

[Operator]

Our next question comes from the line of Ami Probandt with UBS.

[Ami Probandt, analyst]

What is the outlook for when the expansion markets could reach an equilibrium in terms of supply and demand and see a return to some pricing power?

[Benjamin Schall, executive]

Yes. Our expectations for 2025 is particularly the high supply submarkets in the Sunbelt regions are going to continue to face 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.

Start volumes, as we all see, are definitely coming down. I would emphasize they're coming down in both the Sunbelt and in our established regions. So as you get out into 2026 kind of all else being equal, 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.

[Ami Probandt, analyst]

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?

[Sean Breslin, executive]

Yes, Ami, it does based on the numbers I described previously. So yes, it does.

[Operator]

Our next question comes from the line of Rich Anderson with Wedbush.

[Richard Anderson, analyst]

So clearly, you're sounding a little bit more upbeat on 2026 in terms of timing new deliveries. But what's the range of economic assumptions that you're using to get there, particularly for next year?

You're -- obviously you've got some idea about where the broader economy is going, employment and so on to get you comfortable with the year following. So I'm just wondering if you could give a picture of where -- what the broader underlying assumptions are for the next year to get you sort of confident in 2026 deliveries?

[Benjamin Schall, executive]

Yes. Sure, Rich. I'll provide some color on context and really focus on our sort of economic outlook for 2025 at this point. Consensus, and we look to the National Association of Business economics as a guide in and around consensus, generally has job growth slowing in 2025 relative to 2024 going from sort of 2 million net new jobs down into the 1.5 million type of range.

Couple of call-outs. One is potentially the mix of jobs next year could look different than this year and the higher income jobs and jobs in what we would consider our knowledge-based economy, our core type of customer. So that's leaning in 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. 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, seems fairly consistent from a jobs to 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 going to be those with higher levels of new supply coming online.

[Richard Anderson, analyst]

Okay. So with that, color, what's the bull case for owning multifamily next year? It sounds like you got some decent economic observations, and you're feeling generally okay. But equity residential described things as good. And that's, I guess, good. But I just wonder if there's -- 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?

[Benjamin Schall, executive]

Yes. So for us, Rich, I'll highlight a couple of areas. One, we expect our suburban coastal business to continue to outperform. If 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 and around external growth. And we've talked about development activity and the buildup and the prospects there. And then potentially a transaction markets, and I think 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, 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.

[Operator]

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

[Alexander Goldfarb, analyst]

Two questions for you. And maybe first, just following up on Rich's question. It's been 5 years since we've had a normal leasing market and apartment land. As you guys look to 2025, 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, executive]

Alex, it's Sean. When you said normal, just got a normal seasonal patterns in pricing is what you mean specifically?

[Alexander Goldfarb, analyst]

Yes. I mean, we had -- yes, 2020 was COVID, and it's been topsy-turvy since then.

[Sean Breslin, executive]

Yes. I mean I think for the most part, if you think about what -- how the pricing curves are generated kind of follows the patterns of demand. And our expectation is the traditional seasonal patterns for demand aren't likely to shift anytime soon in terms of the reasons people move, when they want to move, what they're desiring in terms of apartments and things of that sort.

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 -- and particularly in our coastal markets, is the return to office trends. Certainly have gotten better. I'm not sure we felt the full impact of that yet across all of our coastal regions as people are sort of inching their way back to what they think is normal state. And we mentioned earlier, Amazon's announcement, Salesforce bringing people back to San Francisco in January, that's certainly a positive that helps sort of build confidence in the city, other issues in L.A. and D.C. 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 on a home is, relative to renting is, the widest we've ever seen. Those two -- it's hard to tell how this fully play out. But they are still playing out, I would say. You can see it on return to office trends. And on the for-sale side, it's really showing up in lower turnover, which we think is going to be durable for a while. But the impact of new households being formed and their options, renting still looks like relative to historical norms and more attractive options -- 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.

[Alexander Goldfarb, analyst]

The second question is on site selection, clearly, especially here in the Northeast, lower Westchester and New Jersey have had a lot of floods. As you guys look throughout your existing markets and expansion markets, have you seen a change in the land that you're looking at as far as land that years ago was not considered flood area is now considered and therefore, your site selection has changed.

I'm curious if, in fact, your site selection has changed based on how some of these rivers and such are overflowing with storms.

[Matthew Birenbaum, executive]

Alex, it's Matt. For us, I'd say, for at least the last 6 or 7 years, we actually do have a pretty formal process for that, where every site gets run through a third-party coastal risk model. It's actually a resiliency risk model, which tries to capture wind, flooding, pluvial flooding, fluvial flooding, excessive heat, wildfire risk, all those different things.

So I'd say we were early adopters of that. And so 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 5 years ago. And we did switch vendors to a more robust reporting format on that. But we've always been pretty mindful of that.

[Operator]

Our next question comes from the line of Haendel St. Juste with Mizuho Securities.

[Haendel St. Juste, analyst]

I have 2 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 in the East Coast markets? Boston, New York, D.C. have been very strong this year, but a tougher year-over-year comparison 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.

[Sean Breslin, executive]

Yes, Haendel, this is Sean. To provide a little bit of color there. Yes, certainly, what I'd say for this year is we've seen better performance out of Boston, New York, specifically of the New York, New Jersey region and the Mid-Atlantic to a certain degree and then also in the West Coast Seattle.

In terms of the outlook for those markets, yes, the earn-in, if you want to describe it that way, it certainly is a little more robust in those markets relative to others. So all else being equal in terms of -- just everything else was equal in terms of rent change across the markets, those ones would outperform in 2025 relative to 2024. But to the extent you see significant momentum due to other factors in the various other markets that haven't performed as well as those in '24. That can certainly overwhelm. They earn in pretty quickly.

So I think it's really a reflection of how you want to look at what the job growth expectations are for 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 can play out, that would really impact the performance in '25 in terms of who's top of the leaderboard versus not?

[Haendel St. Juste, analyst]

Would you care to quantify some of that earn in for those East versus West Coast markets or perhaps wait?

[Sean Breslin, executive]

Yes. I mean we can look at -- I mean, I gave an overall number of 110 basis points. Earn-in on the East is about [ 130 ] and earn-in on the West is about just under 1 point, it's around 94, 95 basis points. And it's a forecast. So things can move around a little bit here. And then as I mentioned earlier, as we're talking about lease to lease, loss to lease, or gain to lease as it relates to our expansion of regions, it's actually a little bit negative around 20 basis points.

[Haendel St. Juste, analyst]

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 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 costs related to some of the initiatives that you'd be rolling out next year?

[Sean Breslin, executive]

Yes, no problem. Yes. So we do expect it to -- the growth rate for other rental revenue to decelerate 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. But the primary one that's driving it to that level has been our AvalonConnect offering, which will still be present in 2025 because we put the programs in place to get fully deployed, we'll be about 90% deployed by year-end 2024, and then the revenue flows through as the leases expire in 2025. Since you can't push it through where people are already on existing leases. And so that's the main driver.

And then in terms of OpEx trends, as I mentioned earlier, the impact for 2024 is a result of some of the initiatives 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, it's not impacting as many units. So that will soften in 2025.

[Operator]

[Operator Instructions] Our next question comes from the line of Linda Tsai with Jefferies.

[Linda Yu Tsai, analyst]

Just on the view that like-term effective rent is reaccelerating into year-end. Does this hold into January too? 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?

[Sean Breslin, executive]

Yes, Linda we haven't provided a forecast yet for January as we're sort of still working through that. We feel comfortable doing that for November, December, just given the volume of lease 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.

[Linda Yu Tsai, analyst]

And then just on BTR, how would yield differ between townhomes over, say, single detached? And then from the perspective of resident preferences, where do townhomes fit between traditional, multifamily and single attached homes?

[Matthew Birenbaum, executive]

Linda, it's Matt. It's early to tell because it's still a relatively new and quickly expanding subsector of our business of rental housing more broadly. But I would say our experience with the townhomes that we do own and what we've seen from third parties, the yields aren't really significantly different and for that matter, probably nor are the cap rates.

As it relates to who's the customer, and is the customer different for single family versus the townhome, I think it probably starts with location that where you're going to see townhomes is in closer in locations where the land is too valuable to kind of have quarter-acre lots or what have you, and people developing townhomes at 10, 15, 20 with the acre. And as you get further out, you start to have more land where you're able to do single-family -- true detach single-family.

I don't -- I haven't seen a lot. I don't know that there's a huge difference in the customer base other than obviously, there are some customers, particularly empty nesters, for whom a 3-story townhouse might be a bit much. Families with kids also, would probably prefer the larger yard. We do get a fair number of townhome BTR that do have their own yard as well as their own garage that is something that's important. And I believe the community we just started there in Plano has yards as well as garages.

So -- but so there are probably subtle differences in terms of life stage. So the school district is probably more important for an SF single-family product in a townhome product. But this is all early days, and we'll certainly learn a lot more as we get more of this product out there.

[Operator]

Our next question comes from the line of Alexander Kim with Zelman & Associates.

[Alexander Kim, analyst]

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?

[Sean Breslin, executive]

Yes Alex, this is Sean. I wouldn't say there's been any meaningful shifts recently. Obviously, as you went through COVID and then initially started coming out of COVID, there was a lot of movement initially in COVID, not as much doubling up, a lot more single-person households. All those things just sort of transition through COVID I'd say, have stabilized at more normal levels. The percentage of the [ roommates ], et cetera. So I don't think there have been any significant shifts.

I think as you look forward, just given the nature of demographics and some of the development I was talking about, I think being more heavily suburban, some of the town home product certainly fits the aging millennial profile where they want to be a little more infill in our established regions. It's very expensive to buy a home. So if we can get a nice quality townhome product, a small yard or a nice deck 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 which may represent 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 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.

[Alexander Kim, analyst]

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 could you talk about which markets are driving that change specifically or may have more runway for improvement as well?

[Sean Breslin, executive]

OkayYes, happy to do that. I mean the regions with the greatest opportunities, I'll say, top 4 or 5. New York, New Jersey, particularly the New York City market still running in the low 2% range. 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 is still running high relative to historical norms, but it's about 25 basis points. L.A. still running a little over 2% with L.A. and Ventura being the issues there within Southern California. Orange County, San Diego, 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, in Northern California and L.A., the markets where we do see more significant improvement as we move through 2025.

[Operator]

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Schall for any final comments.

[Benjamin Schall, executive]

Thank you, everyone, for joining us today, and we look forward to seeing many of you shortly at NAREIT.

[Operator]

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.