Avalonbay Communities Inc

NYSE:AVB

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the AvalonBay Communities Fourth Quarter 2020 Earnings Conference Call. [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, executive]

Thank you, Ali, and welcome to AvalonBay Communities Fourth Quarter 2020 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's 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'll turn the call over to Tim Naughton, Chairman and CEO of AvalonBay Communities, for his remarks. Tim?

[Timothy Naughton, executive]

Thanks, Jason, and welcome to our Q4 call. With me today are Kevin O'Shea, Sean Breslin, Matt Birenbaum and, for the first time, Ben Schall. Sean, Kevin and I will provide commentary on the slides that we posted last night, and all of us will be available for Q&A afterwards.

Before turning to our prepared remarks, I'd like to take a minute to introduce Ben, who many of you have met, either during his previous job or since the announcement in early December. Most recently, Ben served as the CEO and President of Seritage Growth Properties, where he led the company from its inception and oversaw the transformation of the company from a portfolio of Sears stores into a mix of shopping, dining, entertainment and mixed-use destinations. Prior to Seritage, Ben was COO of Rouse Properties, an owner of regional shopping malls. And before that, he was SVP with Vornado Realty Trust. Ben brings a deep background developing, operating and activating real estate, in addition to broad experience in many of the markets in which we do business. This is only Ben's second week on the job, so he'll likely have a limited role on the call today. But I thought I'd give him the floor for a couple of minutes just to share a few comments. Ben?

[Benjamin Schall, executive]

Thank you, Tim. It's terrific to be here, and I'm truly honored by the opportunity to join this team and organization. AvalonBay is one of a rarefied group of companies in my mind, led by Tim and the senior team, that have been able to successfully shape, build and grow an enterprise of this quality and scale and do so with a core culture with a focus on integrity, caring and continuous improvement that remain a real differentiator for the organization. And for me, in terms of why AvalonBay, it very much started with what I believe to be the strong overlap between those values embedded here and my personal values and those that I look to bring to teams and organizations.

I'm also passionate about creating real places that connect with people and communities, and there's not a purpose more powerful than AvalonBay's core purpose of creating a better way to live. And to be a leader as an organization in providing better quality housing environments that are safe, healthy, engaging and at the appropriate price point fulfills such a meaningful need in so many communities. And to do that in scale across the country, it's a very special place for me to have the opportunity to be a part of.

My official first day was not quite 2 weeks ago, on Monday, January 25, and my early transition is in full swing. On a personal front, I'm now a Virginia resident, having moved my family into an Avalon community nearby. Not only is it a wonderful home and community, I also get to be fully immersed in the AvalonBay experience, living and breathing our offerings each and every day and witnessing how much the Avalon ownership mentality comes through as a differentiator on the ground.

Much of my time over the first 90 days is focused on listening, learning and building relationships across the organization. My early listening tour also includes our shareholders and the investment community. And I will be coordinating with Kevin, Jason and team on that front and look forward to connecting with many of you over the coming months.

I'm very excited to be part of the AvalonBay organization as we collectively help shape the future of the company and stay on the forefront of creating better ways to live. And before turning it back over to Tim, I want to give a heartfelt thanks to the wider AvalonBay team and associates for how you've welcomed me and my family to the AvalonBay family. Thanks, Tim.

[Timothy Naughton, executive]

Great. Thanks, Ben, and great to have you and welcome again. Our prepared comments today will focus on providing a summary of Q4 results and some perspective on 2021 and how it impacts our plans for this year.

Before getting started on the slides, maybe just offer a few introductory comments on the quarter and the year. The fourth quarter was a tough end to what was already a very challenging year for the company and the business. The normal effects of an economic downturn on the apartment sector were magnified by work-from-home mandates, civil unrest in our city centers and the growing strength of the for-sale market. The contraction of apartment demand in urban submarkets over the last year has been profound and unprecedented to anything we've experienced, except perhaps for the tech wreck in the Bay Area in the early 2000s.

Over the last few weeks and months, we have begun to see some signs -- early signs of stabilization with a steady improvement in occupancy, followed by effective rents beginning to level off in all of our markets. And yet visibility for the business beyond the next 90 days or so remains challenged due to a combination of unique risk factors, including ongoing transmission of the virus and its variants, the rollout and efficacy of the vaccine, the continuation of work-from-home mandates, the regulatory extension of eviction moratorium in most of our markets, and lastly, the size, impact and distribution of any potential additional federal stimulus that may be passed in the coming days.

As a result, for earnings and operating metrics, we've decided to provide quarterly guidance in lieu of full year guidance. We are providing annual guidance, however, on a number of other items, like lease-up income, capital formation, development starts and overhead. And we'll continue to update and share information with you as we move through the year. And if the environment changes, such that we believe we can reliably expand our guidance, we'll do so.

So now let's turn to the slides, starting on Slide 4. As I mentioned, Q4 was a tough end to a challenging year. Core FFO growth was down by almost 17% in the quarter on a year-over-year basis and 7% for the full year. Same-store revenue was down just over 7.5% year-over-year and 1.6% sequentially from Q3. For the full year, same-store revenue declined 3.2%. We completed almost $400 million of development in Q4 at a projected initial yield of 5%. And for the full year, we completed almost $800 million at a yield of 5.2%. While yields were down by almost 100 basis points due mostly to lower rents, they remained 75 to 100 basis points above prevailing cap rates.

The 2 Northern California developments completed this year particularly weighed on results as rents have declined by double digits in that region over the last year. Excluding those 2 communities, the average stabilized yield for completed communities was 5.8%. In Q4, we started 3 communities in suburban northeast markets, which have been less impacted by the economic downturn. These were the first wholly owned communities started in 2020.

We raised $465 million of capital in Q4 mostly through dispositions. For the year, we sold over $600 million at a weighted average cap rate of 4.4% and an unlevered IRR of 10.8% over an average 14-year hold period, which compares favorably versus the last 2 to 3 years. In addition, we raised just over $1.3 billion of debt this year, mostly to refinance maturing or near maturing debt of just over $1 billion. And lastly, we purchased or repurchased -- purchased almost $200 million of stock for the year at an average share price of $150.

Turning now to Slide 5. We thought we'd provide a little more color on the components of same-store revenue declines that we've experienced on a year-over-year and a sequential basis. On Slide 5, you'll see, on a year-over-year basis this past quarter, we saw about half the decline in same-store revenue being driven by lower effective rents and about a half by increased vacancy and bad debt. And as we mentioned last quarter, future declines of same-store revenue this year will be driven by pressure on lease rates as lower rents we've been leasing at over the last couple of quarters begin to roll through the portfolio and concessions, which have also been elevated over the last couple of quarters and are amortized over the lease term.

Turning to Slide 6 and sequential same-store revenue. Sequential same-store revenue was down 1.6% in Q4 from Q3, driven mostly by lower lease rates, which were down more than 2% sequentially, and concessions as the cumulative impact of amortized concessions continue to grow from Q3 to Q4. Lower lease rates and higher amortized concessions were offset by a significant pick-up in occupancy in Q4, which Sean will touch on in his comments.

And with that, I'll turn it over to Sean to discuss portfolio performance in more detail. Sean?

[Sean Breslin, executive]

All right. Thank you, Tim. Moving to Slide 7. You can see the impact of the pandemic on physical occupancy and the absolute effective rent we have achieved over the past year, broken out between urban and suburban submarkets. Chart 1 reflects our suburban submarkets, which makes up about 2/3 of our portfolio. We experienced some deterioration in both occupancy and rate during the spring and summer of 2020 but have recovered most of the occupancy over the past 4 months. And as of January, effective rental rates were up about 1% sequentially from December and are roughly 4% below where we started 2020.

The primary driver of the weakness in our suburban portfolio has been the performance of assets located in job-centered hubs, where employers have adopted extended work-from-home policies and transit-oriented developments where the use of mass transit has declined materially during the pandemic. Some examples include Assembly Row in Boston, Tysons Corner in Northern Virginia, Mountain View in Cupertino in Northern California and Redmond in Washington State.

Chart 2 reflects our urban portfolio, which suffered from elevated lease breaks, turnover and an overall reduction in demand in the late spring and summer months, which was prompted by employers extending work-from-home policies and major urban universities announcing the adoption of distance-learning models for the fall term. Occupancy dipped to a low point of roughly 90% in September but has since recovered by more than 300 basis points. We're still about 300 basis points below what we consider a more normal occupancy rate in urban submarkets but likely won't experience that level until people return to work and major universities open for on-campus learning. You can also see that rental rates fell substantially in the past 3 quarters but have flattened out late in the year and ticked up about 2% from December to January. On a year-over-year basis, effective rental rates in our urban portfolio are still down about 18%.

Moving to Slide 8. You can see the trend of physical occupancy and the absolute effective rent by region for the last year. Occupancy has recovered from the low point in every region except the Pacific Northwest, which continues to hover around 93%. Rents have leveled off in all of our regions over the past couple of months, and we experienced a modest uptick in January in the metro New York, New Jersey, Mid-Atlantic and Northern California regions. Also in Southern California, effective rents have increased sequentially for the past 3 months. It's certainly too early to call the bottom in rents. We will experience year-over-year negative rent change for the next few months as we pass the 1-year anniversary of the pandemic, but we'll continue to highlight sequential trends in both rents and occupancy as key indicators of a bottoming.

Now I'll turn it to Kevin to address our outlook, development and the balance sheet. Kevin?

[Kevin O'Shea, executive]

Thanks, Sean. Turning to Slide 9. We highlight our financial outlook for 2021. Although we prefer to provide our traditional full year outlook, the uncertain resolution of the pandemic and the related regulatory orders, including evictions moratoria across our footprint, has reduced our visibility on our performance later this year. Consequently, for 2021, we are providing operating and earnings outlook for the first quarter only, and we're providing guidance for development, capital activity and other select items for the full year. Nevertheless, to assist investors in deriving their own perspective on our outlook for the year, we have enhanced our disclosure on expected performance in the first quarter of 2021. Specifically, we identify actual residential revenue performance in January 2021 for our same-store communities which reflected a year-over-year decrease of 7.8% and a sequential decrease of 40 basis points from December 2020. We also provide ranges for projected residential performance for revenue, operating expenses and net operating income in the first quarter of 2021 for our same-store communities.

In the first quarter, we project a year-over-year decrease in same-store residential revenue of about 8.5% to 10%, reflecting the impact of lower residential lease rates, amortized and newly granted concessions, lower occupancy versus the year ago period and a persistent level of uncollectible lease revenue. We expect an increase in same-store residential operating expenses in the low 4% range during the first quarter and for operating expenses to remain elevated during the first half of the year due primarily to several factors that influence a year-over-year comparison, including: first, the presence today of COVID-related expenses that were not incurred during most of Q1 2020; second, substantially reduced maintenance and other spend during the beginning of the pandemic in 2020 that will make for a challenging comparison in the current year period; and third, elevated turnover and marketing costs in the current year period.

As a result, for the first quarter, we project a decrease in same-store residential net operating income of between 13% and 16%. And finally, we project that core FFO per share for the first quarter will range between $1.85 per share and $1.95 per share. At the midpoint, our projection of $1.90 per share in core FFO for the first quarter of '21 represents a sequential decline of $0.12 from the fourth quarter of 2020. This $0.12 sequential decline is composed of an $0.08 sequential decline in residential same-store NOI, a $0.04 sequential decline related to dispositions completed in the fourth quarter and a $0.04 sequential decline related to increased overhead and strategic initiatives that is partially offset by a $0.04 sequential increase from other community classifications which, in turn, are primarily driven by increasing development lease-up NOI and commercial NOI, the latter of which was reduced in the fourth quarter by the write-off in straight-line rent receivables.

As for the full year guidance on other items, we project starting about $750 million in new development projects in 2021. We expect to complete $1.1 billion of development projects this year. And we expect NOI from new development communities undergoing lease-up to be between $40 million and $50 million in 2021.

For full year capital activity, we anticipate sourcing about $630 million in external capital from asset sales, condominium sales from Park Loggia and capital markets activity. This compares with expected capital uses for development, redevelopment and debt maturities and amortization of $835 million in 2021.

Turning to Slide 10. As I just noted, we do expect to increase our development activity in 2021. The roughly $750 million in new starts that we plan for 2021 is comparable to our starts activity late in the last cycle and represents an increase from the $290 million in development started last year when we curtailed new investment activity in response to the pandemic. Over the past 4 years, about 85% of our development starts have been located in suburban markets, where, as Sean mentioned, fundamentals have been much more favorable.

For 2021, our development starts are also concentrated in our suburban markets. In addition, this year's 2 urban starts are located in residential city neighborhoods and not in the more hard-hit, high-density central business districts. These new development starts should contribute to earnings and NAV growth in the next few years, and we'll be delivering into a market environment that we anticipate will be highly favorable for new lease-ups in 2023.

Turning to Slide 11. Almost 95% of current development under way is already match funded with long-term debt and equity capital. As a result, we have locked in the cost of investment capital on these developments, which, in turn, helps to ensure that these projects will provide earnings and NAV growth when they're completed and stabilized.

As shown in the next few slides, we continue to enjoy tremendous financial strength and flexibility with excellent liquidity, modest near-term debt maturities and a well-positioned balance sheet.

As shown on Slide 12, liquidity at quarter end was roughly $2 billion from our credit facility and cash on hand. This compares to just under $600 million of remaining expenditures on development under way over the next several years, resulting in approximately $1.4 billion in excess liquidity relative to our remaining development commitments.

Turning to our debt maturities on Slide 13. We show our debt maturities over the next 10 years and our key credit metrics. For debt maturities, we have only $600 million in debt maturities and amortization over the next 2 years, of which less than $40 million matures in 2021. As a result, our quarter-end liquidity of $2 billion exceeds both our remaining development spend and our debt maturities over the next 2 years by approximately $800 million.

As for our key credit metrics, at quarter end, net debt to core EBITDA of 5.4x was in line with our target range of 5x to 6x, while our unencumbered NOI was at or near an all-time high of 94%, reflecting our large unencumbered pool of assets that we could tap if necessary for additional secured debt capital.

And finally, and perhaps most importantly, as we look beyond the end of this pandemic, our strong balance sheet provides us with terrific financial flexibility to pursue investment opportunities as they emerge in the recovery ahead.

And with that, I'll turn it back to Tim.

[Timothy Naughton, executive]

Thanks, Kevin. Turning to Slide 15. I thought I might provide some longer-term perspective on this downturn and our business. This slide shows an index for same-store base rental revenue since 1999 or over the 22 years, plus or minus since the Avalon and Bay merger.

A couple of things worth mentioning here. First, as you can see, the long-term trend is positive and reflects a healthy business. Over the last 3 cycles, annual compounded same-store revenue growth has been roughly 3%. Rents have grown a little faster than that during the expansionary phase of the cycle. Generally contract for 1 to 2 years during a downturn, as they're doing now, and then reaccelerate during the recovery phase at the start of the next cycle. Housing has been a consistent performer over many cycles as demand and supply generally grow in tandem over the cycle with net completions roughly matching the pace of household formation most years, except during recessions where the number of households temporarily contracts.

During the downturns, it can be difficult to project operating performance as no 2 downturns and recoveries look exactly alike. Just to demonstrate that, the downturn in the early 2000s was reasonably deep for the apartment sector. In fact, it took almost 5 years for rents to recover back to their prior peak across our footprint. And in San Jose, rents didn't fully recover for 15 years. The downturn in the late 2000s was comparatively steeper as the economy and labor market were significantly impacted by the financial crisis. And while it was steeper, it was also shallower for the apartment sector as rental demand benefited from the correction in the for-sale housing sector.

The current downturn brought on by the pandemic has been the steepest yet for the economy and for the apartment sector. And while we are perhaps seeing early signs of stabilization, it is difficult to predict the timing and strength of the recovery, given the myriad of uncertainties directly impacting our business, whether it be economic, regulatory or health related. Importantly, though, we are confident that the apartment housing markets will recover, that we will return to sustained growth in rents and revenues over the next cycle, just as we've seen over the last several cycles, and that multifamily will continue to be a good business for the long term.

So turning now to the last slide. And in summary, operating performance continued to decline in Q4. But during the quarter and the early part of Q1, we began to see early signs of stabilization and some important operating trends. We saw healthy gains in occupancy sequentially with urban submarkets recovering about half of the occupancy they lost earlier in the year. Rent growth began to level off after declining for most of the last 3 quarters, and some regions even began to see modest sequential improvement.

The transaction market has recovered and strengthened significantly in recent months with suburban assets generally now selling at or above pre-COVID values. As Kevin mentioned, our balance sheet and liquidity remain in great shape and well positioned to support new growth opportunities. In fact, given recent operating trends and improved capital and transaction market conditions, we decided to activate the development pipeline, started 3 new developments this past quarter after having been cautious for most of 2020. Our starts in 2021 will be focused in submarkets that have been less impacted by the downturn, where the economics still offer a reasonable risk-adjusted return.

And with that, Ali, we're happy to open up the call for some Q&A.

[Operator]

[Operator Instructions] And we'll go ahead and take our first question from Nick Joseph from Citi.

[Michael Bilerman, analyst]

It's Michael Bilerman here with Nick. Tim, I wanted to ask you sort of on development underwriting and also maybe bring Ben into the conversations because it's a little bit about mixed use about when you're now underwriting these projects, how are you thinking about those ancillary services in locations that are going to be part of a community, whether they be retail or even office? And historically, Avalon has partnered with others to do those. I think about the deal you bought in Virginia, where Regency took the retail. I think about Assembly where Federal, obviously, brought you in to do the resi. How do you think it's going to evolve? Can those pieces stay capitalized separately? Or will it require someone to come in and take a loss on retail or a loss on office to support the multifamily rents? Effectively, you have to get higher returns on multifamily to make the math work.

[Timothy Naughton, executive]

Yes, Michael. I think we've talked a bit about this in the past, and obviously, there's probably more interest in it, just given the events of the last few quarters. As we talked about mixed use, we pursued it in a number of ways, oftentimes partnering, as you suggest, whether it's with Federal or Regency or EDENS on a number of projects where it's more of a condo structure where we may be building out the core and shell and ultimately turning back that retail to them. And that's been sort of the MO in cases where it's been a pretty significant piece of the retail, and we felt like it was -- we were able to reasonably sort of separate the execution and, ultimately, the management of the 2 pieces.

We're also doing a fair bit of mixed use that I sort of think of as sort of horizontal, more kind of PD, if you will, where we may be assembling a site, and Sudbury is a good example of this, where there may be a separate adjacent use. Back there, we had -- Whole Foods was part of the community. But it was owned, fee simple, not a condo structure, but fee simple by a different retail developer. That also had a for-sale housing component, also had a restricted -- an age-restricted component as well.

So particularly in the suburban locations, we'll look to do that. I'd say kind of the -- some of the infill locations, we'll probably continue to partner with some of the top retailers in the country. And then the third category, which I think is where your question was headed, is where -- when the users are so integrally sort of linked, where it's probably in the interest of the asset that would be controlled by a single entity, whether that entity is a partnership or whether we controlled it -- whether we control the entity 100%. I think probably our preferred solution, in that case, is where we're, again, partnering with somebody who's expert in the area of retail and can underwrite and help operate that but are partners in the venture with us. And so we'll be looking at the economics of the entire venture together and trying to optimize them in terms of the trade-offs that you inevitably make between the ground plane, which is usually the retail, and the residential above that.

So I think you'll -- if you sort of fast forward over the next 5, 10 years, I think you'll see more of the third category emerging. And companies like us will be partnering with the -- presumably, the Regencys, the Federals and EDENS of the world to make that happen.

[Michael Bilerman, analyst]

Got it. And then just in terms of the rent recovery, and I know you pointed out that extraordinarily, the timing and the strength of recovery, particularly in the urban submarkets, is difficult to project. You made a comment about the early 2000s and how San Jose didn't recover from a rent perspective to prior peak for 15 years.

I guess when you think about New York and San Francisco, which you still have a fair amount of exposure to, I guess what are you trying to underwrite? So I would assume having a view would dictate your capital allocation decisions about either rotating capital out of these markets or trying to go deeper overall. And if you have a 15-year time frame, that can make it a lot more difficult. So where is your mindset today about when to -- when you think the rent recovery and how the fundamentals in New York and San Francisco will turn?

[Timothy Naughton, executive]

Yes. Yes. Thanks, Mike. I didn't use the San Jose example to suggest that that's what we think is going to happen in New York City and downtown San Francisco. Obviously, the San Jose case was extreme because there had been a big spike during the tech run-up in the late '90s and 2000. So a lot of that period of gain was just before sort of the tech crash.

But I think your point is -- I think part of the point is that some of these things can be long cycles, right? We still believe in New York and San Francisco. We believe in our coastal markets as an investment thesis going forward. I mean they are -- we think they're going to continue to be centers of innovation, homes of great research universities. They're going to continue to overindex, in our view, in terms of the knowledge economy where you have higher incomes and productivity. And that density of knowledge that's contained in those markets is critically valuable, particularly to start-ups and companies that are getting off the ground.

Now as companies continue to grow and mature, they're going to distribute their workforces, as we've seen over the last year, to satellite -- some satellite markets and other markets and with the additional either work-from-home or hybrid positions maybe perhaps all over the map. So I think the -- I think it's too early to underwrite sort of what the relationship between demand and supply is going to look like over the next 5 years, but we don't see those markets in long-term decline, to be clear.

When you think of sort of the power corridors in this country, it's still Washington to Boston on the East Coast, and L.A. to San Francisco on the West Coast, and those are long cycles, too. Those don't reverse themselves over 5 or 10 years. So inevitably, we're going to continue to allocate capital to some of our other markets that I think are going to be somewhat beneficiaries by maybe some spillover effect from New York and San Francisco, whether it's D.C., Seattle or Boston as well as recent expansion markets, Denver and Southeast Florida. But there's probably other expansion markets in our future as well that are likely -- that have some of the same characteristics, research universities attractive to knowledge workers as particularly some of these larger, mature companies disperse their workforces across a wider geography.

[Michael Bilerman, analyst]

But it sounds like you won't sell in New York and San Francisco to fund that. That will be other sort of sales to do it or just raising your capital to expand.

[Timothy Naughton, executive]

Yes. I don't think we're at a point where we think it probably makes sense to pursue sales just given the performance of those markets right now. I think we -- I think all of us, we're going to feel a lot better once we see how much they bounce back. I'm not saying they're going to bounce 100% back from where they were a year or even 2 years ago. But until we -- until there's a little bit more visibility there, I just don't think you're -- I think the bid-ask is just going to be too wide on assets in those markets.

I mean Sean mentioned in urban markets, we've seen rents down 18%, and they're down more than that in Northern California and New York, so -- the city. So I think it's early. But I think it's safe to say that's not where probably the net growth is going to be for the portfolio. Just like if you're Google or Facebook, probably a lot of your net growth isn't going to be in Mountain View or Menlo Park, so -- but it doesn't mean you're going to abandon those regions. So I -- they're going to be core to -- they're going to continue to be core to our portfolio, but it's probably not where the growth is going to come from as it relates to -- from a capital allocation standpoint.

[Operator]

And we'll go ahead and take our next question from Rich Hill from Morgan Stanley.

[Richard Hill, analyst]

And Ben, it's nice to hear from you on an AVB earnings call. Look forward to working with you. Guys, I want to spend a little bit more time thinking about the bridge from 1Q versus 4Q. I recognize that the sales in 4Q probably had a $0.04 to $0.05 hit. And I appreciate the additional disclosure on capitalized interest, which is another $0.01 to $0.02, but it still seems like the guide is -- at midpoint is a little bit lower than what maybe we were expecting. So as you think about that, given the green shoots, is it just -- is it something to do with the mix of apartments coming online? Or how should we think about that difference, which, given the green shoots, I would have expected maybe the guide to be, call it, $0.05 to $0.07 higher. So maybe I'm just trying to understand, like how you get there, and if you could break that down a little bit more for us.

[Kevin O'Shea, executive]

Rich, this is Kevin. And maybe I'll sort of take a stab at that. I tried to walk people through that in my opening remarks. So I don't know that I have a whole lot of details. But let me begin by maybe repeating that, and then if you have further questions around that, we can try to dive a little bit deeper.

So just as a reference point, we anticipate core FFO per share at the midpoint declining from $2.02 in Q4 to $1.90 in Q1. In terms of this $0.12 sequential decline, relative to our budget, what we have is an $0.08 sequential decline in residential same-store NOI, a $0.04 sequential decline related to dispositions that were completed in the fourth quarter. You need to bear in mind we did sell about $450 million of assets in the fourth quarter that were present for much of the fourth quarter and are no longer present in the first quarter. So that's a $0.04 sequential decline from that line item, a $0.04 sequential decline as well from increased overhead and strategic initiatives.

And those total, call it, $0.16 or so, and they are partially offset by a sequential increase in other community classifications, primarily which include increasing lease-up NOI from development; and then commercial NOI, which is expected to recover sequentially because that was burdened in Q4 by the write-off in straight-line rent receivables.

So that was kind of the backdrop for it. Again, it's hard for me to reconcile against your expectations, which seem to have been about $0.05 higher, but that's the backdrop. But happy to answer any follow-up questions you may have about those items.

[Richard Hill, analyst]

No, that's very helpful, and I follow all of that. What I was trying to understand a little bit more was the $0.08 headwind to same-store NOI because it seems like the quarter is going to be maybe a little bit more challenging than 4Q despite some of the green shoots that have emerged. And maybe I'm just asking a naive question, but I wanted to maybe understand why same-store NOI is a headwind versus 4Q despite what looks like to be improving occupancy and improving effective blended rents.

[Sean Breslin, executive]

Yes. Rich, this is Sean. Why don't I try to provide some high-level commentary on that, that I think may help? And then if you're looking for additional detail, we can certainly take it off-line. But one thing to keep in mind here is that while we're talking about sort of green shoots in terms of leveling off of rents and such, we do have sort of the cumulative effect of both lease rent reductions as well as the amortization of concessions that will bleed through the P&L as we move through 2021. So in other words, the expectation would be as you look forward over the next couple of months, the impact from the amortization of concessions and the cumulative effect of those lease rates will be higher than it has been in Q4.

So that's something that I'm not sure people will always think about. But one sort of broad way to look at it, as an example, is we granted about $47 million in cash concessions in 2020. We only amortized about $16 million of those. So there's still another $31 million of concessions that we'll amortize through 2021. So that will continue, as Tim mentioned in his talking points, to impact the growth rates as we move forward over the next several months. So that gives some additional on the headwind.

[Richard Hill, analyst]

Yes. That's very helpful, guys. And I think the simple explanation, I'm sorry for complicating it, is there's just an earn-in benefit that still has to burn off over time, which makes it a little bit more of a tougher comp. But that's very helpful.

One more just clarification question, and I'll get back in the queue. But that $0.04 of strategic initiative that you mentioned, is that onetime? Or is that reoccurring as we think about modeling?

[Kevin O'Shea, executive]

It's reoccurring. It's part of our full year guidance for overhead costs, which includes -- a significant component of which is investment in building out our digital capabilities and other strategic initiatives. And so it's the capability that we've been adding and continue to add to our business and is, therefore, occurring throughout the course of the year. So it's something that you can kind of think about as continuing on.

[Sean Breslin, executive]

Yes. Rich, just to add on to that one as well, we may talk about it in more detail in the coming quarter or 2, but it ties into some of the information that we provided back in sort of late '19 in terms of our investment in digital capabilities, AI, machine learning, things of that sort that, if anything, has only accelerated as we've moved through the pandemic. If you think about what's been happening with virtual tours and self-guided tours and smart access and things of that sort, I think if you talk to not only us but our peers and others, has even probably more conviction in making those investments and the ROI associated with them that we would expect to continue to invest in those capabilities over the next couple of years for sure and then see those payoffs come through.

[Timothy Naughton, executive]

Rich, just to add to that, as we're making those investments in innovation, there's a bit of a geography issue, right? You got -- it may be hitting the overhead line, but the benefit oftentimes is flowing through to the assets. And so when we are able to save some payroll, things like that, it may not be obvious because the payroll expense is a big number, the property OpEx is a big number maybe compared to what the strategic initiative number is.

[Operator]

And we'll now move to our next question from Rich Hightower with Evercore.

[Richard Hightower, analyst]

And again, welcome to Ben on these calls. So my first question, I kind of want to hone in again on San Francisco and New York and the big sequential occupancy gains in the fourth quarter. Obviously, a lot of that must have been driven by pricing in the market as opposed to anything related to return to office or sort of the normal seasonal leasing pattern that we might consider. But as we think about the pace and the drivers of demand going forward as we go through 2021, what do you think the key drivers are that we should be expecting? And how does that overlay with what is normally peak leasing starting in the spring? And how do we fold in return to office in that? And how do you guys think about the moving parts given that this is just going to be a strange year in all respects?

[Sean Breslin, executive]

Yes. Rich, why don't I take a first shot at that and others can comment as needed? But I think the factors that you'd like to monitor are, first, what you mentioned in terms of employers basically reopening their offices and calling people back to work in these major urban environments that's obviously a key driver here. As Tim mentioned earlier, we're probably not expecting 100% to return, but certainly, a very high percentage are very likely to return.

The second component is what I mentioned in my prepared remarks is sort of the reopening of these major urban universities that really do draw in not only domestic but international students that do occupy apartments in some of these major urban centers. And it's not just the student, but it's the ancillary staff, faculty, et cetera, et cetera. So when you think of New York and San Francisco and markets like that, that's a pretty significant phenomenon.

And then ultimately, what's going to follow that is more business activity where there was corporate demand and things of that sort for consulting assignments and such that you can make up 1% to 2% of the market. So the combination of those factors will really sort of drive the demand. What we'll likely see is people lease apartments a little before they need to be either on campus or back at work or going to some consulting assignment, et cetera.

And so the timing of which, that is something that I think we probably all debate. I think our view at this point, just based on what's happening with the pandemic and vaccinations, et cetera, is that it's probably some time, maybe in the summer, when you might see that happen, depending on how the vaccination of the population occurs over the next few months here. So we could see employers calling people back in the summer or maybe the fall when people are returning to school and such. So I think those are the key questions, the timing of which is just to be determined.

For it to have a material impact on 2021 results, however, given the lease expirations that we have from quarter-to-quarter, you really would need to see that happen probably in the late spring to early summer to have any kind of meaningful impact on 2021 as compared to it occurring in the fall where we only have maybe 20% to 30% of our lease expirations remaining, you would see the lift in 2022.

[Richard Hightower, analyst]

Okay. That is helpful color, Sean. I guess my second question here, you're obviously ramping up development starts this year. What's the chance that you guys even go bigger than the $650 million to $850 million guidance, if you think we're really on the cusp of the next multiyear recovery in multifamily?

[Timothy Naughton, executive]

Well, it's a good question. As I mentioned in my prepared remarks, it's somewhat a function of what we've seen in the markets, both the real estate markets as well as the capital markets. At this point, we're basically funding that development with planned dispositions, just given where our leverage is right now and trying to sort of protect our credit metrics where they stand. So -- and I think as we've said in the past, it's hard to -- it's -- with gains ratios of around 50%, it's hard to sell too much. And if we wanted to double down, we'd be -- we'd end up having to do distribution, and then it's just not capital -- it's not as capital efficient.

So I think what would have to happen is the equity markets -- I mean we had a good start today, I guess, but the equity markets would need to recover more to a level which we think sort of more reflective of intrinsic value in NAV where we might have some -- we might have access to those markets as well to really expand the balance sheet in order to accommodate more development.

Now having said that, not all deals we think are sort of ready to go. As I mentioned in my remarks, we're -- for the most part, we're focused on markets that haven't been as impacted from a run rate standpoint so that the yields are still, at least on a current basis, still offer, we think, sort of an appropriate risk-adjusted return. That's -- it's not true of the entire development pipeline, and you know how these deals work. You just don't go out and pick up some land options and start the next quarter. These things take -- even deals that are entitled can take a year or 2 years to sort of fully gestate before they're ready to start.

So the number is probably not going to -- probably just can't flex up too much, even if market conditions were great. But it's -- I suspect it's going to be in this range unless market conditions move dramatically one way or the other.

[Operator]

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

[John Pawlowski, analyst]

Matt, could you give us a sense for the 2 Northern California dispositions, how you think values ultimately settled out to where -- what you could have gotten on the sales pre-COVID and cap rate color for those 2 deals?

[Matthew Birenbaum, executive]

Sure, John. We sold the 2 deals in Northern Cal in the fourth quarter. Eaves San Rafael was our only asset in Marin County. That's a pretty unique asset in a very supply-constrained part of the world with very little existing stock, almost no new construction. So I would say, that one, I don't think that the value there was really impacted much at all. We think the cap rate was a high 3s, maybe around 3.9. So I'm not sure. Maybe it's down slightly from where it would have been a year ago, but that's just such a special asset that it's a bit of a one-off story.

The other assets that we sold at the end of the year was Eaves Diamond Heights. That's an older rent-controlled asset in the city of San Francisco. And we were a little bit motivated there to close by year-end because the city, through a ballot initiative, increased their transfer tax to the highest in the country at 6%. So there was definitely some dollar savings by closing before year-end. That deal was about a 3.7 cap. It's 470,000 a unit. I would say, a year ago, that asset probably would have sold for 8% to 10% more, although it's hard to know. Maybe not as impacted in terms of the NOI as some of the other assets just because it was a rent-controlled asset. And so some of the rents were below market but also maybe less lift for the buyer on the way out because there'll be more constraints on ability to raise rents. So probably a little lower beta maybe than some other assets in San Francisco.

[John Pawlowski, analyst]

Okay. Great. And then second question for Sean, sticking with Northern California. Just curious your thoughts, particularly in San Francisco, San Jose, when a lot of your private competitors' occupancy is well below your own level and it feels like the entire market is 1 to 3 months free, and so the short question is are you going to be able to sustain the occupancy and sustain stable rents as your private competitors play catch up. Or do you feel like the floor is underneath? Or is it going to be a choppy few quarters here?

[Sean Breslin, executive]

Yes. John, that's a good question. And I think if you look at basically how the quarter unfolded, and not just in Northern California, but across some of the more impacted markets, whether it's ones you referenced or New York City or Redmond, Washington State, as an example, is we've certainly seen rents decline as we built occupancy. And now they've sort of leveled off. And the question kind of rolling forward is do they sort of bounce along the bottom here as we basically try to kind of hold occupancy where it is. We feel like the -- for the most part, across the portfolio, we're pretty close to where we think market occupancies are, and so rents should get better.

The question is how much. As the rest of the market sort of does what it does, as you pointed out, I think there's -- some of the other peers are going to be higher in occupancy. Some are lower, trying to catch up. But I think just given what we've seen, the belief is that we probably, just for the next couple of quarters, are going to kind of be bouncing around a little bit. I wouldn't say that we're expecting a sharp uptick. I wouldn't say that. But should we expect some marginal improvement? I think that's reasonable to assume, given where the rents were to get the occupancy that we needed. Now we're trying to sort of stabilize a little bit, so we should be able to compete without as much inventory available, and therefore, the rents won't need to be as soft, I guess, is the way I'd describe that.

Every pocket is a little bit different, though, is the way I think you need to look at it in terms of what's happening, is there new supply or is

there not new supply. Things like that do impact these submarkets in potentially a meaningful way, depending on what's going on there.

[Operator]

We'll take our next question from John Kim with BMO Capital Markets.

[John Kim, analyst]

Comparing this downturn versus the prior recessions on Page 14, which is very helpful, I guess one of the big similarities between now and early 2000s is the homeownership rate and the strength of the housing market. And I'm wondering if you think this is a factor that's most important in terms of the pace of recovery this time around. Or have landlords, including yourselves, aggressively cut rents so that the recovery time could be quicker?

[Timothy Naughton, executive]

Yes. John, it's Tim. It's a good question. I mean we are definitely seeing the for-sale market's strength. I think part of that, like the early 2000s, is demography, as you start to see the kind of the 30- to 34-year olds or the leading edge of the millennials come forward and start to purchase.

I do think, though, what's happening is you are seeing just an acceleration of folks that may have bought a year from now or 2 years from now, 3 years from now, accelerating that purchase just because of what quality of life in the urban markets has been like over the last year. So yes, we'll have to see.

When you look at -- it's been our view, I think we've talked about this over the last 2 or 3 years, that housing demand between rental and for-sale is going to be more balanced over the next decade than we've seen over the last 2 decades. The last decade was kind of the renter decade. The decade before that was kind of the homeowner decade, and there are some artificial factors driving it, particularly in 2000s, as you know, with what was going on in terms of just the whole mortgage crisis. But I just think just given kind of the mortgage finance system we have in place now, I think it's going to be driven more by fundamental factors than speculative factors. And for a long time, homeownership rates were -- just sat at like just 64%, 65%, and they were kind of that level on a marginal level. And if you look at what's happening in terms of the growth, and we've talked about this, too, in terms of this growth in single-person or single-parent households, that population is still growing. That population is still growing. And that multifamily is a better use for -- a better housing choice for that group.

So I think there's a lot of factors. When you sort of put them all together, it really does suggest sort of balanced housing demand going forward. And so today, we're producing, whatever, close to 1 million, around 1 million single-family units and 300,000 or maybe 400,000 multifamily units. That feels about right relative to marginal demand. I think it's been accelerated, as we're speaking right now, just because of the pandemic. But as you look out over a 2-, 3-, 4-year period, it sort of strikes us as about sort of the right mix of supply to address marginal demand.

[John Kim, analyst]

That's very helpful. Maybe the second question for Kevin. The impact to your earnings from concessions doubled this quarter versus last quarter. But can you remind us how the concessions have trended throughout the year last year, so the average concessions being granted by each quarter?

[Kevin O'Shea, executive]

Well, maybe, Sean, if you want to speak to the average concession value.

[Sean Breslin, executive]

Yes. I mean I think what I can probably describe to you is if you look at the leases that we've signed, kind of what the pace has been in terms of concessions, so in Q3, the average concession per lease signed was $1,100. When you look at Q4, the average was $1,350, but it did tick down as we moved through the quarter. So as an example, October was $1,450 a lease. November was $1,400. December was $1,190, and they were down to just under $1,000 a lease in January. So the trend has been our friend in terms of the impact of concessions.

In terms of the accounting of it, just one comment to reiterate what I mentioned earlier, and Kevin can address it more thoroughly as well, is we granted about $47 million in cash concessions in 2020, but we did only amortize $16 million of them in 2020. So there's still $31 million in deferred concessions on the books that will be amortized through 2021. And then in addition to that, whatever concessions -- cash concessions we grant in 2021 will also commence amortization. So hopefully, that gives you some sense of sort of the headwind as we move into 2021 from the concessions that were granted but deferred in 2020. I don't know if that answers your specific question or if you have a follow-up to that.

[Kevin O'Shea, executive]

I can add a couple of things, John. This is Kevin again. So just to give you a sense, to frame it, if you kind of look at our earnings release to start the discussion here, for -- and as Tim -- as Sean has mentioned, on Page 31 of our earnings release, for the full year of 2020, we granted $46.6 million worth of concessions. That's just the granted number. If you kind of go back, in Q4, we granted about $19.5 million; Q3, granted about $15.3 million. So the difference pretty much is really what we did in Q2. So that's going to be, call it, the $12 million or so granted in Q2. And again, what we amortize, of course, is different.

[John Kim, analyst]

Is it fair to assume that third quarter, that year-over-year comps are easier? You'll be withholding the concessions on renewal.

[Sean Breslin, executive]

Well, it is a function of what concessions we grant in 2021. All else being equal, if you just sort of thought today, if you thought the concessions were going to go to 0 effective February 1 as an example. What's on the books today, the peak and concession burn-off or amortization would be sort of in the April-May time frame. We're still granting concessions maybe at a lower rate, but we're still granting concessions now. So it's very likely that the peak burn-off of the amortization will drift into the summer sometime, depending on the volume of concessions that we grant and the amount of each concession over the next few months.

[Operator]

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

[Austin Wurschmidt, analyst]

Great. Just wanted to touch on sort of the occupancy rebound again, and economic occupancy is now approaching kind of that mid-95% range. I think you were 96% plus pre-pandemic. But anyhow, how does it change your view towards continuing to build occupancy, given, I guess, your view that it could be until the summertime until you start to see a surge in demand, as people firm up the back-to-office dates and then into the fall for the student population? How does that kind of balance that, continuing to grind down, I guess, on the concessions versus trying to build occupancy to give yourself maybe some cushion as you get into the spring leasing season and the expirations start to increase?

[Sean Breslin, executive]

Yes. Austin, this is Sean. Good question kind of from a strategy standpoint over the next 2 or 3 months. As I mentioned in response to the couple of questions ago, we think as we look across the suburban markets and the urban markets, that we're in the range of what we consider market occupancy based on multiple data points that are available out there. People use Axiometrics or CoStar or various other sources like that. And so we've got the ability to sort of triangulate into where we think market occupancy is. And we're comfortable sort of operating around market occupancy to slightly above, maybe 100 to 200 basis points. Anything beyond that and you're probably just giving up too much rate to hold that higher occupancy.

So while the occupancy may drift up a little bit over the next couple of months here, I wouldn't expect it to spike materially similar to what we've seen in the last 4 months. So for us, it will be more about maintaining marginal improvements in physical occupancy and really trying to make sure we find where we can hold those rents and see sequential improvement in effective rents at that occupancy. That will be more of the game going forward for us. To the extent that there is a significant pivot one way or another in terms of the macro environment, that would certainly influence that strategy, but that is the strategy as we see it today.

[Austin Wurschmidt, analyst]

Got it. And then you referenced the 18% decline in rents. I think it was in reference to urban markets. But as we think about that recovery, last quarter, you did mention you've kind of gone further down in the renter pool from a credit perspective. Can you give us any type of metric to give us a sense of how that change in renter profile, how significant it's been or maybe an affordability ratio comparison versus the years leading up to the pandemic?

[Sean Breslin, executive]

Yes. No. Also a good question. And one thing to be clear about is, if anything, our credit standards have become more stringent during the pandemic, given the various regulatory orders that are out there, particularly the eviction moratoria. Where we have reached down further in the renter pool, it's more from an income perspective. And obviously, rents are down, so people can qualify for apartments that maybe they couldn't qualify for last year when you go to New York City or San Francisco and the rents are down 25%.

But in terms of maybe where you might be going with this is their ability to pay in the future as we see a rebound and are trying to push through rent increases. And while income levels are down, rents are down more than that. So actual rent-to-income ratios have come in a little bit over the last few quarters, which just tells us that there is more ability to absorb rent increases on the other side of the pandemic when we see a rebound.

And one thing to remember as it relates to concessions is while we have to amortize concessions for GAAP purposes, we don't amortize the concessions for the individual residents. So they may receive a month free, as an example, upfront. But the next month, they are sourcing a check for the full amount of the lease rent. So any renewals that we provide to them at some point in time when their lease expires will typically be based off the lease rent as opposed to the concessed rent. So people are leasing where they can afford, but they're writing a check for it as opposed to the effective rent.

[Austin Wurschmidt, analyst]

Right. And what's the decrease in the gross or face rent, if you will, versus that 18%?

[Sean Breslin, executive]

Yes. So if you look at it on a rent change basis as opposed to the blended values that we were talking about, basically, we had effective rents that were down 11.2%. But if you look at lease rents, they were down about 7%.

[Austin Wurschmidt, analyst]

Yes. No, I saw that for the quarter. I was more curious, I guess, over the course of how that 18% number would compare and is -- are incomes still down less than that face rent number when you remove the concession, as you referenced?

[Sean Breslin, executive]

That's correct. Yes. Yes, incomes are down less than the reduction in rental rates.

[Operator]

We'll now take our next question from Alua Askarbek from Bank of America.

[Alua Noyan Askarbek, analyst]

I know we're going a little too long, so I'll be quick, but I wanted to ask a little bit more on the demand side that you've been seeing. Just to get a clear idea, are you still seeing a lot of those bargain hunters coming in within markets looking for the deals in your urban markets? Or are you starting to see a little bit more demand coming in outside of those markets?

[Sean Breslin, executive]

Yes. No, it's a good question in terms of the bargain hunters. I guess in the current environment, sort of everybody is looking for a deal. But as I mentioned in response to the last question, people are well qualified with good incomes that are coming in, so it's -- I would say that we're not looking for people that really can't afford what we're doing. And so they're really trying to drive for a deep discount to make it comfortable for them.

In terms of the question about net new demand coming in from sort of other geographies, that's a good question. I don't have that right off the top of my head. But I would say, for the most part, what we're seeing is that given the entire market, in many cases, has improved in occupancy, that there is net new demand coming into these markets as opposed to just recirculating of the existing demand that's already in place that would allow that to happen. So I don't have specific details for you in terms of how much demand in New York City as an example. But for market occupancy to come up, there has to be net new demand.

[Alua Noyan Askarbek, analyst]

Okay. Got it. And then just a quick question on Boston or New England overall. It looks like the effective rents really dropped off in 4Q. Is there anything behind that other than maybe the supply that you guys have been talking about?

[Sean Breslin, executive]

No. I mean it's the same phenomena. I mean the urban markets in Boston are still very challenged. It's quite choppy. Not quite as bad as New York City or San Francisco. But the urban markets are driving most of it. And then there are some sort of infill pockets. I mentioned our Assembly Row asset, in Chestnut Hill, pockets like that, that are sort of the inner ring suburbs are also a little bit weaker. But some of the more distant suburban towns with good school districts and things like that are performing better.

[Operator]

We'll now take our next question from Nick Yulico from Scotiabank.

[Nicholas Yulico, analyst]

I just wanted to go back to the slide in the presentation where you gave the occupancy and blended rents for the suburbs and urban environments. And I guess I'm just wondering, for those 2 different buckets, suburbs versus urban, if you had -- if you could give us a feel for kind of the composition of the blended rent, meaning what percentage of that was renewals versus new leases for the different regions?

[Sean Breslin, executive]

Yes. Nick, that -- it's a good question. It's a lot of data points because it is a blend of renewals and new move-ins, which changes by month. It's probably something Jason could talk to you about off-line as opposed to trying to walk through that because it, again, changes month by month. And if you think about it -- if you wanted to, you can just go look at our turnover rates that we provided in the earnings release to get a feel for it, though. It shows that year-to-date and for the last couple of quarters. That will give you a good sense of the mix.

[Nicholas Yulico, analyst]

Right. Okay. Yes. That's what I was wondering if it was kind of similar to the turnover rate because, I guess, my question here is if your turnover is at your lowest point of the year in the fourth quarter and first quarter, and we're looking at a blended rent number that is, in some cases, stabilizing or slightly ticking up versus higher turnover periods, I guess I'm just wondering what we should really be reading into this. Because doesn't it just mean that you're signing less new leases, which is where the worst pricing is? And so the fact that it's starting to stabilize but you're doing more renewals versus new leases and you're going into a period in the spring where you have a lot of new leases, I guess I'm just trying to wrestle with what we should really be reading into this line of improvement for January and the fourth quarter versus other parts last year.

[Sean Breslin, executive]

Yes. No, that's a good question. I think to the comment that I made to John earlier, probably a little too early to tell in terms of calling it a bottom, but we are pleased with the fact that during what is typically a seasonally lower period where we had turnover up 15% year-over-year, we have been able to slowly pull back on concessions and see slightly better blended rents on a sort of net effective basis for now 4 months basically, 3 or 4 months, that, that gives us a sense that we're kind of pricing in the right neighborhood, and that was building occupancy. So we don't need to build as much occupancy as we were attempting to do in the last 3 or 4 months. Therefore, we believe we should be able to do better in terms of absolute effective rents moving forward.

To your point, though, it does -- what happens in each market as we get to the spring leasing season is yet to be seen. So I think we're kind of bouncing around the bottom now. And the question is will we continue to see those sequential improvements now that we're at that occupancy platform that we want to be at. That is a function of just pure supply and demand in these markets and what happens. So I think it's probably a little too early to call in terms of the specific question that you have. Whether actually reading this that this at the bottom and it's going to bounce back, I'm not sure we're prepared to say that just yet.

[Operator]

We'll take our next question from Rich Anderson from SMBC.

[Richard Anderson, analyst]

So when I think about percentages and talk about percentage, you can get sort of misleading if I don't have any jobs that were lost in your markets in 2020, but you need kind of 2x growth to get back to where you were in absolute numbers because -- just because you're growing off a smaller base. And then the same logic applies to the 18% decline in your urban effective rates. You got to do 30-plus off the lower base to get back to where you were in absolute per-unit rent.

And my point is when you look at your slide on Page 14, it's taken 3 to 6 years for you to just get back to where you were in whether it was the tech bubble or the housing crash. Does this environment, which is somewhat more black and white, it's sort of virus vaccine, and it's as bad as it was, it's not very complicated, do you think that the recovery back to where you once were in whether you use jobs or rents, whatever the metric is, will be tighter than that 3% bottom end of the range that you've experienced in history?

[Timothy Naughton, executive]

Rich, Tim here. That's obviously one of the big debates here as to whether this is going to be V-shaped or swoosh-shaped in terms of recovery. And that's ultimately -- it's jobs. It's what's going to help propel total household formation and the deconsolidation of households that may have consolidated over the last year. And while the unemployment rates are looking pretty good, obviously, the labor participation rates are pretty low. So it's going to take some really decent economic growth to -- I think, to really -- I think, yes, suburban rents could be back a lot quick -- could be a lot quicker than the 3 to 5 years we've seen in the past.

I think the question here is really about urban and some of the really tech-intensive suburban submarkets like a Mountain View or Menlo Park, as we were talking about before. And it's going to take some economic growth, I think. And so I think you may -- I think we may see sort of a quick V-shaped maybe for the suburban markets, and the urban markets may be -- we may not be back to those rents for another 3 or 4 years.

[Richard Anderson, analyst]

Yes. So it leads me to my kind of second question, which is you're not giving full year guidance because you don't have a lot of visibility beyond 90 days, but then you're ramping development up. So I just wondered if your confidence in a period 2 years from now when you might be delivering these assets is higher than it is 6 months from now. And I imagine it is, but I -- that's what I'm trying to pinpoint. Or is the development that you're turning on sort of specific to those markets and those areas that maybe weren't as impacted by the COVID pandemic?

[Timothy Naughton, executive]

It's the latter point that you're making. It's -- as I said before, I think suburban rents could be back to where they were in a year. They're only down 4%. It doesn't take a lot of growth to get that 4% back in those markets. And so yes, we're focused. We're kind of activating that lever in markets where we think there's -- as I said in my prepared comments, where we think the risk-adjusted return is -- makes sense to us right now. So I guess that's it.

[Operator]

We'll go ahead and take our next question from Anthony Paolone from JPMorgan.

[Anthony Paolone, analyst]

On the expense side, is there anything for 2021, as we look out, that could bring just expense growth back down to sort of an inflation number? Or does the turnover and some of these other dynamics just step function this up for higher growth this year?

[Sean Breslin, executive]

Yes, it's a good question. I think it's more of the latter. I mean a lot of the stuff that we're seeing is sort of related to the pandemic and it's prompted -- whether it's higher turnover costs, PPE and extra cleaning costs, associates that are on leave and, therefore, driving temporary labor -- contract labor over time, things like that need to kind of play their way through. And obviously, we have a tough comp just given first half of last year, particularly in the second quarter. Yes, spend came to a screeching halt in a number of different areas. Then turnover came down. Maintenance projects were delayed, et cetera, et cetera. So I think that it's just going to put pressure on what the numbers look like, particularly, as Kevin mentioned, in the first half of this year, given that tough comp. It will be a little bit easier when we get to the second half because some of those expenses and elevated turnover and all that will be more comparable, but particularly the first half will be pressured.

[Anthony Paolone, analyst]

Okay. And then just second question for Kevin. The $160 million to $170 million of total overhead for 2021, do you have the comparable number for 2020, just to understand the increase? I think it's a couple of line items and a variety of adjustments to get there.

[Kevin O'Shea, executive]

So Tony, you're referring to the kind of the core expensed overhead number?

[Anthony Paolone, analyst]

Yes. I think you gave brackets around, I guess, a combined, so like G&A and property management, a few things like that.

[Kevin O'Shea, executive]

Core -- expensed overhead for core FFO of $160 million to $170 million. The reference point for the prior year was about $150 million, $151 million. So it's about a $14 million year-over-year increase, where most of that is, as we've alluded to before, related to investment in various strategic and related initiatives. I mean strategic initiatives alone are about $7 million of that number, probably about $5 million on a growth basis, and there's ancillary investments as well. And there's some additional compensation costs, including some executive transition costs.

[Operator]

We'll go ahead and take our next question from Alexander Goldfarb from Piper Sandler.

[Alexander Goldfarb, analyst]

And Ben, welcome aboard. I'm assuming you declined the free rent incentives so you can do your part to help earnings. Two questions here. The first, just going to guidance, Tim and Kevin. You've laid out definitely that you think things are bottoming. You're not sure how things will go. But in general, you've laid out sort of a base case. So with that in mind, why couldn't you provide a full year number, even if it's a wide range? Because it seems like you're sort of tracking in the sort of 7.50, 7.60, something like their midpoint. And just sort of curious what prevents you from providing, even if it's just a wide range, something because, as I say, from your first quarter observations, it sounds like you feel comfortable with where things are shaking out, and you have a general sense that if that continues, then you sort of would know where you were for the full year.

[Timothy Naughton, executive]

Yes. Alex, it's a fair question. We -- I mentioned in my kind of earlier remarks, it's more than just 1 or 2 things that are kind of at play here. We didn't even get into the issue of eviction moratoria, where we've got, call it, 3% of our units sort of tied up in people that aren't paying. We have potentially a federal stimulus that we might benefit from, actually -- and actually -- help us actually to potentially even reverse some bad debt that we've taken on before.

Sean might -- in terms of the work from home mandates, when they expire, makes a big -- you can make a big difference in terms of when we might get initially a good occupancy boost. But with that comes other income and other things as well. So when you put them all together and you start playing out these variables you get the ranges that can feel wide and we just think it's not that reliable. And frankly, it's -- I think in the past, we've actually haven't given quarterly guidance. We've given annual guidance because that's how we manage our business in a typical year. We don't manage it quarter-to-quarter.

Reality is we're managing it week-to-week, month-to-month, quarter-to-quarter right now. And we feel we've got enough visibility at about 90 days to provide reliable guidance. Beyond that, we just don't think it's that reliable to be putting it out there and to always be trying to reconcile and sync up. It just, to us, didn't think that it was really adding anything to the conversation. But -- so others may choose to provide outlook with a wide range, I get it. And I think if you're -- you have a Sunbelt portfolio, I think it makes total sense that you'd be providing guidance right now. But that's not the situation we're in. Kevin, I don't know if you have anything else.

[Kevin O'Shea, executive]

I mean just to add to that. I think that covers it, Tim. But Alex, for us, it came down to, can we satisfy the test of providing a reasonably reliable midpoint and a reasonably narrow and useful range. As we know, anything is possible in Excel. But when we kind of played with these variables and looked at the back half of the year, there were things that could be very positive or very negative and they're beyond our ability to reasonably predict with accuracy. And so given that, we just didn't feel like we could meet the test of providing a reasonably reliable midpoint forecast, which hopefully what we -- what we people would focus on, even if we gave a wide range and we couldn't provide a reasonably narrow range around that. So we just felt like why try to give something that's at odds with how we're managing the business and the Q1 guidance seemed more appropriate.

[Timothy Naughton, executive]

Yes. Alex, maybe just last thing to add. We -- that's one of the reasons we showed the Slide 14 as well and kind of put a circle around the downturns and the recoveries, that's when it's hard to project the business. I mean when you're in an expansion, it's fairly linear, and we feel like we can give some pretty reliable guidance in terms of how the portfolio ought to perform over the next 12 months.

[Alexander Goldfarb, analyst]

Okay. And then the second question is, as you guys think about ramping up the development program and using more capital, how does that balance with the expansion markets? And to the extent that you're looking at other markets like Nashville or Austin or some of the other sort of popular markets these days, how do you reconcile your balance of capital between investing in development in your current markets versus using that capital to either in your expansion markets or enter other new markets?

[Timothy Naughton, executive]

Well, Alex, it's a good question. I think the reality is that we didn't give guidance around acquisitions and dispositions to the extent that we -- acquisitions, I should say, to the extent we acquire, we would just sell more and existing assets. So it's really being done more through portfolio management, basically recycling capital out of certain markets and you know where we've been recycling, largely the Northeast into markets like Denver and Southeast Florida and potentially some other expansion markets to come.

But at this point in the cycle, where capital is priced, that's how it's -- that's probably how we would fund it. If equity values recover in any meaningful way where we think it makes sense to expand the balance sheet in an accretive and prudent way, that'd be sort of the second alternative.

[Alexander Goldfarb, analyst]

Okay. And then just finally, the New York development site, which one was that, that was written off?

[Matthew Birenbaum, executive]

Alex, it's Matt. That was the investment that we had in the East 96th Street RFP that we...

[Alexander Goldfarb, analyst]

Okay. That was the Cuomo-de Blasio one. Got it. Okay. No problem.

[Timothy Naughton, executive]

Alex, just to be clear, when we write it off, it means it's more probable than not -- it's less probable than not. Or did I say that right?

[Kevin O'Shea, executive]

More probable than not that we will not be developing.

[Alexander Goldfarb, analyst]

It's a double negative. Thank you.

[Kevin O'Shea, executive]

[indiscernible]

[Timothy Naughton, executive]

It doesn't mean we're not still working it and pursuing it, but it's more probable.

[Kevin O'Shea, executive]

Yes. We have to do this from an accounting point of view. It tipped the other way into being less probable.

[Operator]

And we'll go ahead and take our next question from Brent Dilts from UBS.

[Brent Dilts, analyst]

Just one for me at this point. But could you talk about how the financial struggles of some of the largest U.S. transit agencies who are talking about permanent cuts to service might impact your transit-oriented properties?

[Sean Breslin, executive]

Yes. Brent, it's Sean. I can take a stab at that one and Matt or others can jump in. But it's probably a little too early to tell right now, I would say. I mean, certainly, ridership has fallen dramatically through the pandemic in all the major transit systems. And as a result, I, in my prepared remarks, mentioned that one of the locations within our suburban footprint that has been most impacted is sort of transit-oriented developments, just because people don't need it as much. Whether that results in permanent cuts versus just the temporary reduction in capacity that we've seen has yet to play out. And I suspect that there probably wouldn't be decisions made around permanent cuts until we get beyond the pandemic and people see what ridership sort of normalizes at.

So I think it's probably too early to call on that at this point. But certainly, if there are transit-oriented developments that are out there that are -- the residents are heavily reliant upon transit system and capacity is cut dramatically, there would be a negative impact on those assets. It's probably just too early to tell what that might be.

[Matthew Birenbaum, executive]

I'll just add one thing to that. This is Matt. On the other side, perhaps marginally, it makes the transit agencies a little more aggressive with trying to dispose of some of their land and/or go into some joint developments. Actually, one of the deals we just started this past quarter was Avalon Somerville, which is at a NJT stop in Central New Jersey. And we are looking at other sites where transit agencies are probably going to feel more pressure to monetize their land positions.

[Operator]

We'll take our next question from Rob Stevenson from Janney.

[Robert Stevenson, analyst]

What percentage of your 2021 development starts are locked in cost-wise at this point? And what are you seeing with respect to construction costs, especially lumber, given what's going on there? And how decent is the labor supply these days?

[Matthew Birenbaum, executive]

Sure. Rob, it's Matt. I can speak to that one as well. If we haven't started a job yet, we have not locked in the cost on anything really, except for probably the land and a little bit of the entitlement costs. So the starts that we're looking at potentially for next year, I think we own the land on maybe 2 or 3 of them, and then there's a couple others where we have -- they're under hard contracts. So everything else is subject to the market. The land and the soft cost usually is around 1/3, 30% -- 25%, 30%, 35% of the total capital cost. The hard cost is usually around 65%, depending on the product type.

We had -- if you had asked at the beginning of the pandemic, I'd say we had a pretty high degree of conviction that hard costs should come down, particularly in some of these markets that have seen a big run-up over the last couple of years. I'd say we have less conviction around that today, just seeing how the for-sale market has recovered and so -- and lumber right now is very, very expensive. We're in a -- fortunately, we're not in a position of really having to buy much lumber as we sit here today because we didn't start anything for 3 quarters last year. But if lumber pricing doesn't adjust back to where we would expect it to, some of those starts may be in question. And my guess is like a lot of commodities, there's a little bit of a self-correcting element to that, that we're not the only ones that will probably find ourselves in that position. There are a number of mills that are shut down right now because of COVID concerns. So we do think supply should start to increase again here by springtime.

But at this point, I'd say our sense is more that costs have leveled off. And except for maybe in a few markets where they were really overheated, I can say the expectation at this point has probably moved towards more of a flattening than a real nominal decline in hard costs.

[Robert Stevenson, analyst]

Okay. And given that, I mean, where are the yields on the new start -- the 2021 starts relative to the 5 8 on the current pipeline?

[Matthew Birenbaum, executive]

Right there, just about the same. And when you look at our current development pipeline and you look at the mix of the current development pipeline, it is mostly suburban. And even the deals that are in lease-up, there's a couple of them that are behind pro forma, but there's a couple that are actually ahead of pro forma as well. So that kind of makes sense when you look at -- when you compare that to kind of near-term starts.

[Robert Stevenson, analyst]

Okay. And then last one for me. Where are you in terms of the mix of condo sales at Park Loggia? Is what's left skewed towards higher or lower price points? Or is what's left fairly consistent with what you've already sold?

[Matthew Birenbaum, executive]

Congratulations, Rob. I was wondering if we're going to get through the call without a question about Park Loggia. So we've closed 73 units. We have another 15 where we've accepted offers that are under contract. So that would bring us to 88 total. The mix -- we have sold maybe a few more. I think we sold 3 of the 4 penthouses. So the mix is going to start to skew a little bit more towards low-priced units just because of that. But we still have a reasonable mix up and down the building. And that's where we're seeing, frankly, some pretty good traction now is in the more modest price points in the podium of the building. Traffic's actually picked up quite a bit. We've seen 15 to 20 inquiries a week in January. We've been averaging about 4 new deals a month the last 3 months, whereas, on the last call, it was more like 3 per month. So -- but we do have -- the inventory that remains is a little bit more affordable on average.

[Robert Stevenson, analyst]

And is stuff being sold, I mean, thus far, been primary residents? Or are these largely secondary residents? And are you expecting any impact if New York City and state passes additional soak-the-rich type of tax measures?

[Matthew Birenbaum, executive]

I don't know. Again, this is not billionaire's row. I mean this is -- by Manhattan standards, this is a pretty compelling value proposition, which is, I think, why we're continuing to see our sales pace maintain pretty strongly. It is not -- there's a lot of people buying condos for their kids. In many cases, maybe they're kids who are going to university in New York, and that market's obviously -- it's been a lot of distance learning since the pandemic hit, but this may well pick up. So I don't have the exact breakdown of primary versus secondary residences, but I would say that there is a lot of [indiscernible] and a lot of family-type transactions.

[Operator]

We'll take our next question from Haendel St. Juste from Mizuho.

[Haendel St. Juste, analyst]

First question is on the bad debt. Remained elevated in 4Q, very similar to the third quarter. I guess, first of all, are you expecting a similar level? Is that what's embedded within your 1Q guidance here? And second, I guess, when do you think you can see some improvement there? And since you brought it up earlier, how is the extension of the eviction moratorium until March 31 playing a role into your thinking?

[Kevin O'Shea, executive]

Well, Haendel, this is Kevin. Maybe I'll answer the first couple here. In terms of the first quarter, we are expecting a persistent level of bad debt expense to roll into the first quarter, so not meaningfully different from what you saw in the first -- in the fourth quarter. And I don't know, Tim, do you want to -- I mean, I'm sorry, Sean, if you want to add any more about kind of...

[Sean Breslin, executive]

Yes. Just on the eviction moratoria, there is sort of a myriad of various regulatory worries out there related to both evictions, whether we can charge late fees, whether we can allow rent increases, things like that. So it's not just at the federal level that we have to comply with but at state and even local levels in some cases. So one example, you may have noticed that California extended what used to be called [indiscernible] into a new bill called AB91 that extends the eviction moratoria through June. So -- and there's other things in Washington State and various other places.

So while the CDC order is a little bit of a federal override, there is quite a bit of, yes, a jigsaw puzzle out there, I guess, I would say, in terms of what you can do at the state and local level. Our expectations at this point is that we'll probably see most of that hold through midyear, very likely, depending on how things unfold with the vaccination of the population and the economy continuing to recover. That's sort of the house view at this point.

But there's no question that it could be extended beyond that. Or in some cases, if things are going well, people let it expire sooner. So that will influence our ability to evict people. We are continuing other efforts as it relates to collections that we'll continue. But at this point, what we basically feel like is going to happen is the bad debt that we saw in the last 3 quarters of 2020 will likely continue at that pace. We had a little bit of a nice surprise in January where it wasn't quite as bad, but the expectation is it'll look more like the last 3 quarters of 2020 going forward.

[Kevin O'Shea, executive]

Yes. I mean, just to add to that, and I mean, to begin to revert from that 250 to 300 basis points of revenue trends that you've seen in the last few quarters to something more typical, which is more like 50 to 60 basis points of revenue, obviously, we're going to need a resolution of the pandemic and a restoration of kind of a [ landlord ] remedies with respect to those who are non-payers, and that could be a little while here. It's certainly not something we expect to change materially in the first half of the year.

[Haendel St. Juste, analyst]

Got it. Got it. Very helpful. Second is more of a follow-up to some earlier questions on development. You noted -- it's been noted that all 3 of new development starts are Northeast suburban. So I'm curious, when you're thinking about new starts, when can we see a few more starts in the West Coast or non-Northeast markets and in more urban locations? I recognize you have a couple West Coast projects under way in the pipeline, but you haven't started a new West Coast project since, I think, it's the second half of 2019?

[Matthew Birenbaum, executive]

Yes, sure. This is Matt. We do have a start likely in Southeast Florida this year. We have a start in Denver that we're planning, and we have a pretty large start in suburban Seattle that we're planning later this year. California is tough. California is where we're probably finding the most challenged economics right now for new starts, but we do have starts in the expansion markets and Seattle.

[Haendel St. Juste, analyst]

And would those spreads on your expected development yields versus cap rates be fairly similar, that, call it, 50, 75 basis points spread you're referring to earlier?

[Matthew Birenbaum, executive]

Yes. No, I think the spread is more than that. I mean if you look at -- we said that the current book is about a 5 8. I mean those assets today would sell for sub 4.5, probably low 4s. So I think the spread is well over 100 basis points. And it's probably just as wide, given how low cap rates are in Seattle, Denver and Florida.

[Operator]

And we will go ahead and take our last question from Dennis McGill from Zelman & Associates.

[Dennis McGill, analyst]

Just wanted to touch on supply and your views on how that might play out in 2021, especially in the urban environments. It seems from our work, there's still quite a bit to deliver. And maybe some of that slides out but would seemingly limit some of the pricing power once you rebuild occupancy. But just wanted to see how you guys are thinking about those competing balances.

[Sean Breslin, executive]

Yes. Dennis, this is Sean. Good question. Happy to comment on that, and others can as well. But as it relates to our footprint, we are expecting deliveries in 2021 to come down about 6% or 7% compared to 2020 and represent about 1.8% of stock. All the regions are expected to be down, except for the New York, New Jersey region first, where the decline in deliveries in sort of the New York area are going to be offset by what we're seeing in northern New Jersey, particularly Jersey City. It increases by about 3,500, 4,000 units, even though the balance of kind of New York City is down maybe 2,200. So in terms of the trade area, there's an increase there. And then we expect it to be relatively flat in Northern California.

In terms of the urban specific, yes, we did see a little bit of benefit certainly coming in. As I mentioned, New York City, urban Boston, a very modest increase in the district, so not terribly different. And San Francisco is basically flat. So no material change there. And then the other urban market, I guess, you could be interested in would be L.A. where deliveries are going to be down about 1,500 units. So in general, the supply picture in the urban environments with the exception of San Francisco and D.C. will be better in 2021 than it was in 2020, which, all things being equal, should certainly help support the recovery at some point in time.

[Timothy Naughton, executive]

Dennis, Tim here. I agree with everything Sean just said. I think one of the things -- interesting things to think about with the urban supply is not just what's happening over '21 and '22 on stuff that's already been started in '19 and '20, but the likelihood that we're going to see starts in '21 and '22 and how that may translate into '23 and '24 performance, I think it's going to be tough for people to get deals financed just against the narrative of this whole kind of work from home, work from anywhere, dispersing your workforce to satellite offices as well as kind of downtown.

And I think by the middle of the decade, you could be in a position where -- we could be in a position where we're seeing very little supply delivered, where demand may be down a bit but where the fundamentals actually look better, quite a bit better in urban submarkets and even in the suburban markets. It's almost a reverse of what we saw this last decade where, at the beginning of the decade, 2010, everyone thought urban was going to outperform. And it did from a demand standpoint, but supply more than made up for it such that performance -- actually, asset performance is -- at least in our portfolio, in our markets are stronger at the suburbs. That story could completely reverse, I think, in the next 3 to 4 years.

[Dennis McGill, analyst]

That's helpful perspective. And then on the share repurchase in the quarter, can you maybe just talk about how you triangulate it to getting comfortable on the buyback and then how you might be thinking about that now with where the stock is? If it hangs out here or higher, is it a likely use of capital in '21?

[Kevin O'Shea, executive]

Yes. Dennis, this is Kevin. So there are a number of variables to take into account, clearly. First of all is what is our alternative use, and development is our alternative use. And as you can see, kind of based on our outlook for the year, we do anticipate starting development, and that reflects an implicit view that, at least relative to where our shares have been trading lately, development represents a more attractive use for our capital than buying back our shares, although our shares do look quite compelling. And it is a tougher call than in most normal circumstances, given how we're trading below NAV.

As you can tell from when we were buying back shares, we were buying back shares at around $150 a share, which we felt was pretty darn compelling when we ran that math. And we're at a different point today. So that -- price matters to us as well when we're looking at the alternatives.

The other factors we need to take into account is not only our source of proceeds but also what the impact on our leverage is. And we did then, and we do now, still have the financial capacity and the proceeds from dispositions to engage in a measured buyback if it were to make sense to do so. But every time we do so, we have to think about the impact on our leverage metrics. And what we knew then and what is still true today is our EBITDA has been sequentially declining over the quarters. And our net debt-to-EBITDA was at 5.4x in the last quarter. Our target is 5 to 6x. When we began the pandemic, our ratio was about 4.6x. And so the movement up in that ratio has really been driven not by taking on more debt but rather by a decline in EBITDA.

And as we pace through the balance of this year and see that the lower lease rates and concessions work into our rent roll and our EBITDA, we need to be mindful of managing that ratio so that it stays, if possible, within our targeted range. Engaging in a heavy buyback could potentially work against that a little bit. But all that said, we stand still ready to engage in a buyback if it made sense on a measured basis, mindful of our credit metrics. But at the moment, when you triangulate around what's the best use of our capital, development still figures today to be our best use of capital.

[Operator]

And with that, that does conclude our question-and-answer session for today. I would now like to turn the call back over to Tim Naughton for his brief closing remarks. Tim?

[Timothy Naughton, executive]

Thank you, Ali, and thanks, everybody, for being on. I know it -- we've been on for a while. Thanks for all of you that hung in there for 1 hour 45 minutes. But look forward to seeing all of you or many of you virtually around here over the next 2 to 3 months. Enjoy the rest of your day. Thank you.

[Operator]

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.