AvalonBay Communities - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 Core FFO per share was $2.80, up 2.2% y/y, while FFO was $2.63 (flat y/y) and EPS was $1.98 (+16.5% y/y). Versus the company’s November outlook midpoints, Core FFO missed by $0.03 and FFO missed by $0.09, while EPS beat by $0.32 due primarily to realized real estate gains and depreciation timing.
• Same Store Residential revenue rose 3.2% y/y and NOI rose 2.3% y/y in Q4; average monthly revenue per occupied home reached $3,040 with economic occupancy at 95.6%. Like-term effective rent change was ~1.1% in Q4, reflecting seasonal deceleration; uncollectible residential lease revenue improved to 1.6% in Q4 (total), down from 2.0% in Q4 2023.
• 2025 initial outlook guides Core FFO/share to $11.14–$11.64 (midpoint $11.39, +3.5% y/y), with Same Store Residential revenue growth of 2.0–4.0%, opex growth of 3.0–5.2%, and NOI growth of 1.3–3.5%. Dividend per quarter increased 2.9% to $1.75 starting Q1 2025.
• Management emphasized operating model transformation (+$39m incremental NOI run-rate exiting 2024), further AI and centralization deployment, a step-up in 2025 development starts (~$1.6B), and balance sheet-funded growth (forward equity ~$890m at ~5% initial cost).

What Went Well and What Went Wrong

• What Went Well

  • Core FFO per share grew to $2.80 (+2.2% y/y) on higher NOI and contribution from development/other stabilized assets; EPS rose to $1.98 (+16.5% y/y) with gains on sales.
  • Same Store metrics: revenue +3.2% and NOI +2.3% y/y in Q4; average monthly revenue/home hit $3,040; economic occupancy 95.6%.
  • Strategic execution: management highlighted $39m of incremental NOI from operating model transformation, with a goal of ~$80m over coming years; expansion of centralized services and AI use to drive efficiency and ancillary revenue growth. “As of year-end 2024, we're generating an incremental $39 million of NOI…well on our way to our updated goal of $80 million”.

• What Went Wrong

  • Modest miss vs November outlook midpoints: Core FFO ($2.80 vs $2.83) and FFO ($2.63 vs $2.72) impacted by unfavorable Same Store opex (utilities) and delayed property tax refunds shifting to 2025 (partly recoverable), though EPS beat on gains.
  • Like-term rent growth decelerated seasonally in Q4; Denver softness was noted on the call with new move-ins and renewals modestly softer amid higher vacancy late in the quarter.
  • Bad debt remains above pre-COVID norms despite improvement; management expects normalization to take until 2026 in tougher jurisdictions (NYC, DC/Montgomery County) given court backlogs and regulatory timelines.

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities' Fourth Quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. Following remarks made by the company, we will conduct a question-and-answer session. You may enter the question-and-answer queue at any time during this call by pressing Star 1. If your question has been answered or you wish to remove yourself from the queue, please press Star 2. If you are using a speakerphone, please lift the handset before asking your questions. We ask that you refrain from typing and have your cell phones turned off during the question-and-answer session. Your host for today's conference call is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference call.

Jason Reilley (VP of Investor Relations)

Thank you, Sherry, and welcome to AvalonBay Communities' Fourth Quarter 2024 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures in 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.

With that, I will turn the call over to Ben Schall, CEO and President of AvalonBay Communities, for his remarks. Ben.

Ben Schall (CEO and President)

Thank you, Jason, and thank you, everyone, for joining us. I will start with a brief synopsis of Q4 and 2024 results, and then turn to a review of the strategic focus areas that we are confident will continue to deliver superior growth in 2025 and in the years ahead. Kevin O'Shea, our Chief Financial Officer, will provide our outlook for 2025 and the components of growth on a year-over-year basis. Sean Breslin, our Chief Operating Officer, will then cover the macro and micro setup for 2025, along with our latest market-by-market expectations. And Matt Birenbaum, our Chief Investment Officer, will discuss our rich menu of investment opportunities. Let me start by expressing our condolences to those who lost loved ones in the L.A. fires last month and to all those impacted by the horrific damage.

While we were fortunate that none of our communities incurred meaningful damage, some of our associates were impacted, including a few who lost their homes. At AvalonBay, in keeping with our core value of a Spirit of Caring, we activated our internal emergency relief programs to assist associates and provided incremental funding to our longtime partners at the American Red Cross. I also want to thank our wider L.A.-based residential services team, led by Eric Ostgarden, for their tireless efforts and dedication through these events. As a look back on Q4 in 2024, we had a very successful year, delivering revenue growth of 3.4% and core FFO growth of 3.6%, as highlighted on slide four. Our suburban coastal portfolio, with steady demand and limited levels of new supply, continued to outperform.

Our operating model transformation drove incremental revenue and operating efficiencies, and our lease-ups exceeded expectations, driving incremental earnings and value creation. We also remained nimble in capital allocation and sourcing during 2024. We increased our development starts by almost $200 million-$1.1 billion, and we proactively raised growth capital, sourcing $2 billion of new capital at an attractive 5.1% initial cost. As we head into 2025, we expect much of our operating and investment momentum to continue, and are confident that our strategic focus areas, as outlined on slide five, will continue to deliver superior internal and external growth for shareholders. Slide six details our successes and key next steps in our operating model transformation. As of year-end 2024, we're generating an incremental $39 million of NOI from these initiatives, running $2 million ahead of plan.

In 2025, we expect to generate an additional $9 million of revenue and operating efficiencies, and we are well on our way to our updated goal of $80 million of annual incremental NOI over the next few years. We continue to be one of the industry leaders in the utilization of centralized services, which is now handling more customer-facing interactions, including an expansion this year to provide centralized leasing support. We also continue to be on the forefront in the use of AI in the apartment industry, having been an early investor and adopter of a lease AI, and with a further expansion this year into additional components of the customer journey. Our investments in technology and centralized services, along with the efficiencies we achieve in managing clusters of assets, are providing meaningful scale benefits for our platform and driving incremental NOI throughout the existing portfolio.

As investors, you can see these results in various financial categories. For example, our implementation of ancillary services for residents resulted in 15% other rental revenue growth in 2024 and is projected to produce almost 9% growth in 2025. In the area of labor efficiencies, our same-store payroll expense declined in 2023 and was zero in 2024. I'd like to thank our operating teams for their continued execution of these initiatives and delivering these results. Importantly, the benefits we're generating via our operating initiatives also facilitate external growth, with new assets more valuable on our platform, allowing us to underwrite incremental yield on acquisitions and new development.

Slide seven highlights our continued progress in optimizing our portfolio for superior growth. In the near term, our conviction for our suburban coastal portfolio is reinforced by the outlooks for both steady demand and limited new supply.

In the medium to longer term, we also believe that our suburban coastal portfolio is well-positioned to capture future renter demand, and particularly the lifestyle preferences of many aging millennials and downsizing baby boomers. We're now 73% suburban, up from 70% just a year ago, making strong progress toward our 80% target allocation. We're also focused on further optimizing our portfolio by increasing exposure to select Sunbelt markets and sub-markets, as we detailed at our investor day. An increasing number of AvalonBay customers live in these markets, and we also see the benefits of diversifying away from certain risks, including increasing our exposure to areas with less regulatory risk.

We increased our expansion market presence to 10% from 8% in 2024, and we expect to make further progress toward our 25% expansion market target in 2025, and believe that we're in an attractive window to facilitate this portfolio shift by acquiring and developing assets at a cost basis meaningfully lower than it has been over the past few years. Our third strategic focus area, as referenced on slide eight, is continuing to leverage our unique development capabilities to generate consistent and accretive external growth. In 2025, we are planning to increase development starts to $1.6 billion at a point in time when overall starts in the industry will be coming down, allowing us to secure stronger deals and returns. These developments will also face less competition when they lease up in roughly two years' time.

By the end of this year, we expect to have $3.5 billion under construction, which is 50% higher than where we are today, setting the stage for a further uplift in earnings growth and value creation in 2026 and 2027. We plan to fund the bulk of this new development from the equity capital that we proactively secured last year, as highlighted on slide nine. In total, we sourced via equity forwards $890 million of equity at an average price of $226 per share and an initial cost of around 5%, providing a 100-plus basis point spread to our expected development yields on new projects. Our balance sheet is as strong as it's ever been, which provides the capital to leverage our strategic capabilities to fuel further growth in 2025 and beyond. And with that, I'll turn it to Kevin to discuss our initial 2025 outlook.

Kevin O’Shea (CFO)

Thanks, Ben. On slide 10, we provide our operating and financial outlook for 2025. For the year, using the midpoint of guidance, we expect 3.5% growth in core FFO per share, driven by our same-store portfolio and by stabilizing development, partially offset by the impact of funding costs associated with capital markets and transaction activity. In our same-store residential portfolio, we expect revenue growth of 3%, operating expense growth of 4.1%, and NOI growth of 2.4% for the year. For development, we expect new development starts of about $1.6 billion this year, and we expect to generate $30 million in residential NOI from development communities currently under construction and undergoing lease-up during 2025. As for our capital plan, our outlook calls for $2.1 billion of capital uses, consisting of $1.3 billion of investment spend and $835 million for debt maturities and amortization.

In terms of sources, we anticipate raising new capital of $960 million in 2025, which we currently assume will be sourced from the unsecured debt issuance later this year. Additionally, we expect to settle our outstanding forward equity contracts to source an incremental $890 million in 2025, which brings the total of capital to be sourced to $1.85 billion this year. We also expect to generate about $450 million in Free Cash Flow after dividends in 2025, and as a result of this capital plan, we project unrestricted cash at year-end 2025 of about $275 million. On slide 11, we illustrate the components of our expected 3.5% growth in Core FFO per share to a projected $11.39 per share in 2025 from $11.01 per share in 2024.

We expect $0.31 per share of earnings growth to come from NOI growth in our same-store and redevelopment portfolios, and we expect another $0.33 per share of earnings growth to come from NOI from new investment, primarily from development. Partially offsetting these sources of growth is an increase of $0.29 per share from capital markets activity. Within this bucket, we have called out on the slide the components of capital markets costs, including lower interest income of $0.13 per share, as our projected cash positions will be lower on a year-over-year basis in 2025, and a $0.08 impact from higher share count as we settle our equity forward contracts over the course of this year in connection with matched funding development starts. These two items combine for $0.21 of the $0.29 from costs from capital markets activities.

As for the remaining $0.08 of costs from capital markets activity, these consist of modest headwinds from refinancing existing debt and net disposition activity, partially offset by modestly higher capitalized interest and earnings growth from SIPA activity. So with that summary of our outlook, I'll turn it over to Sean to discuss our operating business.

Sean Breslin (COO)

All right, thanks, Kevin. Moving to slide 12 and the outlook for apartment demand in 2025, third-party forecasts reflect a moderating but healthy environment for job and wage growth, with wage growth specifically in the high 3% range, which should support relatively stable, effective rent growth throughout the year. For our portfolio specifically, we're also likely to benefit from the expected increase in job growth in two important sectors, professional services and information, which over-index to our established regions and produce above-average wages. Growth in these sectors was relatively weak in 2024 but is expected to rebound nicely in 2025. Turning to slide 13, demand for apartments in our established regions will continue to be supported by two other important factors.

First, somewhat stable rent-to-income ratios, which remain below pre-COVID levels given healthy income growth the last few years, and indicate rental affordability in our coastal markets shouldn't be a material issue, and second, the relatively unaffordable nature of for-sale housing in our established regions. Currently, renters looking to trade into the median-priced home in our established regions would experience a cost increase of more than $2,000 per month relative to the median-priced apartment, and that excludes the ever-rising cost of insuring that home, which has risen materially over the last few years. Pivoting to slide 14 and the outlook for supply, our established regions are expected to see the lowest level of supply as compared to both the U.S. overall and the Sunbelt, with new deliveries representing just 1.4% of stock.

When you look at our suburban sub-markets, where roughly three-quarters of our same-store portfolio is located, the story is even better as suburban deliveries are only forecast to be 1.2% of stock in 2025. Additionally, as we look beyond the current year, it's important to remember that it can often take years to get a new development entitled in our suburban coastal markets, so we may experience low levels of new supply in these regions for an extended period of time. Moving to slide 15 and our outlook for 2025 revenue growth, there are three primary drivers of our expected 3% increase in same-store total rental revenue growth. First, higher lease rates, which reflects our embedded growth from last year and our forecast for a like-term effective rent change of 3% for the calendar year 2025.

Second, strong growth in other rental revenue, which is estimated at almost 9% in 2025 as we continue to deploy various operating initiatives. And third, improvement in uncollectible lease revenue from residents, which is forecast to decline by approximately 40 basis points from 1.8% in 2024 to 1.4% in 2025. Turning to slide 16, our established coastal regions are expected to produce rental revenue growth north of 3%, while the expansion regions are projected to deliver sub-2% growth as heavy levels of unleased inventory from 2024 and new deliveries in 2025 continue to weigh on near-term performance. In our established regions, the Mid-Atlantic is projected to lead with mid-4% revenue growth, followed by Seattle in the low threes, Northern and Southern California at roughly 3%, and then New York, New Jersey, and Boston in the mid-2% range.

Moving to the outlook for operating expense growth on slide 17, we expect same-store operating expense growth of 4.1%, consisting of an organic growth rate of 3%, the net impact of profitable operating initiatives adding 50 basis points, and the phase-out of property tax abatement programs, most notably in New York City, adding another 60 basis points during 2025. Additionally, we expect operating expense growth to be higher in the first half of the year as compared to the second half for several reasons, including year-over-year comp issues related to our AvalonConnect deployment, our renewal for insurance in 2024, and merit adjustments for our associates, which all occur in the first half. Now I'll turn it to Matt to address our investment activity for 2025.

Matt Birenbaum (CIO)

All right, thanks, Sean. Turning to slide 18, we are looking forward to an active year across our various external investment platforms this year, supported by the funding already in place from last year, as indicated in Kevin's remarks. We expect to continue to ramp up our sector-leading development platform with $1.6 billion in new starts planned at yields in the low to mid-sixes. We also look to continue to be active in the transaction market with portfolio trading activity as we pursue our long-term portfolio allocation goals, selling assets out of our established coastal regions and redeploying that capital into acquisitions primarily in our expansion regions.

Given the decline in operating fundamentals and associated asset values in many of our expansion regions over the past two years, we do view this as a more attractive relative trade in the current environment and will look to increase our portfolio trading where we can. In our structured investment program, or SIP, which is our mezz lending platform to provide high-yield capital to merchant builders in our markets, we have continued to be highly selective and did not originate any new loans last year. However, we do have several attractive opportunities in the current pipeline and expect to be able to grow this book of business from its current $190 million balance by another $75 million in 2025 as we advance towards our program goal size of $400 million in total.

We continue to grow value-add investment in our portfolio with highly accretive opportunities to add more resident solar, kitchen and bath renovations, and accessory dwelling units in California. Slide 19 provides a bit more color on our development starts for the year. All are located in suburban sub-markets and are less expensive wood frame construction, with the volume concentrated in our expansion regions and in California. It has been exceedingly difficult to get the math to work for new starts on the West Coast for the past several years, as reflected in the extremely low levels of supply in those markets. This should provide strong support for future performance for the over $500 million in new development we plan for Northern and Southern California in 2025. With that, I'll turn it over to Ben to wrap things up.

Ben Schall (CEO and President)

Thanks, Matt. To recap on slide 20, 2024 was a very successful year for AvalonBay, with the organization delivering strong financial and operating results. Going forward, we continue to execute against our strategic focus areas with a laser focus on delivering superior growth. Apartment fundamentals in 2025 continue to look favorable in our established regions. We have a rich menu of investment opportunities and have a balance sheet well-positioned to pursue accretive opportunities. And with that, I'll turn the call to the operator to facilitate questions.

Operator (participant)

Thank you. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. Our first question is from Eric Wolfe with Citibank. Please proceed.

Eric Wolfe (Director)

Thanks for taking my questions. How should we think about the development accretion you're going to see in earnings this year versus last year? Obviously, you have the capitalized costs moving higher, but not sure if there's an offset in terms of total increase in capital costs. So I was just trying to understand how you're thinking about the potential for earnings accretion this year versus last.

Kevin O’Shea (CFO)

Yeah, Eric, this is Kevin. There's obviously a number of puts and takes that go into that calculation. You do have slightly higher capitalized interest this year, about $0.06. On the other hand, we do have lower occupancies this year versus last. We have occupancies this year in our outlook of about 3,000 units. Last year was about 2,200 units, so a little less than that. And some of that occupancy falloff is a little bit in the front half of this year. And there are other things going on as well. We've got, as you can see, lower cash levels, so lower interest income. And then also we have the equity forward issue into this year, which will increase our share count relative to 2024.

Our expectation in regard to the equity forward is probably that we're likely going to be pulling down those shares in the back half of the year. When you roll it all together, roughly we anticipate about $0.15 of growth from our investment platforms, primarily from development, which is really kind of a few areas: the NOI from investment, $0.33, SIP net earnings growth, maybe around $0.03, higher cap interest about $0.06, and then partially offset by the lower interest income, $0.13. The share issuance under the forward is about $0.08, and probably another $0.06 attributable to the net dispositions that we use from the development activity. So that's how you get to the $0.15, give or take. And that's about 140 basis points of growth all in. So that's one way to sort of look at that. That's how we take a look at that issue.

Eric Wolfe (Director)

Thank you. And you've talked about continuing to deploy capital in the BTR product, liking it given the larger units and suburban locations. I guess, are there any additional challenges to developing or operating those communities that you've seen thus far versus more traditional multifamily to the extent that there's some portfolios that are being marketed of product that are akin to what you would develop? Would you be willing to take a look at those?

Matt Birenbaum (CIO)

Yeah, hey, Eric, it's Matt. To the extent that there are portfolios that are aligned with our strategic priorities, we would absolutely take a look at them. I will tell you, as it relates to BTR, a lot of what's been built to date has been in tertiary markets or in pretty far-flung kind of third-ring suburbs of our major markets. So not a lot has been out there. We did buy the one asset last quarter in Austin. It kind of checked all those boxes. It was 100% three and four-bedroom townhomes. And so we expect we will probably grow more of that product through either DFP, where we're funding kind of middle-market builder developers of the product, or building more of it ourselves. We have a number of communities we expect to start this year that are gardened that have townhome components to them as well.

We started one of those last year as well in Austin. So that's more likely to be the case, but we're certainly open to it. And on the operating side, we don't really have enough history of operating 100% BTR communities to speak to it yet. Again, we do have several thousand townhomes in mixed communities within our own portfolio, and I'm not sure the profile of those has been materially different. I don't know, Sean, if you want to.

Sean Breslin (COO)

Yeah, the only thing I would add, really, Eric, is if you think about the way people operate BTR, particularly for these smaller communities that are 100-150 units, there's typically not dedicated staff. There's a maintenance team. There's a sales team. They rove around from community to community. It's more where the multifamily industry, and for us specifically, have been moving over the last two or three years is to have a more mobile-enabled, flexible workforce. So I think it's pretty well aligned to the extent that the assets, to Matt's point, are within a reasonable proximity of sort of core multifamily assets. It makes it relatively easy for us to operate those.

Eric Wolfe (Director)

Got it. That's helpful. Thank you.

Operator (participant)

Our next question is from Jamie Feldman with Wells Fargo. Please proceed.

Jamie Feldman (Managing Director)

Great. Thank you for taking the question. Can you provide more color on your thoughts on new renewal, new leases, renewal leases, and what the trajectory looks like throughout the year? If you look at slide 12 of the presentation, it shows a meaningful pickup sequentially in the job outlook, employment outlook. So I'm just wondering, are you assuming a similar acceleration into 4Q on blends as you did last year?

Sean Breslin (COO)

Yeah, Jamie, this is Sean. I'm happy to take that one. So yeah, so as I mentioned in my prepared remarks, we're expecting like-term effective rent change to average 3% for the year. To your point, we are expecting slightly stronger growth in the second half of the year as compared to the first half of the year, which is actually the opposite of what occurred in 2024. A combination of different factors influencing that in terms of year-over-year comp issues, more declines in supply expected in the second half of the year as opposed to the first half of the year, and various other things. So slightly better growth in the second half of the year is the way to be thinking about it today.

Jamie Feldman (Managing Director)

Okay. So can you provide more granularity on what you're thinking on new leases versus renewal? And then specifically in 4Q, there tends to be the seasonal slowdown. Are you still expecting a pickup? I know in 4Q, you expected inflection higher didn't play out. Are you thinking something similar this year?

Sean Breslin (COO)

Yeah. So for the full year, the expectation is that renewals will average probably in the mid-4s, and new move-ins will average kind of mid-1% range. And then as it relates to the first quarter, consistent with sort of historical norms, we would expect sequential improvement as we move through the first quarter into the prime leasing season. So as it relates to Q4, we did have slightly softer rates on both new move-ins and renewals given slightly lower occupancy, but net-net, it wasn't terribly material given the volume of leases is pretty light during those two months.

Jamie Feldman (Managing Director)

Okay. And then I guess just sticking with the 4Q result, I mean, were there any markets that surprised you? Looking at what you provided in the earnings release, I think just Denver seemed like it really rolled over in November, December. Nothing else seemed to really stand out. So can you provide just more color on what played out differently than you expected, or if there's any markets that caught you off guard?

Sean Breslin (COO)

Yeah. So as you pointed out, I mean, Denver was the only one that was maybe a little bit of a surprise. I mean, I think as you think of the fourth quarter, one thing to keep in mind here is on a net basis, it was not terribly material. We're talking about the Q4 shortfall was about $700,000 on $670 million of revenue. And for the full year, total revenue growth was like 3.42%. So it was up three or four basis points from what we originally anticipated. So the primary driver being, as I mentioned, slightly higher vacancy that we anticipated, which did impact the move-in and renewal rates across most of the markets as we move through November and December. So net-net, not a material number, but at the margin, when you have a small sample size of leases, it can move the rent change calculation.

Jamie Feldman (Managing Director)

Okay. So it sounds like your outlook in each of the markets hasn't really changed.

Sean Breslin (COO)

No. No. I'd say, like I said, it was a little bit of a rounding error in Q4, but the fundamental outlook for 2025 is intact.

Jamie Feldman (Managing Director)

Okay. All right. Thank you.

Sean Breslin (COO)

Sure.

Operator (participant)

Our next question is from Steve Sakwa with Evercore ISI. Please proceed. Steve, please make sure your phone's not muted. Okay. We're going to move on to the next one, which is Austin Wurschmidt with KeyBank Capital Markets. Please proceed.

Austin Wurschmidt (Senior REIT Analyst)

Great. Thanks, and good afternoon. Just curious if you guys, Matt, maybe if you've seen any pickup in the transaction market and just how that's kind of playing into your ability to use the disposition capital to rotate into the expansion markets and whether you still expect to be net neutral on the buy-sell side this year?

Matt Birenbaum (CIO)

Yeah. Hey, Austin. So the transaction market has been pretty volatile, I would say. We did see a pretty significant pickup in Q4. Fourth quarter multifamily closings were up quite a bit over fourth quarter of 2023 and over third quarter. But almost all that business was deals that priced before when the tenure was closer to four than four and a half. And so what we see is anytime that the tenure starts to get down towards that level, transaction volume starts to pick up because there is a lot of capital that's still on the sidelines. But when you see rates move back up to where they are today, the volume comes back down again because cap rates for most of these assets are trading still below the debt rates, and there's just limited buyers that will fit that profile.

We saw a number of larger deals close in Q4. I would expect Q1 to be much quieter. We just had the big NMHC conference. If you'd ask people 90 days ago, they would have said, "There's going to be all these listings come out, and everybody's all geared up." Now they came out, and they all said, "Yeah, maybe second half." There needs to be some more stability in debt rates for the market to pick back up. For us, we actually last year wound up being a net seller of $200 million. That was not our expectation. We thought at midyear that we were going to be net neutral. So we did get more sold than we expected relative to what we bought.

So we start the year, and we have a couple dispositions currently working in the market that we expect to close here in Q1. So we start the year with a little bit of a head start on our trading activity. So we do think that we have some spending money, so to speak, and we are looking to be more active, understanding, though, that the limit is, is there enough for sale that we would want to buy? And that has yet to be seen because we are selective in terms of what fits our box.

Austin Wurschmidt (Senior REIT Analyst)

So I guess, I mean, is the approach to continue to kind of have assets teed up to give you that buying power to the extent that the market does free up and you see opportunities arise? And I guess, I mean, how do you kind of take advantage of where the balance sheet is today with the forward equity available to fund development, stock prices at a level you guys have been willing to issue some equity? And clearly, there's fundamental improvement ahead over the next few years within those expansion markets. So just curious how you're thinking about all the different sources and uses and whether you'd be willing to look at other sources of capital if the disposition markets remains volatile. Thank you.

Matt Birenbaum (CIO)

Yeah. I'll speak to that a little bit, and Kevin may want to chime in as well. But yeah, so the first thing is we are not counting on the disposition market to fund our development. We're looking to grow development significantly this year, and that is being funded primarily through the equity forward that was sourced last year and through free cash flow. So again, we're starting from a good place where we're a little ahead on our dispos relative to our acquisitions. And yeah, to the extent that we see more we continue to see buying opportunities. We're hoping we can increase our asset trading to roughly $1 billion on both sides, both buying and selling this year. And to the extent we see the buying opportunities we like, and you're right, the basis is getting pretty interesting.

We can certainly use some of the dispos we've already pre-funded, so to speak. We will pull more dispo assets off the bench, and then we could also consider other sources of capital to the extent the yields were appealing.

Kevin O’Shea (CFO)

Yeah. Austin, this is Kevin. Maybe just to add a couple of things. I think you're looking at it the right way, and Matt's comments tie into that. I mean, we are in a strong position from a financial point of view. We've got a lot of capacity to lean into opportunities should they make sense to do so. Naturally, we need to look at sort of the incremental return relative to our funding cost. And given where debt rates are, that does narrow the opportunity set somewhat.

But I think what that really speaks to is not only our capacity to be flexible, but having a mindset of being nimble and responding to opportunities, not only in the investment market, but also the capital markets, to try to create that spread so that what we can deliver is cost-effective capital to the investment uses that kind of move us down the field towards our strategic objectives in terms of portfolio positioning and funding development.

Ben Schall (CEO and President)

Austin, I'll add a third area of emphasis, which is increasingly, as we think about opportunities, we also want to bring our strategic capabilities to bear, and particularly the operating model initiatives. We're now in our underwriting on specific new acquisitions and new developments to tune a 30-40 basis points of incremental yield by having those assets on our platform. And I'd also emphasize that we're now at a point in most of our expansion markets where we've got our teams in place. We've got the density of assets starting to build up where I really do feel like we're at the point where we can leverage those investments we've been making over the last four or five years to step into further growth.

Austin Wurschmidt (Senior REIT Analyst)

That's all very helpful. Thank you.

Operator (participant)

Our next question is from Jeff Spector with Bank of America. Please proceed.

Jeff Spector (Managing Director)

Great. Thank you. Just a big picture, Ben, on recent demographic shifts, changes that we're seeing. Anything impacting your decision on the future allocation of suburbs for 80%? Are you confident to stick with that at this point? Is there any thought to decrease that? Thank you.

Ben Schall (CEO and President)

Yeah. I appreciate that, Jeff. We go through a fairly robust updated strategic assessment each year looking into trying to identify, are there shifts that have happened that, as we think of forward a couple of years, we want to start to get ahead of? So that's a constant process, constant part of how we think about evolving our platform. A lot of the demographics, there's obviously longer-term trends, demographics, migration shifts, regulatory environment. So we are still at this point focused on moving increasingly to the suburbs with a target of getting to 80% suburban exposure. We made good progress this year. And then the other big shift is our expansion market shift to get to 25%. And then the other elements which you're increasingly hearing us talk about is the evolution of product, right?

It's not just market and submarket, but it's also the right product at the right price point. And I think we have taken a different approach in terms of how we've built out our portfolio over time, but particularly recently in the expansion markets with a heavier suburban focus, a focus on lower density, slightly older products that we believe will be less susceptible to new supply and deliver stronger growth over a cycle.

Jeff Spector (Managing Director)

Okay. Thank you. And then my second question, probably a tough one to answer given the changes we're seeing on tariffs, but development costs and the risk of tariffs. We've seen homebuilders come out with projections of higher costs. Of course, I'm assuming that would really more hit garden style. But how should we think about the risk of tariffs and the development costs? I think they're fairly set in 2025, but 2026, how are you thinking about it? Thank you.

Ben Schall (CEO and President)

Yeah. I'll start at a high level and then ask Matt to talk a little bit more specifically. Challenging at this point in time to forecast what policy changes are going to come through. Equally challenging to figure out what the flow through of that's going to be from the economy down to the apartment market. Tariffs being one of those areas. Where we can, we are trying to get ahead of those potential impacts. So thinking about securing supply channels, thinking about locking in pricing. There's aspects of it that could flow through to some contract services. And on the development and construction side, not huge swings, but potentially some headwinds there. Matt, you want to provide some more details?

Matt Birenbaum (CIO)

Yeah. We do look at it all the time, and Jeff, what I tell you is when you think about what goes into the cost of a new apartment community, land is on average maybe 15% of the total budget, 10%-20%, maybe even 25%, depending on the location. But on average, call it 15%. Soft costs, interest, A&E, permits and fees, overheads, probably 30%-35%. So your actual hard cost is probably about 60%-65% of the total capital cost. And of that cost, most of it, probably two-thirds of it, is labor, depending on the trade.

So we have gone through, and if you look at it on a typical deal for us, based on assumptions you make about what percentage of product is foreign sourced and so on, it might add a couple % to a total budget, maybe $5,000-$7,000 a unit if it all gets 100% passed through. So that would be a little bit of a headwind to future new business. I think much more important is labor. What makes up hard costs? It's the materials. That's the smallest piece of it. It's the labor, and then it's the subcontractor's profit margin. And what we're seeing in the current market today with the slowdown in multifamily starts and with the slowdown in single-family starts is the subcontractors are hungry for work.

We're seeing great success on the buildout right now on the things that we currently have in the market. You can see that even in our current deals we just completed this past quarter actually finished under budget, which is the first time I think I've been able to say that in probably six years. The deals we have currently under construction are also tracking a little bit under budget. Much more of it's going to depend on the macro environment, the subcontractors, the trade base, how busy they are, and ultimately their labor costs. Right now, there's more tailwinds than headwinds, but obviously that could change.

Jeff Spector (Managing Director)

Thank you. And then just one more, if I can. On the prior call, the company was a bit cautious on Boston. Can you talk about Boston, your thoughts between supply and demand? And then is pharma, biotech slowing down Boston more than expected? Thank you.

Sean Breslin (COO)

Yeah. Jeff, this is Sean. I would say our experience in Boston is relatively positive. We do not have a cautious outlook for Boston whatsoever. It's been a strong performer, particularly our primarily suburban portfolio, well insulated from new supply, highly educated, high-income workforce there in Boston. We don't have a lot in the sort of inner core. We have a handful of assets where there's been a little more supply. So maybe it's the portfolio differences that are creating a bit of a cautious note as compared to our experience.

Jeff Spector (Managing Director)

Thank you.

Operator (participant)

Our next question is from Nick Yulico with Scotiabank. Please proceed.

Nick Yulico (Managing Director)

Thanks. I was hoping to get what the development completion expectation is for this year relative to the $1.3 billion that was completed last year.

Matt Birenbaum (CIO)

Yeah. Nick, it's Matt. I think we're only looking at completing about $350 million this year, 350. Yeah. So that's why you're going to see our expectation is if we start at $1.6 billion, we only complete 350. The development underway would grow from, call it $2.2 billion today to $3.5 billion by the end of the year.

Nick Yulico (Managing Director)

Okay. Yeah. That's helpful. Thanks, Matt, and I guess the follow-up on that is I know page 11 of the presentation, you guys give that helpful math on the NOI from new investment and then the capital markets activity, and the net of those two is a slight benefit this year, so I guess based on what you just said, that $0.33 from new investment, that's a sort of lighter number, I guess, than normal, and perhaps the capital markets activity is eating into that more so than it would in a given year, meaning that this feels like this might be a little bit of an abnormal year for how development overall is contributing to earnings growth. Is that the right way to look at it?

Ben Schall (CEO and President)

Nick, that's probably true to some degree. The capital costs are a little heavier this year. You do have a cap interest benefit of $0.06 that goes the other way. And then per your discussion with Matt, where we're delivering a little bit less, our occupancies this year, which is what gives us this development NOI, is expected to be a little less this year at 2,200 units this year versus 3,000 units in 2025. So when you kind of roll it all together, you can see this in our development NOI itself, which is a component of that $0.33. For 2025, our development NOI is expected to be $30 million, whereas for last year, it was a higher number last year at about, I think, probably $40 million-$41 million, something like that, $40 million-$45 million dollars.

So when you put it all together, there's a little bit less development NOI coming through, but there's some puts and takes. And I guess I'd refer you to kind of the answer that I gave to Eric at the top of the call here in the Q&A session where I kind of walked through the development accretion with our SIP earnings growth. What we think we get from our investment platforms in terms of earnings growth this year is about $0.15, which equates to about 140 basis points of growth. That's probably a little lower than a normal year, which is probably more like 150-200 basis points contribution from our investment activities. And again, if you want to walk through this offline, we can certainly do that.

Nick Yulico (Managing Director)

Yeah. No. Very helpful. Thanks, guys.

Operator (participant)

Our next question is from John Pawlowski with Green Street Advisors. Please proceed.

John Pawlowski (Managing Director)

Thanks for the time. Matt, just two transaction market questions for you. I'm curious, in the markets you're looking to buy in, what rough range of discounts or replacement costs are you able to buy at? Because I know a lot of folks in the private market are quoting discounts to replacement costs, but it's a really, really subjective figure and that you can pick any number to justify the price you're paying. So curious for what your team is seeing given your good detail or good kind of clarity on construction costs and where you could buy in the same market.

Matt Birenbaum (CIO)

Yeah. It is something that we also look at pretty closely because those are both investment options that are available to us, and we're both developing and buying in many of these markets today. It depends on the submarket. It depends on the product type. A lot of what we're looking to buy is, call it five to 10 years old, and it might be at a 10%-20% discount to replacement cost. That's not inappropriate. Brand new products should sell at a higher price per door or per foot than 10-year-old, five- to 10-year-old product. It'll generate more NOI. There are markets where you can probably buy brand new product in lease-up or coming right out of lease-up below where today's replacement costs are. Those are not the markets and the submarkets we're generally looking at. We're trying to stay away from those high-supply submarkets.

What we've been looking at anyway, it kind of lines up in a way that makes a bit more sense.

John Pawlowski (Managing Director)

Okay, and then last one for me. I briefly caught your portfolio trading commentary, the quote you had. Could you just expand on that? It sounds like you're more optimistic about getting portfolios done. Is that a function of wanting to accelerate your portfolio shift in the suburbs and the expansion markets, or is it a function of you're seeing better pricing on portfolio acquisitions?

Matt Birenbaum (CIO)

Yeah. No. Well, what I meant to say anyway was if a portfolio that aligned with our strategic objectives came to market, we would definitely be interested in pursuing it, and our balance sheet would support it. So we certainly could pull the trigger on something that was attractive. We're not necessarily at this moment seeing that. So I'd say the conditions are our balance sheet supports the conditions are there. And more broadly, we think it's a better time to make the relative trade than maybe it has been in the last couple of years. So therefore, our hope is that we will be able to increase our portfolio trading activity further, but we haven't seen anything yet.

John Pawlowski (Managing Director)

Okay. Thank you.

Operator (participant)

Our next question is from Adam Kramer with Morgan Stanley. Please proceed.

Adam Kramer (VP of Equity Research)

Great. Thanks for the time here. I wanted to ask about the Los Angeles market. Obviously, a really unfortunate wildfires and situation there. I was wondering if in your portfolio, you've seen anything on the ground, whether it's leads or activity that could suggest there could be some incremental benefit to the portfolio just from a need for more rental properties. And then on the other side of it, anything from a headwinds perspective, be it a fictional moratorium or anything else that could impact operations there on the other side?

Sean Breslin (COO)

Yeah. Adam, this is Sean. First, as it relates to your initial question, if you think about the displacement and what happened there, which certainly is tragic, as you might imagine, what we have heard on the ground from our teams is that most of those customers, as you might expect, are looking for single-family rentals, larger floor plans, preferably in the same school districts if they can get it, which is certainly challenging, obviously, given the level of destruction that occurred. We've seen a little bit of an uptick, I would say, over the last three weeks. Maybe 15% of our leases, there's around 60 leases or so, have come from people who have been displaced. But it is very specific as to assets and submarkets, Pasadena, Glendale, Santa Monica, Burbank, some of those submarkets.

It's a handful of leases here and there that add up to about 60 leases. So it's hard to know where it's going to go forward as the insurance process evolves and things of that sort. But that's what we've experienced thus far. And as it relates to the potential adoption of any eviction moratorium and/or rent freezes, we have not contemplated that as part of our guidance. There's been chatter about that. City Council looked at it a week ago. They sent it back to the housing committee. The housing committee is reviewing it, saying stuff back to the council. So there's a little bit of ping pong going on right now. So we don't know exactly how that may come out. But we hope that they don't take action that certainly has a negative impact on people who have been displaced.

We need more housing for those folks, not less. So we'll see where it comes out, but we don't know anything definitive at this point.

Adam Kramer (VP of Equity Research)

Got it. That's helpful. And then looking at that slide 12 with the kind of job growth, any kind of employment forecast for this year, I don't know that I have a specific question here other than just, I think, being a little bit surprised maybe at kind of the acceleration in jobs for the rest of this year. And I know these are from third parties, so the level of granularity that you guys have may not be super robust here. But just the extent you can talk about kind of what their thinking is or what's embedded in that kind of acceleration over the course of this year from a jobs perspective. And again, it looks like it's taking jobs in 3Q and 4Q to a level we haven't seen in a couple of years.

So just the kind of underlying assumptions or thought process there, I think, would be helpful.

Ben Schall (CEO and President)

Yeah. Adam, it's Ben. We continue to look at NABE, the National Association of Business Economists, as the starting point for our job and wage assumptions going into the year. And as you call out, moderating growth. Last year, wound up having roughly about two million jobs generated across the country. And NABE's consensus is that figure coming down into roughly the million and a half type of range. Fairly consistent kind of growth throughout the year. Sean called out in his prepared remarks, we are hopeful that we'll benefit from a better mix of jobs this year given potentially more of the growth occurring in the core AvalonBay types of industries.

Sean Breslin (COO)

Yeah. One thing just to clarify and make sure you're interpreting the chart correctly is that chart on the right only reflects two job classifications within our established regions. It's not overall job growth. So keep that in mind that it's talking about an acceleration in those specific categories of employment as opposed to that being the cadence of overall job growth throughout the U.S.

Adam Kramer (VP of Equity Research)

Thank you both. Really helpful.

Operator (participant)

Our next question is from Rich Hightower with Barclays. Please proceed.

Rich Hightower (Managing Director)

Hey. Good afternoon, guys. Sean, I want to go back to your comments of the breakdown between new and renewal and blends for the year and to see if you could break it down just a little bit further and tell us how sort of the established markets relative to the expansion markets might look under the same framework? Thanks.

Sean Breslin (COO)

Yeah. So as I mentioned, we expect to see an improvement in effective rent change as we move through the year, which would be normal with the second half being slightly stronger than the first half, which is the opposite of what occurred in 2024. So that's kind of where we are as it relates to the sequencing by quarter. As it relates to the expansion regions versus the established regions, the first thing I would say is the majority of our portfolios obviously are established regions, and we're expecting rent change to be healthier in those regions as compared to the expansion regions. The expansion regions, we're talking about a handful of regions here, so I wouldn't necessarily average them because you have a lot of different things happening across those regions that are very unique. Charlotte, particularly urban Charlotte, is pretty beat up.

It's likely going to be flat to negative. Dallas will likely be positive this year because of a pretty rough 2024 in the 2%-3% range positive. And then Florida and Denver, Florida is expected to be very modestly positive. I call it roughly flat to plus 50 basis points. And then as it relates to Denver, so better about Denver than what is represented by the market overall given the distributed nature of our assets across suburban submarkets. That being said, it's experienced a level of supply that has impacted the market more generally. So it would also be below the established region average. So I would be hesitant to draw sort of a broad conclusion across expansion regions, but give you those insights as it relates to each one.

Rich Hightower (Managing Director)

That's very helpful. Thank you, Sean. And then the second quick one is for Matt. You mentioned wanting over time to grow the SIP book to maybe around $400 million. I think we've heard comments on other calls that that particular product in the marketplace is becoming increasingly competitive, I guess, in terms of capital chasing yield and so forth. So maybe just tell us about the dynamic that you're seeing in the marketplace and how you guys can sort of be uber selective and still hit your growth target there. Thanks.

Matt Birenbaum (CIO)

Sure. Rich, I guess what I would say is we do think that we bring in terms of the competitive environment, for us, the issue hasn't been losing deals to other providers of that slice of capital. It's been finding deals that underwrite to an appropriate level of safety and margin for us relative to where our proceeds are going to stop. So we're not going as high up the capital stack as we used to go, whereas maybe earlier iterations went just given what's happened to interest rates and valuations. So what we saw last year is there were a lot of deals trying to get capitalized that really they were just the wrong poor product-market fit.

They were high rises in a market that would only support mid-rise or mid-rise in a market that should only support garden or very aggressive super luxury rents assumed or something like that. So through the course of 2024, a lot of those deals got flushed out of the system and just didn't happen. And not only did they not happen, but eventually, the sponsors just gave up and moved on. So what we've seen recently, I'd say in the last quarter or so, is deals that start to make a lot more sense. They're on a much better basis. It's a better land deal. It's the right product. It's generally not as ambitious and aggressive in terms of the density and the rent level. So we think those deals make sense. And some of those deals, people are not taking. Our program is strictly mezz to merchant builders.

We're not doing the kind of bridge-to-bridge thing or the recaps, and the reason we're keeping it to that is because it leverages our unique capabilities in development, construction, and operations, so on the deals that make sense to us, I would say we are a preferred capital provider, and we have intercreditor agreements with quite a few primary lenders, both banks and debt funds that take a lot of comfort in the fact that we are there with them in the lending in the capital stack because we have a lot of internal data. We know how to look at a deal and understand if it's getting built right and if it's going to be operated right, so I'd say we're very competitive on the deals that we want to win, and it's just hoping that there'll be enough of them out there for what's a pretty modest goal.

I mean, these are $20-$25 million per deal. So we're talking three deals, three or four deals over the course of the year. We already have one that's in due diligence right now that we hope to close here in the first quarter and several others that are in the advanced stages. So I'd say it's a relatively modest goal, and I'm feeling pretty good about it.

Rich Hightower (Managing Director)

That's great. Great comment. Thank you.

Operator (participant)

Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed.

Alexander Goldfarb (Managing Director)

Oh, hey. Good afternoon. Good afternoon down there. Two questions. First, fee income has been a popular topic as the industry rolls out various things like Wi-Fi in addition to historic things, waste services, etc. As you guys look at the total all-in pricing of rent plus these other services, is it your sense that these services are additive or from a resident perspective, they look at the whole sort of the whole enchilada and say, "This is the amount I can pay?" And therefore, whether you're charging more in fees or rent, it doesn't really increase the overall sort of growth rate of the unit per se?

Sean Breslin (COO)

Yeah. Alex this is Sean, it's a good question. What I'd say is it depends a little bit on the composition of the various things that end up in the bundle, I'll call it. So for example, if we're talking about bulk internet, to use one example, if we can replace the cost of that service for the resident at a comparable speed at a discount, net net, they should look at that favorably, right? When it comes to other fees that are out there, I think it's a good point where people start looking at, "Okay, there's a, let's call it a move-in fee for amenities, or there's a recurring maintenance fee, or this, that, or the other." If you're an outlier as it relates to that, then you may start to see some resistance. Everybody's passing through utilities.

Everybody has pet fees, things like that that are relatively standard.

I think it's people maybe who are out on the edge a little bit as it relates to either the amount they're charging for something or the unique nature of one that people may start to pause and wonder if that really makes sense or not. So it's an area that's evolving, I would say, and we're all pushing it, the publics, the privates, etc. And I think where we're providing good service and good value for residents, they should appreciate it. It may take a little education for them to understand it. "Hey, what's this fee?" "Well, this is the bulk internet fee. If you look at what you pay every month to Verizon, what we're offering, it's a discount," etc., etc. So it's a good question. I think people are working their way through it.

Net net, we think we provide good value to residents for what we charge, but it is sort of an owner-by-owner type of approach that you really have to look at.

Alexander Goldfarb (Managing Director)

Okay. The second question is on harvesting assets. Clearly, you guys are now out of Connecticut. As you look at Maryland, Montgomery County has become a flashpoint given rent control. Is it your view that that's another that Maryland is another market that you would look to significantly scale back, especially where it's been impacted by rent control laws? Just sort of curious given some of the headlines out of that market?

Matt Birenbaum (CIO)

Yeah. Alex, it's Matt. It is a factor in our overall portfolio allocation goals longer term. So Ben talked about our goal to get to 80% suburban. Some of that is about demand and supply. We like the demographics, and there's more supply constraints in many of these suburban towns. And some of it is about regulatory risk and exposure. And most of the jurisdictions that have a more aggressive regulatory regime or more regulatory risk are urban. You mentioned one that's not Montgomery County, which is suburban. We have a relatively modest presence in Montgomery County. I think we only have maybe four assets there. So we're not necessarily looking to lighten up specifically in Montgomery County at this moment, but it is a part of our overall strategy.

You'll see us continue to sell assets out of jurisdictions where we view there being elevated regulatory risk over the next period of years. I mean, if you look at what we sold in the past year, we sold an asset in the city of Seattle. We sold an asset in the city of Los Angeles, city of Boston. Those are all places. I mean, that was one factor among others, and you'll continue to see that.

Ben Schall (CEO and President)

There's the disposition side, Alex. And obviously, then there's also the new investment side. And so in certain locations that have heightened regulatory risk or uncertainty as it relates to the regulatory future, for sure, the bar is higher there in terms of investing new capital dollars.

Alexander Goldfarb (Managing Director)

Right. Okay. Thank you.

Operator (participant)

Our next question is from Rich Anderson with Wedbush Securities. Please proceed.

Rich Anderson (Managing Director)

Hey. Thanks. Good afternoon. So when you just look at what you have going on right now, and let's say you get everything done in 2025 that you have on your plate, how much closer do you get to your 25% target in expansion markets from the 10% that ended the year? I'm just wondering how much the gap closes over the course of this coming year as you see it today.

Ben Schall (CEO and President)

Yeah. Rich, we've been taking a fairly steady and sort of measured approach there. As you saw this year, we moved it to a 2%-3%. So if we continue in that normal course between trading activity and new investment activities, probably likely in that range. Now, that is subject to the extent that we find opportunities, a small portfolio, opportunities to potentially move that needle quicker. That's out there. But normal course, it's probably in that type of range. So it's a multi-year effort, which has benefited us as we've sort of paced our capital allocation into these markets over time.

Rich Anderson (Managing Director)

Okay, and maybe correct me if I'm wrong here, but I think 45% of your starts this year will be in your expansion markets. Do you think as that area of the country steadily improves over the course of this year and perhaps you start to see some really big-time growth in 2026 and 2027, that acquiring in those markets becomes incrementally less appealing and developing is perhaps the way you top off getting to your full allocation of 25%? Is that a reasonable way to think about it? For now, maybe more in the way of acquisitions, but later on, more in the way of development?

Ben Schall (CEO and President)

I think about it as both. I mean, I don't think it's an either-or choice for us. At a market level, at a sub-market level, obviously, we'll lean into acquisitions versus development, going back to Matt's conversations as it relates to replacement costs. But I think we are in a window right now where we feel like we have a balance sheet. We could bring our strategic capabilities to bear where we can be growing both through acquisitions and development, and then breaking down development further through our own development and through the funding of other developers. And that's a program that, in times where we feel like we have the green light on development in terms of economics of development and cost of capital, that allows us to flex capital allocation into that sleeve.

Rich Anderson (Managing Director)

Okay. Fair enough. Thanks very much.

Operator (participant)

Our next question is from Michael Goldsmith with UBS. Please proceed.

Michael Goldsmith (US REITs Analyst)

Good afternoon. Thanks a lot for taking my question. Can you talk about the gap in performance in suburban and urban markets in the fourth quarter, and do you expect that gap to remain similar in 2025?

Sean Breslin (COO)

When you say gap in performance, Michael, can you be a little more specific as to what you're looking for? Are you talking about rent changes as an example?

Michael Goldsmith (US REITs Analyst)

Yeah. Yeah. Rent change. Rent change, exactly.

Sean Breslin (COO)

Yeah. Yeah. From a rent change standpoint, our suburban portfolio continues to outperform and outperformed in the fourth quarter by about 40 basis points. And given some of the dynamics we've been talking about and what I refer to as it relates to the very, very low levels of supply in our suburban sub-markets, that expectation is that it will continue moving forward. There are some places with return to office that you might see a little bit of a lift more significantly on the urban side. We haven't seen that quite yet, but it's certainly a possibility as we move through the year.

Michael Goldsmith (US REITs Analyst)

Thanks for that. That's helpful. And my second question is that bad debt assumptions for 2025 imply that delinquencies remain elevated versus the historical level. What factors are keeping you from reaching that historical level of bad debt? Thanks.

Sean Breslin (COO)

Yeah. Michael, Sean again. Yeah. In terms of reaching the historical level of bad debt, I think a couple of schools of thought there. I mean, people wonder, is that achievable or not? The 50 to 70 basis points that we have realized historically, that is still a little bit of a TBD. The headwinds are certainly a tighter regulatory environment in terms of the processing of evictions. The timeline is taking some of that's just backlog, but some of it is additional regulatory actions that have been adopted that slow the process. So that may be a little bit of a headwind to getting back to normal levels.

At the same time, though, there's always been an element of fraud in the system, and I would say that the industry has much better tools available nowadays than we ever had pre-COVID to weed that element out, screen them out, essentially. So there's some puts and takes there. So we still have a ways to go in terms of getting there. I suspect my intuition is we will certainly be closer to the 50-70 than where we expect in 2025, but it's going to continue to take time to get there. In certain markets in particular, like in New York City, the District of Columbia, Montgomery County, we need to see greater movement in those regions to support us getting there a little bit faster.

Michael Goldsmith (US REITs Analyst)

Thank you very much.

Sean Breslin (COO)

Yep.

Operator (participant)

Our next question is from Alex Kim with Zelman & Associates. Please proceed.

Alex Kim (Equity Research Senior Associate)

Hey, guys. Thanks for taking my question. Just a clarifying one to begin. Is the development volume from the DFP included in the overall $1.6 billion number? And is there a number or percentage even book the townhomes you're developing alongside your apartment units?

Matt Birenbaum (CIO)

Yeah. Hey, Alex. It's Matt. So yes, the development volume includes it's mostly our own development and a little bit of DFP. So I think as we sit here today, three of the 17 deals under construction are DFPs. And then as we look to our 25 starts, time will tell, but my guess is maybe a similar proportion, probably two or three out of 10 or 12 starts would probably be DFP. Those come quicker, so they're not quite as easy to predict, but that's our expectation. As it relates to the townhome component, so we have the 100% townhome community under construction today, which is a DFP deal. That's Avalon Plano. And then we probably have two or three other communities currently under construction that have a townhome component to them.

I'm just looking at the list now: Lake Norman, Wayne, two deals in New Jersey, Pleasanton out in the East Bay actually has some townhomes. Tech Ridge in Austin has some townhomes. So anytime that we can mix it in, we will. And we see that more and more with some of our garden communities where we might do a very typical deal, like look at an Avalon Wayne in northern New Jersey. It's, I think, 470 or 450 units. It's maybe 50 townhomes and 400 stacked flats. And that's been a great formula for us.

Alex Kim (Equity Research Senior Associate)

Got it. That's very helpful. And then just another one on the BTR business. As you expand your exposure to the product type, are there any plans to ramp overhead this year, or will you continue leveraging your existing capabilities?

Matt Birenbaum (CIO)

So one of the nice things about the DFP is that it doesn't come with the same internal overhead. We do fund third-party developers, their overhead through paying them developer fees, but it doesn't require incremental overhead on our platform. So we don't see that as a driver.

Alex Kim (Equity Research Senior Associate)

Got it. Okay. Yeah. Thanks for the call.

Operator (participant)

We have reached the end of our question and answer session. I would like to turn the conference back over to Ben Schall for closing remarks.

Ben Schall (CEO and President)

Thank you, everyone, for joining us today, and we look forward to speaking with you soon.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.