To AvalonBay Communities Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. Following remarks by the company, we will conduct a question and answer session. You may enter the queue and question and answer session at any time If you are using a speakerphone, please lift the handset before asking your question. And 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 is Mr. Jason Riley, Vice President of Investor Relations. Mr. Reilly, you may begin.
Thank you, April, and welcome to AvalonBay Communities' Q2 2021 Earnings Conference Call. Before we begin, please note that forward looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10 ks 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. Tim?
Yes. Thanks, Jason, and welcome to our Q2 call. With me today are Ben Schall, Kevin O'Shea, Matt Birenbaum and Sean Breslin. For our prepared comments today, I'll start by providing some high level comments on Apartment market conditions and how the current operating and capital environment is shaping our actions, including our recent decision to enter New markets in North Carolina and Texas. Ben will provide a summary of second quarter results, including a detailed road map of results on a year over year and a sequential Quarter basis.
Sean will then elaborate on operating trends in the portfolio, where we've seen a robust recovery in fundamentals and performance Since the first of the year, Matt will review performance in our development portfolio, including lease up performance And an overview of our first Conso community located in Rockville, Maryland, where we completed construction this past quarter. Kevin will then provide an overview of our outlook for Q3 and the full year. And lastly, Ben will provide some summary comments On how ABB is well positioned to deliver earnings and NAV growth as we look forward. Before turning to the deck, I thought I'd provide Some perspective on what we're seeing in the markets and how it's shaping our actions in terms of operations and capital allocation. Since the 1st of the year, the recovery in the apartment market conditions has been dramatic.
Effective move in rents have fully recovered from the trough, Up almost 20% over the last two quarters alone, and asking rents grew even faster, up over 20% since the beginning of the year and now stand at 8% above pre pandemic peak. Concessions, which were significantly elevated last year, have fallen back to a modest level closer to what we experienced pre pandemic. As you might guess, the speed and steepness of the recovery has been driven by very strong rental demand. In fact, Q2 traffic was up over 40% from last year. It continues to outpace last year despite very low levels of availability.
The combination of strong traffic and low inventory propelled rental rates through Q2 and that has continued through July. While all regions and submarkets are improving and most are back to or near pre pandemic levels, there's still a fair bit of variability across the portfolio. Specifically, suburban continues to outperform urban. Class A is outperforming Class B. And regionally, Southern And our expansion markets of Southeast Florida and Denver are outperforming the portfolio average, while the Bay Area continues to lag the average.
In addition to strong apartment markets, the capital markets are also extremely healthy and constructive for apartment investment. The transaction debt and equity markets are all wide open and are supporting strong growth in asset values as we've seen cap rates fall below 4% across most markets Based on the strong market sentiment, we expect capital flows to remain healthy over the foreseeable future. With this operating and capital backdrop, we have shifted to offense and have increased our planned investment activity for the year by almost 1,000,000,000 between new development starts and acquisitions. In addition, in our release, we announced our intent to enter the Raleigh and Charlotte markets in North Carolina As we discussed over the last 2 to 3 years, we've been evaluating expansion into markets that we believe will disproportionately benefit from the growth in the knowledge economy and domestic migration, particularly in those markets that figure to see some migration from our existing legacy markets. We'll have more to share with you about our growth plans in these markets over the next couple of quarters.
And lastly, as we mentioned last quarter, after completing a comprehensive midyear reforecast, we are now providing full year outlook in addition to Quarterly guidance. While risk remains to our outlook, including the impact of the virus and the Delta variant, The exact timing of eventual phase out of eviction moratorium across our markets and the receipt of any rent relief payments from state and local governments, We believe we have enough clarity to provide meaningful perspective with respect to our operating performance for the rest of the year. With that, now let me turn it over to Ben, who'll discuss Q2 results.
Thank you, Tim. Slide 4 highlights our Q2 results and activity. And while we meaningfully exceeded our guidance for Q2 with core FFO of 1.98 Versus guidance at the midpoint of $1.90 per share, our year over year core FFO figures were down 11.2% for the quarter and 14.8% year to date, reflecting the disruption that we've seen in our business over the last 12 months. Notably, And reflecting the strong recovery that Tim emphasized, rental revenue increased on a sequential basis, turning positive for the first time since March of 2020, with a 90 basis point increase on a GAAP basis and 170 basis points on a cash basis from Q1 to Q2. As Sean will delve into in more detail, rental rates improved during each month of the quarter with continued growth in July.
Our development platform also continues to create meaningful shareholder value. We completed $385,000,000 of development in the quarter and close to $1,000,000,000 through the first half of twenty twenty one. These developments are primarily suburban and are benefiting from the renter demand and increasing rents We're experiencing across our suburban communities. For our completions in the second quarter, the initial projected stabilized yield is 6.4%, providing roughly 250 basis points of spread to the sub-four percent stabilized cap rates we're seeing in the asset sale market today. These completed projects, along with others that are in lease up, also provide a meaningful incremental boost to earnings growth as Matt will discuss in more detail.
We also started $580,000,000 of new developments in Q2 and are on track to meet our target of $1,200,000,000 of new starts in 2021, which we increased last quarter from our initial target of $750,000,000 of new starts. During the quarter, we raised $540,000,000 of capital through dispositions at an average cost of capital of 3.7%. By match funding our development activity, primarily with these disposition proceeds, we in turn are able to reduce the capital cost risk associated with the earnings and NAV accretion as we execute on our development pipeline over the coming years. Slide 5 breaks down the components of our rental revenue change on a year over year basis, with lower lease rates over the last 12 months and the amortization of concessions being the largest drivers of the decline. As it relates to concessions, at the end of Q2, we had a total of 29,000,000 Previously granted concessions still to be amortized in our same store pool over the coming quarters.
However, Concession usage has declined by roughly 85% since Q4 2020 from $1900 per move in to just above $300 in July. Slide 6 provides the factors leading to our increase in rental revenue from Q1 to Q2, with a turn to the positive being driven by higher occupancy an improvement in uncollectible lease revenue. At a portfolio level, uncollectible lease revenue remains elevated with bad debt at roughly 3% versus a more normalized 50 to 60 basis points with the expectation that we'll continue to see elevated bad debt levels until eviction moratoria are behind us. Before turning it over to Sean for further context on our operating performance, Slide 7 illustrates our strong momentum in the form of like term effective rent change, which turned positive in June and now stands at 5% in July. With that, I'll turn it to Sean.
All right. Thanks, Ben. I thought I'd share a few slides on portfolio rent trends, both overall and across different markets and submarkets. Overall, we've seen a meaningful acceleration in the positive rent trends we spoke about during our Q1 call. On Slide 8, you can see that our average move in rent value Has grown by roughly 18% since the beginning of the year, including a 13% increase since just April and is now consistent with the peak rent levels we achieved in mid-twenty 19.
Moving to Slide 9, Improved performance has been broad based with every region experiencing a material increase in average move in rent over the past 7 months. If you look at our July move ins specifically, rents are now equal to or greater than the 2019 peak in every region except Northern California, which remains roughly 11% below peak. The timeline for a full recovery in Northern California will In part, be based on when major tech employers call people back to work. The hybrid work policies adopted by major employers will certainly have some impact on where Tech workers want to live, but Silicon Valley will very likely remain one of the world's leading innovation centers for years to come. Turning to Slide 10 to address suburban and urban performance trends.
The average July move in rent for our suburban portfolio was roughly 3% above peak we achieved in 2019. In our urban portfolio, while demand has returned in a meaningful way, The average rent in these submarkets fill the most throughout 2020 and is still down about 7.5% from peak 2019 rents. As it relates to the urban portfolio, we expect performance to continue to improve as people are called back to the office, Urban universities resume on campus learning and the quality of the environment starts to look and feel more like pre pandemic conditions. Turning to Slide 11, our average asking rent, which is representative of the published rent for available inventory, Has increased 24% since the beginning of the year and is currently about 8% above the mid-twenty 19 peak. Our suburban submarkets, which represent about 2 thirds of portfolio revenue, are leading the recovery.
The average asking rent in our urban submarkets is basically back to the 2019 peak and as I mentioned previously is expected to continue to grow As I mentioned a few slides ago, the average portfolio move in rent has increased roughly 18% this year, Betrayals the increase in average asking rent, which is up 24%. The average dollar spread between the two, Whichever 12% for the month of July is wider than the 4% to 5% we've seen historically and is representative of the capacity available to grow move in rents over the next couple of quarters. Additionally, if we see a seasonal adjustment in asking rents the last few months of the year, something we have not yet experienced this year, there's plenty of room for asking rents to soften a bit And still grow move in rents. With that summary, I'll turn it to Matt to address development and portfolio trading activity. Matt?
All right. Great. Thanks, Sean. Turning to our current lease up community, you can see on Slide 13, the same positive trends that we're seeing in the stabilized portfolio. We're achieving rents $155 above initial underwriting on the 7 communities that are currently in lease up, which is lifting the stabilized yield on those investments to 0.1% generating substantial value creation relative to current cap rates, which are at or below 4% across our footprint.
This is really a remarkable turnaround in our development portfolio, which just a few quarters ago had rents and yields modestly below initial underwriting and continues to demonstrate our long track record of delivering outsized risk adjusted returns from our development and construction capabilities. One development that we wanted to highlight this quarter is shown on Slide 14, which is the first completion of our latest brand, Conso, Located at the Twinbrook Metro Station in Rockville, Maryland. Conso was born out of customer insight research, which Telling us that there's a large underserved segment of residents that are looking for a new high quality apartment in a transit served or infill location, but without all the extra bells and whistles provided in typical Class A new construction. By focusing our investment on the apartment home itself And removing common area amenities that these customers do not value, like pools, fitness centers and lounges, we're able to save on both upfront capital and ongoing operating and CapEx costs, which in turn allow us to provide a meaningful discount on the rent as compared to a fully programmed Avalon offering at the same location. Conso leverages technology to provide a primarily self-service experience for residents and prospects with very limited on-site staffing Supported by our centralized call center and a design with low maintenance needs to deliver on the brand promise to live simply without sacrifice.
We're excited the market has embraced the concept of Kanto Twinbrook leasing up successfully at a strong pace at rents above pro form a I look forward to growing this new brand via additional development opportunities in the future. Turning to Slide 15, We continue to see tremendous demand in the asset sales market and completed 6 wholly owned dispositions in the 2nd quarter at a weighted average cap rate of 3.7%. The assets sold were predominantly in the Northeast region with more than 60% of the proceeds coming out of the Greater New York area and we're older than average for our portfolio with an average age of 25 years, allowing us to continue to further our portfolio allocation goals To reduce exposure to some of our legacy markets, while also minimizing our CapEx profile and by redeploying this capital into new development starts at $580,000,000 this quarter At projected yields of 5.7 percent, we're match funding new growth at highly accretive margins. And with that, I'll turn it over to Kevin to go over our earnings guidance.
Great. Thanks, Matt. On slide 16, we provide our financial and operating outlook for the Q3 and for full year 2021. For the Q3, using the midpoint of our guidance ranges, we expect core FFO per share of 1.96 On a sequential basis, our 3rd quarter estimate reflects a sequential decline in core FFO of $0.02 per share from the 2nd quarter. The sequential decrease in core FFO per share is driven primarily by an increase of $0.05 per share in same store residential revenue and a $0.03 per share increase in lease up NOI, offset by a seasonally driven increase in same store residential operating expenses of $0.06 per share and a $0.03 per share decrease in community NOI as a result of recent disposition activity.
On a year over year basis, For our same store portfolio, using the midpoint of our ranges, we expect NOI to decrease by 3% for the 3rd quarter, driven by an 80 basis point reduction in same store residential rental revenue and a 3.5% increase in same store residential operating expenses. For the Q4, our full year earnings guidance implies core FFO per share of $2.13 which would represent a $0.17 or 8.7 percent sequential increase from the 3rd quarter estimate. This expected sequential increase in earnings in the 4th quarter is primarily driven by a continued increase in same store residential rental revenue by a seasonally expected decline in same store residential operating expenses and by further NOI growth in our lease up
portfolio. For our
full year 2021 guidance, we expect core FFO per share of $8.02 at the midpoint of our range. And for our same store residential portfolio, again using the midpoint ranges and looking at growth on a year over year basis, we expect NOI to decrease by 6.2% for full year 2021, driven by a 3.2% decrease in revenues and a 3.3% increase in operating expenses. Turning to our updated investment in capital plan. The combination of a strong recovery in revenue and earnings growth Attractive access to the capital markets has prompted us to pivot to offense and pursue increased development and acquisition activity as reflected in our current investment and capital plan on slide 17. For development, we now anticipate starting $1,200,000,000 in new This year up from our original plan of $750,000,000 And we expect NOI for new development communities undergoing lease up to be about $50,000,000 this year at the midpoint, an increase of $5,000,000 from our original outlook.
For capital activity, we now anticipate a busier year with total capital uses for development, redevelopment, acquisitions And debt repayments of $1,800,000,000 in 2021. This represents an increase of nearly $1,000,000,000 from our original outlook It is driven by increased acquisition activity for the year and an expected early repayment later this year of $450,000,000 in unsecured debt that is scheduled to mature in September 2022. In terms of capital sourcing, our current plan contemplates meeting our capital needs Through a combination of unsecured debt issuance and additional asset sales, although the sources we ultimately tap are subject to change based on changes in capital market conditions or our actual capital uses. Turning now to slide 18 And our continuing efforts in the area of corporate responsibility or ESG, we are pleased to report that we recently released our 10th Annual Corporate Responsibility or ESG report, reflecting our long standing commitment to this part of our business. As highlighted in the report, immeasurable progress on our science based emission reduction targets, primarily due to our investments in on-site solar generation and efforts to improve building efficiency.
We're also proud of our commitments to the communities in which we do business, Increased funding to our non profit partners
to help
serve those in need during the pandemic. We continued our important national partnership with the American Red Cross, focused on disaster preparedness and response. And we initiated a new partnership with the National Urban League designed to engage them on our diversity and inclusion efforts and provide support to their mission. All these efforts continue to be recognized externally with the CDP rating us in the A band And the Global Real Estate Sustainability Benchmark or GRESB rating us number 1 in the multifamily sector, both globally and in the United States. In addition, NAREIT awarded us their highest honor sustainability performance.
Further, our associates remain highly engaged As reflected in our engagement scores that are in the top quartile on this important metric. And finally, our customers weighed in and we are pleased to be number 1 in online customer reputation. And with
that, I'll turn it back
to Ben for his concluding remarks.
Thanks, Kevin. Turning to our key takeaways on Slide 19. We're very encouraged by the continued improvement in our operating fundamentals and believe our portfolio is well positioned for additional growth as reflected in the growth assumptions incorporated into our second half guidance. Near term trends in our suburban portfolio continue to look very strong, And we are hopeful that our urban communities, which have been lagging the rest of the portfolio, should benefit over the coming months with a fuller return to offices and universities. As Tim mentioned at the start, we also expect that our Class A communities will continue to outperform as higher income residents and prospects benefit from the economic recovery and seek out high quality living environments.
As discussed, our development acumen and pipeline continue to be a differentiator for us. Our projects in lease up, primarily in the suburbs, are benefiting from strong renter demand, and we've been able to quickly scale up our development activity at attractive yields relative to stabilize As we look forward, we expect the breadth of our development expertise will allow us to shift capital to growing markets and evolve our product offering to meet the needs of our targeted customer segments. We also see our operating platform and our investments in innovation as a differentiator. In addition to the expense reductions and the margin opportunities we discussed last quarter, our technology forward approach positions us to be able to create de novo offerings such as Konzo, bringing together the best of our operating, innovation, brand and development expertise as we evolve our offerings and create a better way to live. As we head forward, we're excited about our new growth in Raleigh Durham, Charlotte, Dallas and Austin, in addition to our continued growth in Southeast Florida and Denver, bringing us to a total of 6 expansion markets.
We're actively negotiating on opportunities in these new expansion markets and expect to grow through acquisitions, our own development And through the funding of other developers where we own the asset upon stabilization similar to the growth strategies we've successfully utilized to grow our presence in Southeast Florida and Denver. This multi pronged approach also allows us to invest capital over different time horizons with acquisitions of existing communities being Finally, thank you to the entire AvalonBay organization for their commitment and leadership on ESG, where our recently issued 10th Annual Responsibility Report highlighted our continued ESG leadership position across the wider REIT sector. And with that, we'll open it up for questions.
We'll hear from Nick Joseph of Citi.
Thanks. Appreciate the comments on the new markets. How large do you expect each market to be once you get the scale, so either from a unit perspective or as a percentage of total NOI?
Hey, Nick. This is Ben. I'll take that one. We're not putting out a specific target at this point. As I mentioned, it's Part of what we'll discuss with investors over the coming quarters, and also how that ties into our overall portfolio allocation approach.
But we do see this announcement as a meaningful one. We are actively engaged with specific opportunities currently on both the acquisition side and on the development side. We've been just for some context, we've been growing in Southeast Florida and Denver, where we set a target of 5% for each market as a goal for our overall allocation. And our rough views are that Texas and North Carolina have the potential for a similar type of allocation. Overall, we're excited for opening up these new Growth opportunities in these new four markets and leveraging our skills across investments, development, and operations over the coming years.
Hey, Ben. It's Michael Bilangan speaking. It sounds like you've been pretty active in these markets sourcing. Can you just sort of provide maybe just How much is under contract or in advanced stage? I don't know if it's like $1,000,000,000 already that you've sort of almost circled In terms of opportunities, whether they be acquisitions or development, just to give us a sense of how quickly you've been able to work your way into these markets?
Hey, Michael, it's Matt. I can speak to that one a little bit. I mean, things are fluid until they close. So, I don't want to get too specific, but we do have active deals working In 3 of those four markets that Ben mentioned, those three deals together probably add up to maybe half of what you're saying, maybe it's $500,000,000 not $1,000,000,000 yet at this point, but We're continuing to look for more as well. And certainly, we expect some of that activity to close here in the Q3.
And then just finally, I know a couple of you have talked about Growth opportunities in those markets in terms of people coming from your existing legacy markets as well as just job growth in those markets. So how should we think about sort of the initial funding of these? Is this going to be at a dilutive exercise and you sell assets or raise equity Or other forms of financing, that you'll benefit from the growth going forward? Or do you think you can do this on a sort of non dilutive basis, maybe even accretive as you go forward.
Hey, Michael, this is Kevin. I think in terms of our Pacing into these new markets, I think number 1, it's likely to be measured as Matt alluded to and similar to what you've seen in terms of the rollout in some of our other markets, Maybe a little bit more, a little bit less. Obviously, we like to be to make some progress on that front. But then relatedly, the capital impact in terms It's probably also likely to be measured. And so we've got unlike Some others, because we are so active in development, we have that as a tool in our toolkit either to venture with partners or to eventually start doing development on our own.
To the extent we engage in those new markets in that way, that obviously paces out the capital deployment And also maps it against investments that are generally pretty darn accretive to our cost of capital. So our intention would not be to do so in any dilutive way. From a standpoint of acquisitions, as you know from what we've done so far, we've been leaning pretty heavily into our gains capacity by selling assets in Non core markets or non core submarkets in our legacy footprint and then, putting them into Southeast Florida and Denver, and I think we'll continue to do that. And that's something that we think actually is marginally accretive because we're kind of moving and as you can see from assets that we're selling now in sub-four cap rates And to asset into markets where it may be similar cap rates, but hopefully a better growth profile. So I think what you've seen us do in the past is probably a good indication of what we might do in the future.
And probably from a funding
point of view, we'd be
looking to do so on accretive basis.
Thanks for that color.
And next we'll hear from Rich Hill of Morgan Stanley.
Hey, guys. Good afternoon. I wanted to maybe just build off of what Michael just asked. Is there any do you see any opportunity for you to maybe do a bigger acquisition of our private apartment REIT in these or private apartment owner In these markets or maybe even a public apartment REIT, I'm obviously not trying to put anyone in play, but it seems like there's what might be some And interesting synergies, both on a G and A basis and a portfolio basis, if you're really looking to make a move into these markets. Curious if you've thought about that.
And If so, what might make sense and what might not make sense about it?
M and A is always a possibility. It's not our main strategy in terms of entering these markets. I mean, I guess, sort of step back, we're not necessarily looking to, as Kevin mentioned, we're looking to sort of pace our way into these markets. We're making We see these markets as having great fundamentals over a long period of time and that they have certain structural advantages. They're going to make them appealing markets Over the next 20, 30, 40 years, much like our legacy markets have been over the last 20, 30 years.
So the need either through M and A or to A highly disproportionate level of transaction activity in these markets is not what's It's driving us motivated. To also recognize we're learning as we get into these markets. And so there is obviously a big risk Either do an M and A or a high level of volume in the 1st year or 2 as you start to gain market intelligence in the market So very much a strategy, as Kevin mentioned, that we deployed employed it in Southeast Florida and Denver and You know how we look to deploy capital here as well.
Very fair. I appreciate that response. I want to maybe come back To this concept of base effect versus earnings power for the apartment REITs, obviously, from our perspective, the recovery It's happening sooner and faster than we were anticipating, and I think we were pretty Constructive over the past 9 months or so. But I do I am curious, as you speak to your tenants And you think about supply versus demand, it just strikes me that occupancy is at a really healthy level. There's a tremendous amount of demand coming back.
And you mentioned that all of your markets, I think, except Northern California were sort of back to 2019 levels. How much do you think you can push rents in this market and This sort of market. And are we facing a relatively elastic demand profile just given a tremendous amount of demand that's coming from Gen Zs and Gen Ys relative to a limited supply of housing. How do you think about that?
Yes. Rich, this is Sean. I'll take a first shot at that and then anybody else could jump in. In terms of Got the demand profile on how it plays out, how long it could run. Yes, that's a function of a lot of different variables that would take us quite a while to get through.
But Yes, Sterling, on the demand side, things have been quite robust, as you noted. The trajectory of the recovery, whether you look at Asking rents, you look at move in values, you look at occupancy, all of them quite healthy, even by historical standards in terms of coming out of a downturn, In terms of the speed of the recovery and the order of magnitude, both have probably been a little bit surprising for everyone. When we look at where we're clearing the market today on rents, we kind of put that slide in the deck that shows where asking rents are relative to move in values. In the near term, I guess what I would say is that demand has been quite healthy. We have not seen signs of weakening at whatsoever and have seen very healthy week by week growth in both those move in values and asking rents.
People have asked about the seasonal effect as demand been pulled forward, etcetera, etcetera. We don't see signs of that yet. But what we do feel good about is that spread between move in rents and asking rents being at 12%, Even if there's a little bit of seasonality that comes upon us in the Q4 or the variant creates some disruption and delays, we're Starting to see a little bit of that. There's still plenty of room in the short run to see move in rents continue to grow and maintain the recovery. In the longer term, It's a broader question around just overall housing demand and supply, which is a function of what happens with job and income growth And various other factors associated with the demand side.
And on the supply side, just overall housing production and multifamily housing production specifically. And at least on the supply side, our markets, we feel pretty good about, particularly the legacy markets, the outlook for supply coming down over the next year or 2, Potentially by a pretty decent amount, we'll be able to refresh our numbers by the end of this year, but we could be seeing double digit percentage decline across the footprint and supply as we move into 2022 would certainly further kind of support healthy Demand and rental rate growth as we move through 2022. So that's kind of the near term and other kind of maybe medium term outlook. And then, Sam or others may want to jump in terms of the longer term outlook.
Yes. Well, maybe just tag on to what Sean was saying. Yes. Sean mentioned the supply outlook. I do think there's a combination of maybe some one time items that are fueling demand as well as maybe some structural things that have been Accelerated, obviously, by the pandemic.
I mean, you do have unprecedented federal stimulus And excess savings that have been created during this downturn that may be help propelling some household demand at the margin. A lot of it lot of it is being fueled by the 25 to 29 cohort. And then in addition, we believe We've had a housing shortage that's been building over the last decade. And you sort of couple that with the federal stimulus and maybe A broader de densifying of our population, where you may have had roommates now We'll get that 1 household and now there are 2 households as people want to have their own unit. We think that's probably stimulating some demand.
But The other thing I think that is maybe is structural is just the nature of this recovery is, a lot of people talk about it as being K shaped, and That's very much our view where our renters and at a sense are really kind of on the upper part of that K and are really experiencing a V shaped recovery. And I think from our perspective, it feels like a V shaped recovery, very steep recovery. There are parts of the population that obviously Are being left behind and not participating as much in it as and as much, just given that they're not They may be service oriented jobs as opposed to technology or financial services or the types of industries we tend to over index to. So I think that may be more structural, in nature and could help propel, some household formation, particularly kind of within our target segments.
Thanks guys. That's helpful. I may have some follow-up questions offline, but I'll jump back in the queue.
Next we'll hear from Rich Hightower of Evercore.
Good afternoon, guys. Thanks for taking the questions here. I just want to go back to the movement into the 4 expansion markets mentioned on this earnings cycle. And maybe help us understand, obviously, a lot of your peers have been in some of these markets for a long time. And so, might have had a view on the different positive attributes, some of which I think were mentioned on this call.
But maybe help us understand what changed Directly due to COVID, in terms of your view of these markets, if it's migration patterns and so forth versus what you sort of knew about these It's prior to COVID, that's led to the decision to expand there.
Yes. Rich, I would say from my perspective, COVID is not really changing our view as these markets are really Formed by how we think they're going to perform over the next 20 or 30 years. Obviously, some of these Sunbelt markets have benefited during COVID as you've seen some migration from some of our legacy markets, so those markets that maybe some of it may be transitory, some of it may be Yes, permanent. But that trend was already occurring at some level in terms of domestic migration. And when we saw all these markets, what we saw in Southeast Florida and Denver, there's only so many expansion markets you could take on At one time, obviously, it's a pretty big deal for us to move into Southeast Florida Denver 3 years ago or so and add those to our footprint.
And Yes, we've seen some success there and that's probably made us more confident about how we can enter in some of these other markets as well. So I would say Probably if COVID hadn't happened, we might have entered these markets sooner in some ways. Obviously, the events over the last 16 months Have re centered our focus on a lot of other priorities. But given where we are right now, we felt like We're in a position to continue to grow. And whether it's through looking at new segments, Whether it's looking through mixed use, as we've talked about in the past, or potential broader geography, We're looking at and willing to pursue all this.
Okay. That's helpful color, Tim. Then I want to go back to a comment, I guess from the last earnings call where, Matt, you helpfully broke The development costs across hard costs, soft costs, labor, land and so forth. And I guess talking about lumber Price inflation is so 90 days ago, and you actually explained that that's not really what people should be focused on. But labor expense could be could sort of drive the equation as we think about ultimate yield on development.
So help us understand what movements are you seeing in labor costs in that context right now? And where do you expect that to be, let's say, over the next 12 to 24 months?
Yes, sure, Rich. We're certainly seeing it's definitely good to see the top Ridiculous, Eric, come out of the lumber market a little bit, but you're right. And as we talked about really the last couple of quarters, hard cost inflation in general It's driven primarily by labor and secondarily by kind of
the commodities cost. And while lumber
has come down, steel is up, drywall is up. Some The other things that we buy a lot of are up. And certainly, there is pressure. It's hard for us. We don't have a direct line of sight into what Our subcontractors are paying their workers, but we see it in the bids we're getting and we are buying a lot of activity right now.
And what I would say is what we're seeing is that the development starts that we started this quarter, last quarter that was in the release that we're getting ready to start this quarter. Probably our total capital costs are up 5% to 10% from where we thought those deals would have priced at the end of the year. So and that in turn has pushed our yields down a bit. I think our development yields on the $1,200,000,000 that we expect to start this year is about a $5,700,000,000 And a year ago or late last year, maybe that was Closer to a 6. So we have seen some downward pressure in yields.
And again, obviously, as we talked about before, cap rates are down that much or more. So if anything, the margins Are just as strong and we're seeing on the transaction side that every month new records are being broken in terms of where assets are trading. So that's giving us and others confidence to continue building, taking that 5% 10% increase in our basis because the transaction market is giving it back to us and then some. And that's still on NOIs, which are We're starting to see and that's starting to work its way into our underwriting, the rent list that we were talking about. But I would say our rental underwriting on development is still pretty conservative.
So there's probably still a little bit of numerator list to come there as well. Great. Thank you.
Nick Yulico of Scotiabank.
Hi, everyone. I guess a question on development. I was wondering in terms of the incremental development starts That you announced, even just thinking about how you're thinking about development going forward, how much is that going to be weighed towards suburban Projects, I know that is a lot of the current pipeline, a little perspective there would be great.
Sure. This is Matt. I'm just looking at the list now. So it looks like 1, 2, 3. We got 10 development starts planned this year and 1 of them is urban 2 of them are urban.
1 is kind of a residential urban neighborhood in Boston, in Brighton. It's a relatively small wood frame deal and the deal we just started this quarter in Merritt Park, which is in Miami, but really in Coral Gables, so not downtown Miami. Those are the only 2 that are urban. So it's still predominantly 70%, 80% suburban. And as I look at what we're likely to start next year, It's more of the same.
That's where we're finding the development economics are working better. And there's still more supply coming In urban submarkets relative to suburban submarkets, again, when you look out maybe 2, 3, 4 years from now, that equation could well change. And We're mindful of that as we look at the land market and where that might be in the future. But certainly over the next Year or 2, the starts are going to continue to be the vast majority suburban.
Okay, great. And then just one other question is in terms If we just look at, let's say, Metro New York for Metro New York, New Jersey as your region, for example. And I know you don't get a development rights page anymore, but if you go back to last year, that is where the bulk of your development rights are. And maybe you can just give us a feel for because it is, it's over $2,000,000,000 that you listed as capital costs for that metro for those development rights, the feel for suburban versus urban. And my other question was, In terms of in the supplemental, you list the average rents right now for New York City and suburban, and they're shockingly almost the same.
And so I'm just wondering if there's a concession impact there or something we should think about or have suburban rents really almost now gotten to the point of New York City rents in your portfolio.
Yes. I can speak to the first part and Sean may want to speak to the second part a little bit. So as I mentioned, we're Today, we have about $3,100,000,000 in development rights. It looks like about 25% of that is Metro New York. So compared to when we used to have the Schedule has come down quite a bit or we've been adding more in other regions.
And of that, so maybe $800,000,000 $900,000,000 of it is in Metro New York. And of that, At least 2 thirds of it is in the suburbs. I think we have 1 urban development right on the coast in Jersey, but everything else is A lot of that is inland, New Jersey, Long Island type of locations. In terms of the existing rents in the portfolio, very different kind of unit. Our average unit size in the suburbs is, I don't know the number, but it's probably over 1,000 square feet.
So the whole dollar rents may look the same, but the rents per foot look pretty different. And frankly, that's where we're seeing a lot of success. So we're trying to add more Rental townhomes, for example, in New Jersey or empty nester targeted product on Long Island. So the Unit sizes and the target customers are quite different.
And then Nick, just in terms of additional context as we look at over our development pipeline over the next couple of years, We took our overall starts for this year up to $1,200,000,000 We think over the next couple of years in that $1,200,000,000 to $1,500,000,000 type of range is achievable, Plus the opportunity for additional development starts in our expansion markets as we get moving heavier in that direction.
Appreciate it. Very helpful. Thanks.
Brad Heffern of RBC.
Yes. Hey, everyone. On the expansion markets, can you talk about The path towards getting to that sort of 5% number that you called out because obviously, Southeast Florida, I think, is maybe 1.5%, Denver is 1%. So Is that like a 10 year process that's largely development at this point or sort of what's the timescale?
Hey, Brad, it's Matt. So I think, yes, you're talking about Southeast Florida and Denver. I think you're probably looking at our same store portfolio. So Our current weighting is kind of by total revenue or by investments or by units is actually a little higher than those numbers, but it's not I'd say we're roughly halfway there. We're maybe 2%, 2.5%, where we're trying to get to 5%, over some period of time.
It's a combination of all of that. I mean, clearly, we can move the needle more quickly with acquisitions. And so we are looking to do that. And we will as we did in Denver and Florida and In many cases, in those instances, we're actually trading. So we're taking dispositions from our Legacy markets and redeploying that capital there.
Development takes longer. So ultimately, it's going to be all of the above. It's going to be acquisitions. It's going to be development. It's going to be funding other developers.
Each of those three activities is
on a little bit of
a different time frame, which does give us a little bit of diversification in terms of kind of the timing and the relative trade. So we kind of like that. But we certainly are staffing up in these regions. We're Looking at putting people on the ground, and as we make those commitments, certainly we're expecting to be able to move at a reasonable pace. But, yes, I mean, I wouldn't expect either any of them to get to 5% or more of our portfolio within 2 or 3 years.
It's going to probably take longer than that.
Yes. Okay. Got it. And then maybe for Kevin, can you talk through the sort of federal relief funds? I know you mentioned in the prepared comments that bad debt had been kind of consistent at 3%, but then there was that sequential 0.6% benefit On uncollectible lease revenue.
So was that relief funds and just any outlook on kind of what's in the guide for receipts on that?
Sure, Brad. Yes, Kevin and Sean may want to jump in here a little bit. So, to talk about the relief programs, but just To give you a sense of what has happened so far and what is in our numbers, the current relief programs Have been somewhat helpful so far, but only marginally so. Overall, we received $5,000,000 in rent relief payments, of which approximately $4,000,000 in rent relief payments was in the first half of the year, including $2,500,000 in the second quarter. For the back half of the year, we've assumed we'll receive $4,000,000 And that includes what we've received in July, which is kind of around $1,500,000 And of that $4,000,000 in the back half, most of that will be in the 3rd quarter.
So That's how we're looking at it. Obviously, we've been involved in working with our residents and applying where we can on our own for much more, but it obviously takes time and It's a process that is inherently uncertain and for which there's not an awful lot of visibility about what we're going to receive and when. So We've been relatively modest in what we assume we will receive going forward from that opportunity.
Okay. Thank you.
John Pawlowski of Green Street.
Thanks. Just a few quick questions from me. Curious on the development pipeline moving forward, how big will the Konso product line be As a proportion?
I wish I knew John. Certainly, we like Konzo. We think that It's got a lot of potential. We don't have a lot of Conso opportunities in our pipeline right now. Frankly, Seeing how it performed helps us understand how to underwrite it, going forward.
So and they probably will tend to be smaller deals. So, one of the things we like about it actually is that it opens up some smaller sites where it's pretty hard to make the numbers work on 100 or 150 unit Avalon when you think about The cost of the amenities and staffing and amortizing that over relatively few apartments. So, it may Hopefully, we're going to get a number of new kinds of opportunities into the pipeline, but they're because they're likely to be smaller, I would expect that it would be Relatively small percentage of the pipeline at least in the next year or 2.
Okay. And then on the operations side, the disclosure answers Most of my questions, but Sean, could you help me understand kind of total fee income, call Full year 2019 and where we are today, given the divot and then when we can get back to kind of a normalized Fee income, absolute dollar run rate?
Yes, good question, John. I want to give you Some qualitative answers and then, we can follow-up offline with detail because there's a fair amount of detail associated with that. But For the most part, I would say at this point in time, we're back to a pretty high percentage of recurring fee income across most of the footprint with a Few exceptions, like in Washington State, we can't charge for much of anything. As a result of some, you may recall some changes in New York We had to change some fees from upfront to monthly. This is still working its way through the system.
So it's not a simple answer, but I would say that for the most part, we're back to Sort of what we expected on a stabilized basis with a little bit yet to come, but I can follow-up off
Rich Anderson of SMBC.
Thanks. Good afternoon. So with regard to the kind of geographic pie chart and how it's changing, I know you made Comments that COVID really hasn't influenced some of the decisions you've made. But I am curious about a kind of reversion to the mean. It's easy to see that Sunbelt is the winner right now.
But when you think long term, are you equally enthusiastic about your legacy gateway markets as you are In these new markets that you're entering, do they kind of they're all different, but have maybe a similar level of upside to them, when you think maybe 3, 4, 5 years out.
Hey, Rich, Tim and others might want to join. I think the simple answer is yes. We've and if it wasn't, we should be exiting those markets, right? But we're always and we have exited some markets, so it doesn't mean we're not going to either reduce our exposure certain markets where we think there may be more risk or a little bit less upside or potentially exit a market. We're not prepared to do that today, but we are trying to be intellectually honest in terms of what we see as not the next 4 or 5 years of opportunity, but this is the next 20 or 30 years as we look at both demand and supply drivers in the business.
Some of the risks that are out there, whether it be regulatory or immigration related that might affect Certain markets, more than others. So, and certainly supply, I mean, the markets we're talking about are They are less supply constrained as we know, but they are massive job generators at the same time, particularly in Some of the businesses and parts of the economy we want to be exposed to. So I would say this is more about diversification and growth Then it is about not liking what we're seeing in our current markets today.
Okay. Good. And then second question, you mentioned the 3% bad debt. What are the assumptions that you have in the sort of the various state and local Headwinds, moratorium issues about those kind of going away. Do you can you kind of Peel off those that are affecting you the most and what you think is going to happen in terms of timeline?
Yes. Rich, this is Sean. It's a long answer to that one based on the various What I'd say in characterizing is that we're in the early stages of seeing The various eviction moratorium, rent caps, etcetera, etcetera beginning to phase out. But we do think that process for A number of different reasons will be sort of a slow burn, if you want to call it that, over the next couple of quarters, as opposed to All of a sudden, it's kind of open game everywhere. And you're already starting to see that in terms of what's happened in various regions, whether it's Washington State ended June 30, but there's a transitional period for 90 days.
California extended through September. Local jurisdictions are prohibited from doing anything subsequent to that until March. Request obviously on the CDC side of what the government can do. So I think people are trying to find the right way to transition it. And therefore, I think the impact of the bad debt kind of came back to normal levels.
It's probably a multi quarter process to get there as opposed to Flipping a switch and it happens in 1 or 2 quarters, just based on the way things will bleed in across not only at the state level, but at the local level as well.
Okay, great. Thanks very much.
Sure.
Austin Wurschmidt of KeyBanc Capital Markets.
Great. Thanks, everyone. So, you guys had hit on one of my questions with respect to kind of future new starts. It sounds like of Up to $1,500,000,000 in the current footprint and maybe some upside from the expansion markets, but just curious what's the latest thinking On how large you're willing to grow the total size of the development pipeline today? As I know, you've moved that threshold over the years just as a percent of EV.
And so how you're thinking about that given the various risks and opportunities?
Hey Austin, it's Matt. I guess there's a number of ways to think about it. You can think about it in terms of the size of the development rights pipeline, which typically represents 3 years of future start activity. You can think about it in terms of the size of development underway. In terms of the latter, we are well below kind of We've talked in the past about having a target range of 10% to 15% of development underway at any given point in time as a percentage of our total enterprise value.
I think we're at 5% or 6% right now. So, if we can find the opportunities, I think from a balance sheet point So, and as Ben mentioned, we're feeling pretty good about it over the next Couple of years at any rate. In terms of the development rights pipeline, if you think even if you take 10% of TEV underway, a TEV of Whatever mid-thirty billion ish, dollars 35,000,000,000 maybe going to $40,000,000,000 that would be $3,500,000,000 under way at any given point in time. That would say you probably want to have a Development rights pipeline of $6,000,000,000 or so, and $6,000,000,000 or even $7,000,000 So, we're looking to grow it.
A couple of things I'd add to Matt's comments. I mean, one obviously depends on the opportunity he said. And we hit on in our prepared remarks. We look at the our spread to where we're developing to market cap rates today, and our ability to by match funding And we think there are some pretty attractive development profits, right? That will drive activity.
And then the other part, there's our own development, but then there's also our Funding of other developers and that's a method we've been using and are looking to use more fully in our expansion markets Partially from a time perspective, right, we're able to partner up with developers who have sites that are entitled and ready to go and lets to get activation slightly sooner than if we were going and pursuing our own development right.
No, that's all very great color. You mentioned the match funding piece and the attractive spread versus dispositions. Clearly, we saw you use that this quarter with the new starts and level of dispose that occurred. So I'm just curious, historically, we have seen you use the forward ATM as well as mechanism when you had kind of good light and sight on future development starts and wondering given where the stock is and maybe some of the uncertainty that's out there today, Is that something that you'd look to use to lock in an attractive cost of capital today to fund maybe a potentially growing Size of the overall pipeline?
Hey, Austin, it's Kevin. Yes, I mean, you asked an interesting question, but it's Unfortunately, it's one that's inherently speculative. It sort of, as you point out, begins with uses. What do we intend to do? What's the return profile on that?
And then it comes back to sources. And as you know, this could potentially also be a long answer, but we have 3 primary markets. We have Unsecured debt, we have asset sales, which lately have been suburban asset sales and common equity, which is what you're alluding to there. Today, right now, all three of those markets, as Tim alluded to in his opening remarks, are Attractive. And that's one of the main factors when you think about how we might gather our sources.
One factor is clearly pricing and right now all 3 are relatively attractive from the standpoint of funding accretive developments. Then you get into the debate about which one is more attractive and you can have a little bit of a debate there. My own view right now and with things Where things stand today is probably based on their own historical pricing metrics. I'd probably rank unsecured debt, first Suburban asset sales, 2nd, and then common equity, 3rd. The reasonable minds can differ and circumstances matter, particularly with regard to The assets you might sell and the usage you might put them to and where we are from a balance sheet point of view.
2nd factor is obviously our capacity to increase leverage and the good news is there right that with revenue and NOI growth growing and with modest leverage right now at 5.3 turns, We do have capacity to increase our leverage, somewhat to support investment activity and so that allows us to tap that market if it makes sense. And the third factor is our capacity to absorb capital gains before we have to make a special distribution. And we tend to like to lean to that capacity Quite a bit lately to help buy assets in our expansion markets, but also to fund development as we're doing here with that activity. So A lot of choices on the menu for us today. So I don't know that we need to decide anything right now in terms of our capital plan for what's in front of us for the back Half of the year, what we are planning to do and what I alluded to in my remarks is tap the unsecured debt markets and the asset sale markets to fund What's in front of us and sort of but if we get more uses beyond that which we have in front of us, that's a little bit of how we think about it.
And I'd say the good news is having kind of attractive access to capital and the opportunity to deploy it accretively in development It's just a wonderful situation to be in. It means we're kind of like into a very strong part of the cycle where we can enhance earnings growth through accretive investment activity. So And that's an important differentiator for AvalonBay.
That makes a lot of sense. Appreciate the thorough and thoughtful answer, Kevin.
April. Thank you.
Thanks, everyone. Hope everyone's doing well.
I was just looking at your slide deck, page 10. I thought it was pretty interesting, the suburban versus urban kind of communities, the move in rate. Any thoughts on when maybe the urban communities would get above their 2019 levels? And maybe just what's built into guidance The rest of this year and where those could get to?
Yes. Josh, this is Sean. Good question. It's a question I'm not sure that has a completely notable answer, but I can say the factors that would relate to it. I mean, the urban environments In terms of what's dragging at this point in time, it's places that you might expect.
So places that are below the 2019 peak for move in values are like New York City, The district, a little bit in some of the urban submarkets within Northern Virginia And then, the urban submarkets in Northern California. And I think all of those are a function of various stages of reopening that they're in. And as the major employers call people back to work, what does that look like in terms of When it happens, is it around Labor Day? Is it thereafter? Is it everyone or is it partial?
What happens with the university campuses and Their housing, and one of the things that we don't know for sure in every case is some of the universities, they use the PAC man pretty tight. And as Tim referred to, If there's some, you know, detensifying that occurs, that should help support local demand outside the university campuses in terms of their dorm housing And various other factors like that really will influence what happens in these urban environments, and we should have a much better sense of that As we get beyond Labor Day, I would say, I think a number of us expect pretty good demand through Labor Day. What does that look like and how much does that boost asking rents and therefore lagging behind that would be move in values? Those would be the factors you'd want to think about In terms of when you get back to sort of those peak levels of move in rents. In terms of what's in guidance, we have feathered in continued growth across the markets, consistent with what we have been seeing.
And right now, Urban has been lagging and we do expect it to continue to lag the suburban of our elements, But catch up over the next few months is the way I would describe it in sort of general terms.
Okay, super helpful. And then, if we just think about your strategy, obviously, kind of a weird lease up period, Probably longer and some more all at once and probably a lot of other leasing periods. How are you thinking about kind of pushing rate into fall? And then is there anything you might have to adjust as far as your revenue management systems go as we kind of get into next year? Because I guess the timing of your leases is going to be changing, just maybe they're more in August, July than they would normally be.
Yes. Good question. A couple of different actually a couple of different questions in there. So first, on the latter part around lease expirations, lease expirations don't look The one piece that's different today based on the eviction moratorium and some of the rent increase caps that exist is Very little incentive for residents in some jurisdictions to actually go on to leases. So our month to month It's normally around 1%, it's about 3x that right now, around 3%.
So in terms of lease expiration profile, we're not too concerned about that. And given lease breaks that occur month to month as we move through the year, we're always kind of resetting lease expirations As we offer new leases to make sure that stays in check. So that's just something we normally do all the time. As it relates to the first part of your question, which is more around seasonality, As I mentioned in my prepared remarks, we really haven't seen any seasonal softening this year That would typically occur if you go back to sort of normal times, rents rise pretty asking rents rise pretty materially from January through, say, mid July, And then you start to see some seasonal adjustments and downward slope as you move through the back half of the year. We have not experienced that this year.
And by all the metrics that we see in terms of lead volume, visit volume, etcetera, low availability, we certainly don't see that in terms of the near term outlook over the next 30 days or so. The question would be, if you're thinking about what the risks are, The Delta variant and the impact on potential delays for reopening of certain companies and things like that, Might there be seasonality in, say, Q4 that we're not seeing today. That's a possibility. We do feel good about where we are positioned, though, because, Again, the spread between asking rents and moving rents is about 12%. Even if those asking rents start to decelerate a little bit, There's still a nice spread there to continue to grow move in rents even if asking rents do decelerate.
So again, we haven't seen that seasonal adjustment yet. But to the extent some macro factors impacted and we start to see it, we do have enough spread that we can continue to grow move in rents.
Great. Thanks for the time.
Yes.
Alexander Goldfarb of Piper Sandler.
Hey, good afternoon. One, it is pretty amazing how development has come back so quickly. So That's wonderful to see, just really eye popping. But along those lines, you guys now have the Avalon brand, you have Ava, you have Eves and now Kenzo or Kenzo, apologies if I mispronounced. Just some sort of an economic return basis and a development cost basis, What's the sort of range between the 4 brands?
And I understand the Eats is more of the older suburban stuff, but still part of your offering. But how do we assess
Alex, it's Matt. I guess I can Speak to it a little bit in terms of development economics and others may want to speak to it in terms of the existing asset base. But I mean, So you're right. Eves, we can't build Eves profitably. Nobody's been able to figure that out in this industry.
But, so that brings gross acquisitions through Avalon's aging into it over time, which has happened in some cases. It's really not so much about one brand necessarily being more profitable For generating higher yield than another, it's about having more, being able to serve more customer segments in a more tailored way, So that we're optimizing the opportunity on any given side. It's not necessarily that AIVA is going to generate a higher yield than an Avalon. That in certain locations where AIVA is more appropriate, it might be a better investment decision to program that We're the dual brand as we've done in some cases, than if it were an Avalon, and vice versa. So it's really and we think that by doing that, we're able To first do more business, because we can we have a broader product line to choose from.
And second, optimize any individual opportunity that comes along as opposed to having the same offering that we're going to force into multiple different submarkets And locations. Conso, we did underwrite that and look at that and we our thinking there was that There is this great underserved market of folks that want a new apartment, but don't want don't value all the other things that They're basically being over served by an Avalon or even by an Ava. And no one in the market is really delivering to that customer segment. And our analysis would show that between hard cost savings from programming it more lightly and operating savings by Operating it more likely in a more self-service manner, as well as the longer term CapEx savings that, we can get to a rent point, which is 10% to 15% below what an Avalon would be in that location and get a similar yield. So There are locations where you could do both.
But, and what we're finding there, at least so far, with the one we've done is the discount is less than that. It's more like 5%. So we're pretty excited about that. It's still early. We'll have to see how things play out kind of post COVID to really see where that settles in.
But that's the way I'd think about it.
Okay. That's helpful. And then the second thing is just sort of along the development. Just given the demands of especially suburban, but also People wanting more space for living or maybe just more housing type. As you guys see new sites, Is there more of an ability to either add townhouse or add, I'm not suggesting you guys getting single family, but add more elements that make your apartments more sort of Longer living, for people where you can hit sort of a different demographic that's additive, but still within the whole site plan make all the math work?
Absolutely, Alex. And I'd point you to our biggest start for the quarter, which is we just started Avalon Bothell Commons Phase 1. That's a deal in Bothell, which is a very high end infill suburban community on the east side of the Lake East of Seattle. That's a 20 acre site that ultimately we're going to program with 2 phases. And the first phase does have, I think, about 370 flats And about 100 rental towns.
And, that's a site where a couple of years ago, we might have sold a piece of that site to a for sale developer. And instead, we decided we would do the lower density component of the product ourselves as well. The average unit size There includes even in the flats, we have more flats with dens than we would have built in the past, so that there's work from spaces As well as the townhomes. So I think the average unit size there is about 10 70 square feet as opposed to other communities we might be developing and metric Last cycle that might have averaged 850 or 900 square feet per home. So that's definitely a trend we're seeing in our portfolio.
Okay.
Thank you. We'll next hear from Alex Kalmus of Zelman and Associates.
Hi. Thank you for taking my question. A question based on the eviction moratoriums and sort of the bad debt side, How many units or is this mostly from sustained non payers at this point
That are
causing the sort of sustained bad debt expense or is it a little more broad based? And then Yes. Secondarily, if the eviction moratoriums are lifted, what could this do to sort of the occupancy levels if Hypothetically, they were unleashed at one time.
Yes. Alex, Good questions. So on the first part of your question, sustained non payers, yes, that is for the most part the answer as it relates to the bad debt. On the second question, I kind of would maybe refer back to what I mentioned earlier on the various kind of eviction moratoria that's out there. Assuming nothing happens, there is federal level, there is state level, actions in place, there is local level actions in place.
The timing of all of those and when they are lifted will likely be different from jurisdiction to jurisdiction. And the ability to get people out based on the court system, how backed up it may be, etcetera, As a result of those things, we believe the sort of bleed in process as it relates to people leaving our communities either Their own choosing or through a legal process will take some time. And therefore, units coming back to the market, so to speak, The vacant units that have to be turned and then leased and occupied will probably be not just a 1 or 2 quarter process, So potentially a few quarters to work our way through. Yes, some people will leave early when they see sort of the light at the end of the tunnel and they need to do something. There will definitely be those people who will hold off to the very last minute, so they are really forced out and everything in between.
So therefore, We do believe it will work its way through the system over a period of time. The market where it's probably most concentrated for us and many others is in Los Angeles. So that one could get a little bumpy depending on what happens in that specific jurisdiction. But we still think there are residents who will choose different paths to their eventual outcome. And therefore, it may take, again, 2 or 3 quarters for it to work its way through the system.
And Based on conversations with many others, I think people expect a fairly similar outcome.
Got it. Makes sense. Thank you very much. And on the demographic side, with the new tenants, you have a 70 basis point bump in occupancy sequentially. Do they pretty much match the portfolio's demographic base?
Or are you seeing a little differences here and there depending Maybe market or the type of age or income levels?
Yes, also a good question. I mean, at the portfolio level, the changes have not been terribly material. If you look at the suburban portfolio as an example, incomes are pretty consistent with kind of pre pandemic levels in 2019. Average age is basically the same. It went from high 35s to low 36 range, so not a meaningful difference.
On the urban side, at the portfolio level, incomes are down about 6%, but average age actually went up. I mean, it kind of makes sense if you think about it because move in values are basically back at 2019 levels, while the urban move ins are still 7% to 8% below 2019. So your rent to income ratios have remained relatively constant and we've seen incomes come up as rents have come back. So it all kind of lines up. There are some nuances by region.
Incomes are up a little bit more in age as well in some of the suburban New York markets. But at the portfolio level, modest changes relative to kind of pre pandemic 2019 levels.
And that does conclude the question and answer session for today. At this time, I'll turn the call back over to Tim for any additional or closing comments.
Thank you, April. I know it's
been a long call. And thank
you all for being on today. And Just hope you enjoy the rest of your summer and stay well. Thank you.
And that does conclude today's conference. Thank you all for your participation. You may now disconnect.