Oct 27, 2015
Executives
Jason Reilley - Senior Director of Investor Relations Timothy J. Naughton - Chairman, President & Chief Executive Officer Kevin P.
O'Shea - Chief Financial Officer Sean J. Breslin - Chief Operating Officer Matthew H.
Birenbaum - Chief Investment Officer
Analysts
Nicholas Joseph - Citigroup Global Markets, Inc. (Broker) Nick Yulico - UBS Securities LLC Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Jana Galan - Bank of America Merrill Lynch Gregory A. Van Winkle - Morgan Stanley & Co.
LLC Dan M. Oppenheim - Zelman Partners LLC John P.
Kim - BMO Capital Markets (United States) Alexander D. Goldfarb - Sandler O'Neill & Partners LP William Kuo - Cowen & Co.
LLC Omotayo Tejumade Okusanya - Jefferies LLC Wes Golladay - RBC Capital Markets LLC Drew T. Babin - Robert W.
Baird & Co., Inc. (Broker) Conor Wagner - Green Street Advisors, LLC
Operator
Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities' Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Following the remarks by the company, we will conduct a question-and-answer session. Your host for today's conference call is Mr.
Jason Reilley, Senior Director of Investor Relations. Mr.
Reilley, you may begin your conference.
Jason Reilley - Senior Director of Investor Relations
Thank you, Robbie, and welcome to AvalonBay Communities' third quarter 2015 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion.
There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC.
As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance.
And with that, I'll turn the call over to Tim Naughton, Chairman and CEO, for his remarks.
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Thanks, Jason, and welcome to our Q3 call. Joining me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum.
Kevin and I have a few comments on the slides that we posted this morning, and then all of us will be available for Q&A afterwards. Starting on slide four, overall, results in Q3 were very strong driven by favorable operating fundamentals and healthy absorption of our lease up portfolio.
Some highlights for the quarter include Core FFO growth of more than 11.5% with year-over-year same-store revenue growth of 5.4% for Q3, which accelerated 70 basis points from Q2 and 110 basis points from Q1 and is the strongest rate of growth since 2012 that we've seen in our same-store portfolio. Including redevelopment, same-store revenue growth was 5.7% for the quarter.
Sequentially, same-store revenue growth came in at 2.6% or 2.7%, when you include redevelopment from Q2, which was actually the strongest sequential growth this cycle and in more than 10 years in our same-store portfolio. So, overall, we experienced very strong momentum in the operating portfolio this past quarter.
In addition, we're continuing to see strong external growth from our development portfolio as we remain on track to start and complete around $1.2 billion to $1.3 billion of new development this year with average yields in the mid to high 6% range. Most of the development underway is already funded with permanent capital including over $600 million of capital raised in Q3.
Turning now to slide five, we have updated our outlook for the year by modestly raising Core FFO by a $0.01 at the midpoint from our mid-year update and raising same-store revenues by about 20 basis points to a midpoint of 5%, or 100 basis points from our original outlook and more than 100 basis points from what we actually experienced in 2014. Same-store NOI growth is tracking at around 5.6% for the year at the midpoint, up 20 basis points from the mid-year update and 130 basis points from our original outlook.
Moving to slide six, our revised outlook is being driven by favorable trends in the operating portfolio as we're seeing same-unit rent growth remaining strong throughout the quarter, tracking above 6% or about 180 basis points above what we saw in Q3 of 2014, and new movements and renewals are both showing strength through the quarter with renewals running at right around 6.5% and new movements just under 6% for the same-store portfolio. Now performance does vary across regions and this can be seen in slide seven.
Starting in the upper left there, Northern California and Seattle are still generally leading the way although rent growth did moderate a bit in Q3. While job growth remains healthy in these markets, we are starting to see an increase in new supply and would expect that we'll continue to see some moderation in rent growth as a result.
In the upper right, New York and Boston are stable with same-unit rent growth of around 5%, very healthy levels, driven by healthy job growth in the 2%-plus range in those regions. And then lastly, at the bottom of the page, Southern California and Mid-Atlantic are in the earlier stages of their recovery and/or expansion cycle with growing strength most visible obviously in Southern California.
But the outlook for the D.C. market continues to improve with job growth rebounding in recent quarters and deliveries starting to stabilize.
Moving on to slide eight, now, as we look out over the next couple of years, we do expect, and I think we've talked about this the last couple of quarters, we do expect performance to start to converge across regions. In general, most regions are expected to experience job growth roughly in line with new deliveries.
The exceptions would include Seattle, if technology job growth slows a bit later in the tech cycle and economic cycle as expected, and Southern California, the region expected to have the strongest fundamentals over the next couple of years with modest level of new deliveries expected. Moving to slide nine, within the regions, suburban supply is expected to only grow at about only half the rate of urban supply.
In fact, suburban supply is not expected to outpace urban supply in any of our six regions over the next couple of years. While urban housing demands, on the other side of the equation, may be stronger than suburban, as we've seen in recent years, we do believe that the difference in demand is likely to be muted somewhat by the leading edge of the Millennials aging into their 30s where housing preferences start tilting more towards the suburbs.
I'd now like to turn it over to Kevin, who will provide some highlights on investment and capital activity for the quarter.
Kevin P. O'Shea - Chief Financial Officer
Sure. Thanks, Tim.
Turning to slide 10, we highlight the current performance of the nine communities in lease-up under construction during the third quarter that was more than 20% leased, as of mid October. As you can see in the slide, the performance of communities undergoing initial lease up is strong and exceeds our original underwriting expectations.
Specifically, for these nine communities, which represent $780 million in total capital costs, the current weighted average monthly rent per home is $100 above initial expectations. In terms of yield performance, the weighted average initial projected stabilized yield for these communities is currently 6.7%, or 30 basis points higher than our original projection of 6.4% for these communities.
Turning to slide 11, with U.S. multifamily transaction volume exceeding $130 billion over the past year, the transaction market continues to benefit from strong buyer demands and remains a compelling capital source for funding development, for harvesting value from our Fund platform and from improving the asset quality of our portfolio.
As you can see at the bottom left of the slide, we sold an asset in suburban Northern New Jersey last quarter and have sourced a total of $215 million year-to-date to be a wholly-owned dispositions with those assets being located in the Northeast and averaging 10 years of age and a 5.1% cap rate. To further take advantage of current favorable transaction market conditions, we also opportunistically increased sales out of our limited life Fund platform, adding three additional Fund II sales in Q3, all of which sold at a compelling pricing of mid-4% cap rate.
On the bottom right, you can see that in our cost of capital heat map our three principal sources of capital range from being reasonably priced to very attractively priced today at least relative to their historical precedence with asset sales and unsecured debt screening as our most attractive sources of capital to fund ongoing development at the present time. On slide 12, we highlight the company's funding position against the total projected capital cost of development under construction.
As you can see here, we have only about $500 million in long-term capital left to source against the $3.3 billion in development under construction after taking into account capital already spent to date, unrestricted cash on hand and projected annual free cash flow of about $300 million. As a result, in addition to our strong balance sheet position we enjoy a strong funding position on our external growth activity with about 84% to 85% of the value creation from ongoing development activity already locked in for our shareholders.
And with that, I'll turn it back over to Tim.
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Well thanks, Kevin. Just a couple closing thoughts.
Obviously 2015 is shaping up to be another strong year. We are seeing double digit growth in Core FFO for the fourth year out of the last five and total Core FFO growth, as you see on slide 13, since 2010 has been almost 90% versus the sector median of right around 50% which equates into about 500 basis points of outperformance and growth compounded annually over that five-year period.
Just given that all markets to some extent have experienced a healthy recovery, the differentiator really has been capital allocation which has really driven the outperformance. As we estimate that, about roughly 45% of this growth has come from external investment activity and about 55% from organic growth from the existing stabilized portfolio during that time.
Importantly, we believe we are well positioned to continue to outperform given that $6 billion to $7 billion development pipeline of compelling development opportunities. Much of that that is currently underway is already funded and a balance sheet that provides a great deal of flexibility to accretively fund future development.
So with that, operator, we'd now like to open the line for questions. Operator, Robbie, are we opening the line for questions?
Okay. Thank you.
Operator
Yes. Sorry.
And we'll go first to Nick Joseph with Citigroup.
Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)
Thanks. In your investor presentation last quarter you had a handful of slides indicating that we were in the middle of the cycle both in terms of U.S.
economic conditions, as well as apartment fundamentals. Has the economic volatility and performance of the credit markets in the last three months changed your view on either of these?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Nick, Tim here. Obviously just looking at the slowdown in job growth and some of the volatility we've seen in the credit markets it makes you – you keep an eye on it.
But no, I mean, fundamentally it hasn't changed our view in terms of where we are in the economic cycle and how long the apartment cycle is likely to play out.
Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)
Thanks. And then can you talk more about what you're seeing in D.C.
and if you expect the modest recovery that you've seen this year to continue into 2016?
Sean J. Breslin - Chief Operating Officer
Yeah, Nick, it's Sean. Based on what we've experienced this year and the outlook for job growth, as you look forward into 2016, the expectation is there will be a continued but modest recovery across the market.
Obviously, it depends on where you are within each market in terms of the supply considerations as to whether that recovery is moving on along a little faster, a little slower. So, for us, what we've seen most recently is that D.C.
has been performing relatively well, given the positioning of our assets that we have, with very little exposure to some of the heavier supply sub-markets within the district followed by suburban Virginia and then suburban Maryland. But as you move into 2016, the supply characteristics sub-market by sub-market starts to shift.
So it really depends on the competition of your portfolio and what your exposure is to new supply. In general, though, we expect the entire market to get modestly better as you move into 2016.
Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)
Thanks. And then just last question on the cost of capital heat map, I'm a little surprised that the equity doesn't screen a little better given that's based on a stock price of $185, which is 5% premium to consensus NAV and pretty close to an all-time high price.
So I'm wondering what goes into that equity component of the map?
Kevin P. O'Shea - Chief Financial Officer
Sure. Nick, this is Kevin.
In terms of the equity temperature, as we've talked about it in the past, there are four components that load into that with different weightings. About half the weighting relates to how our stock price looks compared to other investor choices, that is, the S&P 500 yield and the BAA bond yield.
And against those two items we're in the kind of the mid-60% range. If you look at the other half, which is really more of a corporate finance perspective or an issuer perspective, we prescribe about 40% weighting to how we compare to consensus NAV.
And on that basis we're about 55% in terms of a percentile ranking. But to your point, in terms of the attractiveness of the absolute pricing, that's reflected in our AFFO yields, which is about 10% of the weighting.
And on that dimension, we're about an 80-percentile ranking.
Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)
Thanks. Appreciate the breakdown.
Operator
Thank you. We'll take our next question from Nick Yulico with UBS.
Nick Yulico - UBS Securities LLC
Thanks. I was hoping, first off, you could talk a little bit more about the expense pressures you faced in the quarter.
And looking at your guidance it looks like it's going to – expense pressures get easier in the fourth quarter. Maybe you could talk about what's driving expense pressures easing and how we should think about some of that heading into next year?
Sean J. Breslin - Chief Operating Officer
Sure, Nick. This is Sean.
I mean, if you look at the quarter, there's a fair amount of noise in there. So just kind of walking through it, 60% of the year-over-year increase in the quarter really related to two items, insurance and taxes.
Taxes were up about 8.5% or $2.9 million. About $1 million of that relates to supplemental assessments that were accruals reversed in a prior period in last year which created obviously a headwind in terms of the year-over-year comp.
And then the balance is rate and assessment in different markets across the country, particularly the East Coast markets and a little bit of a pilot burn off in New York as well. And then on the insurance side, we had the property renewal and then you have the timing of claims and recoveries in insurance, which is extremely volatile, that was up 20%, 21% if you look at the third quarter.
But our expectation for the full calendar year is that's going to thin out and be closer to probably 10%, 11%, as an example. So we're going to see that trim out.
And then on some of the other topics in the quarter, repairs and maintenance being up is a couple of things. One is the timing of maintenance projects during that particular season when you're doing a lot of roof work and other things, as well as turnover costs during the quarter, which is sort of by design.
We talked about last quarter shifting our lease expirations around to take advantage of the rental rates we thought we could achieve during particularly June, July, August but even heading into September, which we did realize in the form of our sequential results which were quite strong. But obviously we incurred more turnover costs during that period of time to actually get those units turned and get people into them.
And to make one other comment just on the marketing side, the year-over-year increase and really the year-to-date increase as well on marketing relates to a couple of different things. One is in the third quarter a little more concentrated Internet advertising cost, which obviously relates to shifts in lease expirations and needing to spur more of a demand in the third quarter of this year relative to the third quarter of last year.
And then the other component that goes in there is customer service incentives related to either heavy CapEx at a building or when you have unexpected events, floods or otherwise that an apartment becomes uninhabitable and we had a little bit of that in the third quarter. And one thing to keep in mind, on a year-to-date basis is, we're still carrying the costs from the first quarter from the winter storms, which included repairs and maintenance, snow removal, other things.
So all that's reflected in either repairs or maintenance or marketing costs. As indicated in the release, we still expect to be within the range we provided and tighten that range so the midpoint is still 3.5%.
And what you're going to see is, as I mentioned, there are things that occurred in the third quarter related to our shift to lease expiration strategy that won't materialize quite as much in the fourth quarter. Lease expirations were down about 10% year-over-year in the fourth quarter.
In addition to that, there was a lot of noise in taxes in the third quarter. As I mentioned, we still expect property taxes to be in line with our original expectation for the year which probably is in the mid-3% range.
So if you put all those pieces together in terms of the shift in activity in the fourth quarter versus the third quarter and some of the one-time events, particularly related to taxes and insurance, you'd solve to getting sort of into that mid-3%s in terms of expenses for the full year.
Nick Yulico - UBS Securities LLC
All right. That's very helpful.
Just one other question on your development rights page. Can you break out for the Metro New York-New Jersey region how many of those projects are actually in New York City proper?
And then whether you would at all think about perhaps selling some of those projects since there is such a strong demand to build or to find land in New York City and yet it's hard for people to do so, meaning that those projects would have some pretty good land value today.
Matthew H. Birenbaum - Chief Investment Officer
Sure. This is Matt.
I can speak to that. I believe we only have one development right in New York City itself right now, which is the big Columbus Circle site.
So that's a big deal but most of those 14 development rights, obviously everything else is not in the City itself. And that deal, as we've talked about, we may sell a piece of it, either the retail component and/or we're exploring different options including for sale condominiums there either directly or through others.
So one of the great things about that site is it's incredibly flexible, the zoning is very flexible, we're not planning on pursuing a 421-a there, so it'd be 100% market rate. So we have a lot of options there.
But generally speaking, we generally aren't in the market to kind of buy and flip land as a general rule and really not equipped (19:56) to do that as a REIT frankly.
Nick Yulico - UBS Securities LLC
All right. Thanks.
Operator
Thank you. We'll go next to Austin Wurschmidt with KeyBanc Capital Markets.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Great. Thanks, guys.
I was just curious how you guys are thinking about your development funding plans today given that leverage has come down half a turn. So it seems like you have some debt capacity but you did mention that asset sales are a more attractive source of funds.
So how should we think about the balance of those two going forward?
Kevin P. O'Shea - Chief Financial Officer
Sure, Austin, this is Kevin. A couple comments here.
First, in terms of the timing of our – describing our capital plan, we're still in the budget process and we won't really have a precise guidance in terms of net external capital needs for 2016 until we get to the fourth quarter call in January. But that said, in terms of how we look at pricing today, as I indicated, asset sales and unsecured debt screen as most attractive.
The common (21:03) equity pricing is attractively priced from an issuer or corporate finance perspective, as reflected in my earlier comment, where on an AFFO yield basis our share price is in the 80th percentile. However, asset sales screen as relatively more attractive today based on sort of the percentile ranking that you see in the heat map, which was the 96th percentile.
So that's how we look at our capital choices today. Of course, capital market conditions change continually both in terms of the absolute pricing as well as the relative pricing.
And so that's why we don't really comment with precision in terms of our future capital or transaction market activity. But that said, there are sort of two points to think about as you fine tune your models for what our funding might look like over the next year.
The first you pointed out, which is at 4.9 times net debt to EBITDA our leverage in the third quarter was tracking a bit below our target leverage, which is 5 times to 6 times net debt to EBITDA. And so we do have capacity for debt issuance at that level, particularly when you consider the de-leveraging impact of continued market rent growth and stabilizing developments, which serve to drive that number down, all else equal.
And then the second point to think about when you come up with your assumptions for our funding next year is that next year we have below average level of debt maturities with about $280 million of debt coming due next year compared to about an average level of $500 million to $600 million. So, all-in-all, our net external capital need next year is likely to be a little bit less than it is and has been in recent years and our need for equity, whether it's in the form of asset sales or common equity issuance is likely to be a little bit more modest than it has been in recent years.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Thanks for the detail there. And then just curious what are the metrics or components that make up that 96% today on the heat map?
Kevin P. O'Shea - Chief Financial Officer
It's basically a measure of current pricing relative to the trend line, and we have dataset that we use – it goes back to I think about 2001.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Great. Thanks for the detail.
Operator
Thank you. We'll take our next questions from Jana Galan with Bank of America Merrill Lynch.
Jana Galan - Bank of America Merrill Lynch
Thank you. I was wondering if you could share a new and renewal rates for October and renewals for November/December?
Sean J. Breslin - Chief Operating Officer
Sure, Jana. This is Sean.
As it relates to October, we're basically running at a blended rent change at 5.6%, which is renewals running at 6.8%, which is slightly higher than we achieved in the third quarter, but new move-in rents starting to trend down as they typically do at this time of year into the low 4% range. And then in terms of renewal offers for November and December, we're basically in the high 7% range, and as we typically indicate, as you move into the fourth quarter, you probably see that the spread between initial offers and where they actually settle somewhere it's between 100 basis points to 150 basis points.
Jana Galan - Bank of America Merrill Lynch
Thank you. And on the supply side you provided on page nine, I would think it looks like a good run rate for you through 2017.
But particularly in your markets, the rate to build in these suburban markets are very difficult. Do you see this favorable supply-demand outlook going further than 2017?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Jana, it's Tim. It's obviously a function of the macro environment on the demand side.
As we've talked about, we're about 20 quarters, 22 quarters into this particular expansion. The 90s lasted 40 quarters.
So we do think the economic cycle, the macro cycle could last into 2019, just looking at historical precedence. But on the supply side, we talked about that last quarter.
It bears watching. There are a lot of people, builders, homebuilders, commercial developers, who are doing a little bit more in the multi-family world, the multi-family space.
So if you look at it from our perspective, if anything we probably expect it to trend down a little bit, just based upon opportunity and being later in the cycle and some markets just getting a little bit distorted where pricing gets out a little bit ahead of fundamentals and just makes less sense from a capital allocation standpoint to take that kind of risk. So we're geared to do about $1.2 billion to $1.3 billion a year right now for the next two to three years.
I think it kind of remains to be seen after that. But if I had to guess, I would suspect it would trend down from there.
Jana Galan - Bank of America Merrill Lynch
Thank you.
Operator
Thank you. We'll take our next question from Greg Van Winkle with Morgan Stanley.
Gregory A. Van Winkle - Morgan Stanley & Co. LLC
Hi, guys. I just wanted to get your thoughts on your Connecticut portfolio.
One of your peers announced they're selling all of their Connecticut portfolio and we've heard some reports that the market is slowing down there a bit. What are your expectations for that market?
And would you consider trying to do some opportunistic pruning yourself there?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
First part of that question...
Sean J. Breslin - Chief Operating Officer
Yeah. Greg.
This is Sean. Maybe I'll take the first part and then Tim can comment on the second part.
In terms of the Connecticut portfolio, for the most part the way we think about it is indirectly it kind of moves as New York moves a bit in terms of job creation. There's certainly – Connecticut has some of its own job centers, of course, if you're in Stanford or depending on where you are.
But it tends to run sort of slow and steady for us is the way I'd describe it, typically trailing the New York region. But it's not uncommon to see rent change in that market running – New York is running say in the mid-5%, Connecticut's probably running around 4%, typically lagging 100 basis points to 150 basis points.
Now it tends to be slow and steady and adds some diversification benefits to the portfolio in some form in terms of the slow and steady nature of the portfolio in Connecticut for the most part. And as it relates to trading activity there, Tim, do you want to talk about that?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Yeah, sure. To the extent we were to do more asset sales in Connecticut or frankly any part of suburban Northeast, it's really more strategic rather than I would say opportunistic and it's much a function of kind of where we are from a portfolio management standpoint and the opportunity we have to continue to build in those markets and just not getting overweighted in those markets.
Having said that, we wouldn't rule out doing something that's opportunistic. Where we think there's a portfolio of premium that might exist just through the transaction structure itself being a large portfolio and you might think that right now just given the wall of private equity capital that's out there and/or just an arbitrage opportunity where we just think the market value has got ahead of intrinsic value for a variety of reasons.
So it's not just kind of a slowdown in a market. To us it's much about whether we think it's going to slow down more than maybe the market thinks it's going to slow down and that's what creates sort of the arbitrage from our perspective.
So that would be how we would look at it from an opportunistic standpoint. But increased sales activity there would likely be really more strategic in nature from a portfolio allocation standpoint.
Gregory A. Van Winkle - Morgan Stanley & Co. LLC
Okay. And that kind of leads into my next question, what are your thoughts on asset pricing?
And generally how sustainable this low cap rate environment is as we move into 2016? I know you don't necessarily need to do, from a funding standpoint, any kind of big portfolio deal but what would your appetite be for doing something like your competitor did where you sell a sizable portfolio even if there isn't something you necessarily identified to deploy the proceeds into?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Maybe I could start on that last part because we've gotten a lot of questions offline about that. First of all, obviously our peer did announce a large portfolio transaction yesterday.
And obviously, we thought it made a lot of sense for them, just given sort of a large non-core basket of assets and markets, around $6 billion I think it was. And just given what their strategy has been, which is to transform their portfolio and move to fewer more urban markets.
So, from our standpoint, it's just a question of timing if that's our strategy, and it's hard to argue that it's not a good time to sell non-core assets today, just given the liquidity and activity in the private equity market. But for us, the same set of circumstances aren't really true.
It makes less sense for us. It's not out of the question.
We have much smaller basket of what we would consider non-core assets. I think you can just think about what our strategy has been over the years that makes sense.
We've really built our portfolio more organically over time through the development process and one-off acquisitions where we are an investor builder. We're not a merchant builder to be clear.
We're building a market that we intend to own for a long time. And we've really used the disposition lever, if you will, really to prune the portfolio over time.
We've sold $300 million to $400 million a year, typically cap rates around 5%, unlevered IRR is at 12% to 13% over the last five years, closer to 14% over the last 10 years. So we try to be smart about that when we're selling but we've really been able to do it really kind of in a more measured way, in part we don't have – we're not an UPREIT.
We're not a heavy secured bar. We just don't have the same kind of frictional costs that maybe some others in the sector might do.
So it's not out of question doing something opportunistic but I think it's just less compelling for us just given kind of what we've already done to date and just kind of our business model.
Gregory A. Van Winkle - Morgan Stanley & Co. LLC
Okay. Yeah.
That makes sense. And then last one quickly on Seattle and Bellevue, you guys have obviously stated you kind of have a strategy of preferring suburbs right now broadly.
Bellevue is a suburb where we're expecting to see a lot supply growth over the next couple years. And I think I'm right that most of your exposure in the Seattle area is in that Bellevue submarket.
Is that still a market where you like being more suburban exposed or could that be kind of an exception to the rule where you wouldn't mind shifting some of that exposure to the more urban core in Seattle? And, I guess, just your thoughts generally on how Bellevue is set up to weather the supply over the next couple years.
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Yeah. Let me start with that more broadly and then I'll turn it over to Sean to talk maybe more specifically about Bellevue itself.
Just to be clear, our investment strategy is focused on great MSAs with great structural advantages and we favor certain submarkets within each of those MSAs, some urban, some suburban. And we think urban, just to be clear, has been a compelling opportunity over the last cycle.
We created a new brand around it, particularly as it related to the Millennial segment. But as it relates to when we make bets, I mean we're agnostic.
It depends on where we are in the cycle and how urban is pricing versus suburban and it's going to vary across markets. And while generally we're seeing more supply in urban markets, there are some suburban markets like Bellevue that you point out where we're seeing a lot of supply.
Having said that, downtown Seattle is still seeing a lot of supply from a comparison standpoint. But, Sean, maybe you can just talk a little bit more about Bellevue and what we're seeing there.
Sean J. Breslin - Chief Operating Officer
Yeah. Greg, just to give you some perspective, certainly we're going to see an increase in supply in Bellevue as you move into 2016 but it hasn't been zero.
As you look back over the last 12 months to 18 months, instead of running probably in the 4%, 4.5% range, supply is projected to increase up to 7% to 8% of inventory next year across Bellevue. And the one thing you have to keep in mind is Bellevue is a pretty broad market.
You have sort of what you might think of as the CBD of Bellevue but then there's a lot of suburban neighborhoods where there's product coming online as well as it bleeds over towards Redmond. But if you think about what the supply is today that's been coming online, we're still doing rent change in that market that is on the renewal side 8% to 9% and if you look across the Bellevue assets, they've been holding in right in line there with the rest of the East side portfolio that we have over in Redmond or anything that we have up in Lynnwood.
The laggard has been the downtown sort of Queen Anne market in terms of rent change, which has been in the 4% to 5% range, as compared to 8% to 9%, 10% across the East side and the North end. So, as you look forward, there'd probably be the expectation for some slowing in Seattle overall including what's happening in the Bellevue, Redmond and other East side markets.
But if our recent experience is helpful in projecting next year it probably is going to hold up better than people think.
Gregory A. Van Winkle - Morgan Stanley & Co. LLC
All right. That's very helpful.
Thanks a lot, guys. I'll pass it on.
Operator
Thank you. We'll take our next question from Dan Oppenheim with Zelman Associates.
Dan M. Oppenheim - Zelman Partners LLC
Thanks very much. I was wondering a little bit about the Chino Hills development, where, I guess, the western edge of the Inland Empire, but normally would expect developments for you to be a little bit more coastal.
Wondering how you think about that in terms of just reflecting some of the challenges in getting sites in Southern California, and particularly just wondering, given whether it's Chino Hills or a little slightly east in Eastvale, the for sale market is not so expensive there, so there can be some opportunities and issues with turnover.
Matthew H. Birenbaum - Chief Investment Officer
Hey, Dan, this is Matt. I guess I can take that one and Sean may want to chime in as well being a native of Southern California.
But we just saw that as a good development opportunity. We do have an appetite to continue to do more in Southern California.
It was a very low risk kind of structure in terms of the deal. It had already been approved.
So it was entitled. It's a very simple three-storey block-up product, it's a very low execution risk and assets are trading in that sub-market at cap rates that are still significantly below where we see the yield on that deal.
So we think there's reasonable value creation there. It is in a great school district and actually single-family values right around there are in the $500,000 to $800,000 range and even north of there.
So it's actually a pretty attractive living environment, good retail. We probably aren't looking to go further east certainly but we think it's a fine deal.
Sean J. Breslin - Chief Operating Officer
The only thing I'd add is that – I mean, what you've seen from us is certainly a focus on some of the coastal sub-markets and more infield locations, whether it's Huntington Beach or along the coast, just down towards San Diego or up in Hollywood. But we have looked at opportunities in what we think are some supply protected sub-markets that some people may think of as sort of B sub-markets, but there is demand for some of the higher end housing that we can provide in some of these markets.
So if you look at our development attachment you'll see sub-markets like Glendora, obviously you referenced Chino Hills. We completed a couple of properties in San Dimas and sub-markets like that where we think we're producing pretty good value creation at a relatively supply protected sub-market that may not be a target for a lot of other competitors.
Dan M. Oppenheim - Zelman Partners LLC
Great. Thanks very much.
Operator
Thank you. We'll take our next question from John Kim with BMO Capital Markets.
John P. Kim - BMO Capital Markets (United States)
Thank you. I had a question on the change in your lease expiration strategy resulting in the occupancy decline this quarter.
It sounds like that you believe the occupancy dip is just a one-off, and I just wanted to clarify that was the case. And also if you could just update us on the percentage of your portfolio that you expect to expire each quarter?
Sean J. Breslin - Chief Operating Officer
Sure, John. This is Sean.
A couple comments. One, in terms of occupancy, occupancy has rebounded and we're back up in the call it 95.6% or 95.7% range in terms of physical occupancy.
And we would expect it to hold probably in that range for the quarter, maybe slightly higher, slightly lower depending on how things evolve here. One of the things you have to watch for is lease breaks which typically represent somewhere around 30% of all move outs that we tried to adjust our lease expirations to make sure that when you include lease breaks, the volume of inventory that we're supplying to the market is appropriate, given what the demand patterns are in each market, and each one a little bit different from a seasonal perspective.
When you move into the fourth quarter, as I referenced earlier, we expect expirations to be down about 12% year over year. And one thing to keep in mind is managing lease expirations is sort of a continuous process because you have lease breaks and other things that occur, as I referenced.
So you're always trying to figure out what are the offers that you need to make to people versus not make to people so that things stay where you sort of need them to stay. If you think about it, generally speaking, what I'd say is across the quarter it is typically about 20% in Q1 and then up to 28%, 32% and then back down to about 20%.
That's been the historical average. To give you some perspective, the activity in the third quarter was closer to about 36% of inventory, and the fourth quarter we're expecting, depending on lease breaks again, which we'll know at the end of the year what exactly it was, probably closer to 17% or 18% of transactions in the portfolio.
John P. Kim - BMO Capital Markets (United States)
Okay. Great.
And then on the stabilized development yields on slide 10 of your presentation, it dropped a little bit this quarter to 6.7% versus that same number in the second quarter presentation. I know some of this is due to mix, but I was wondering if there was anything else driving this number?
Matthew H. Birenbaum - Chief Investment Officer
This is Matt. No.
It really is – the basket changes every quarter, and I can't remember what rolled off last quarter, but we had – we're always adding new deals and old deals rolling off, so as the geographic mix changes, that's going to move around a little bit.
John P. Kim - BMO Capital Markets (United States)
Okay. So nothing on the cost side?
Matthew H. Birenbaum - Chief Investment Officer
No.
John P. Kim - BMO Capital Markets (United States)
Okay. And then finally for me is can you provide some more color on the sales on Value Added Fund II this quarter, either IRR or economic gains?
It seems like it's lower than what you achieve in your wholly owned portfolio and if there's anything we should read into that?
Kevin P. O'Shea - Chief Financial Officer
John, this is Kevin. It's a private vehicle, so we don't disclose unlevered IRRs for that vehicle.
The gains and the performance of that second fund has been robust, nothing short of robust and a lot of that is driven based on the timing. We had our final closing on that fund in April of 2009.
So those assets were bought in 2009, 2010 and 2011, so they all enjoy and have enjoyed to the extent we've harvested those assets, significant gains.
John P. Kim - BMO Capital Markets (United States)
So given that success, are there any plans to raise additional funds?
Kevin P. O'Shea - Chief Financial Officer
That's a topic we've discussed before in the past. We certainly have liked the fund business, but from a strategic perspective it does raise some complications.
In particular when we have a fund actively investing in new product, it does tend to represent our exclusive acquisition vehicle which prevents the wholly-owned company, the parent company from buying on our own account. So it does create a little bit of a conflict there that is something that is a bit of a challenge.
And from a relative size point of view it's a smaller business relative to where we are now and tends to not to move the value creation needle quite as much. So while we've liked the business and certainly have benefited from it, we're not actively involved in trying to raise another fund right now.
John P. Kim - BMO Capital Markets (United States)
Okay. Great.
Thank you.
Operator
Thank you. We'll go next to Alexander Goldfarb with Sandler O'Neill.
Alexander D. Goldfarb - Sandler O'Neill & Partners LP
Good morning. Tim, just a first question.
You were talking to, in response to one of the earlier questions on dispositions, whether large scale or small, that you guys view it more tactically. And I'm just sort of curious, is that because there's sort of asset base that you guys seek to maintain to support the development program vis-à-vis your credit metrics, or is it more fundamental thing that you wouldn't want to sell more and have to – or actually get your thoughts on selling more to pay a special dividend, if within the current Avalon structure and funding the development program, if there is enough room to do something large to return capital to shareholders, and clearly you guys have created, between your development spread and where the assets trade in the private market.
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Yeah. There's quite a bit in there.
Let's see where to start. In terms of the volume that we can do just from a tax and sort of capital efficiency standpoint, what we're doing today basically is the level that you can do before you start getting into an issue of potential distribution, so, of gains to – through a special dividend.
Now as I mentioned before, I mean, that doesn't mean we wouldn't do one. I'm just not sure that from our standpoint the conditions are such that it makes sense in terms of pricing today.
For instance, relative to just NAV, where we think most assets trade relative to intrinsic value. And then we just don't have that much non-core.
Again, I think what our peer did made a lot of sense just given kind of where they were positioning their portfolio. We've been basically in the same markets for 20 years.
And so for everything we do is either additive or is really about pruning and managing the portfolio at the margin rather than kind of wholesale, making wholesale transformative changes at this point. It's how we looked at the Archstone transaction.
For us it was additive. We had to raise a lot more external capital as part of that transaction even though we were the smaller part of that transaction.
Again, because we weren't looking at some of our existing portfolio as trade capital, to be honest. So there's always some conditions which it could make sense to do a special dividend.
We did it back during the credit crisis when asset sales were kind of another way to sort of tap the secured financing of the GSE market beyond just debt, and there was always some unique conditions that you might – you have to be open to. I'm just not sure it makes as much sense for us as it might for others in the sector...
Alexander D. Goldfarb - Sandler O'Neill & Partners LP
Okay. And then Kevin, in response to one of the earlier questions on explaining the cost of equity, why it's the lower of the three, you mentioned, if I heard correctly, something about relation to S&P valuations and corporate credit.
If you could just expand on that, because I would think that the big driver would be where your implied cap rate is and FFO yield and the value creation of investing the capital versus how Avalon's stock relates to other corporate public companies.
Kevin P. O'Shea - Chief Financial Officer
Sure, Alex. Yeah.
I probably should have explained it a little bit better. We've talked about the heat map in the past and – so maybe a little bit of review is in order.
In terms of the equity pricing there are four components that have their individual weights that we use to drive the overall percentile ranking, which in this case is 62% for our equity temperature. Two of the components, as I mentioned are really more from an investor perspective, while the other two relate more to a corporate finance or an issuer perspective, which is I think the point you're making.
And this is just simply how we've constructed it. We find it to be relatively informative to look at both sides of the equation, if you will.
In terms of the components that relate to how our share price might look from an investment perspective to an investor who can invest across different asset markets, we look at how our share price, the relative earnings or AFFO yield on our share price relative to the earnings yield on the S&P 500 and that's a 25% weighting, and then also against Baa bond yields. We look at that spread between our AFFO yield and Baa bond yields and that's a 25% weighting.
And we find that to be pretty informative. And basically what those tell you today is that, that our stock in terms of its current pricing today relative to those two markets is somewhat attractively priced but not terrifically so, and as the temperature screens in kind of the mid-60 percentile ranking for those two items.
I think what you're really getting at is trying to understand how we look at things from a corporate finance or issuer perspective. And there the two metrics we look at are how our share price trades relative to NAV.
And for the purpose of this exercise we compare it to consensus NAV. From an actual corporate finance perspective we compare it to our own estimate of NAV, of course, but we don't publish that.
But to give investor's insight into our thinking on that we compare it to consensus NAV. And so that measure really today gets a 40% weighting because it matters a whole lot to us how we think about it because fundamentally when we're sourcing equity, we can either issue common equity or we can sell assets.
But we also want look at how our share price trades on an AFFO yield basis to get a sense of kind of our earnings multiple and how attractive it looks like on that dimension and that gets a 10% weighting.
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Hey, Kevin, if I could just maybe because, Alex, I don't think sort of fully answered your question. I think sort of broadly underneath it is really kind of getting at the heart of capital allocation.
And obviously I think with the sales of a big portfolio, it just raised a lot of discussion around that issue and certainly at least within our space. And certainly asset sales are just one – as is raising equity, but asset sales one lever that we have.
But from our standpoint, I mean, capital allocation is really so much more than that. It's about raising capital and how you deploy it, which Kevin's talking about how we raise it.
Just look at it in a very disciplined way in terms of the options we have available to us, how you deploy it, whether through acquisitions, whether through development, whether through re-development, which market you're deploying it, how you grow it. To grow NAV and residual value and you can recognize, as a public entity, it can be recognized or materialized through a number of ways.
Certainly through selling assets and showing attractive unlevered IRR, through growing free cash flow, which as we point out on the slide we've been able to grow Core FFO by around 12% compounded this cycle versus 7% for the sector. It's how you grow dividends which we've been able to grow for 5.5% kind of on a compounded basis over 20 years, its total shareholder return that could be recognized that way.
So there's a number of ways that it could be recognized, but there are opportunities every once in a while as we understand it, it's arbitraged just pricing in different markets and try to take advantage of it. We measure ourselves by the results on all those metrics, not on any one of those and – but it's about doing all these activities well that ultimately allows you to outperform from our perspective.
And as I said earlier in my prepared comments, capital allocation really is the differentiator. It's really kind of you look across all markets.
Other than the West Coast which has dramatically outperformed, we've had a really healthy recovery. And so I don't feel like I maybe did a good enough job at the beginning, but I think that's really what kind of occurred, as I sort of reflected on your question.
Alexander D. Goldfarb - Sandler O'Neill & Partners LP
Okay. I mean, it definitely creates some good NAREIT conversations, but it would seem like there's an odds between what investors find your stock attractive when it's super cheap, whereas you guys find it attractive when it's fairly or healthfully valued, so that would seem to be a tension between the two, but probably that's good for a NAREIT discussion.
So, thank you.
Operator
Thank you. We'll take our next question from William Kuo with Cowen & Company.
William Kuo - Cowen & Co. LLC
Hi. Thank you.
I wanted to follow up on the urban versus suburban discussion. With your increasing focus developing in suburban albeit infill transit oriented and your comments about favorable supply trends and your prepared remarks about the demographic wave that might move further out into the suburbs.
Is it your view that over this next apartment cycle that these suburban markets might outperform urban, especially versus kind of prior cycles?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
To be honest we think it ebbs and flows, to be honest over the course of a cycle. And again it's one of the reasons why we say we're agnostic.
We do think there are points in cycles where things just get either overpriced or undervalued and we – it's our job to trade on that just like it is the investor's job. They may like a number of different names in the apartment sector, but you allocate capital based upon price, price has to enter into the equation.
And if everyone sold stock today, everyone would get the same price but everyone would have a different return and it would depend on when the price and timing of that investment, that investment was made. And just like investors are on this call, we're trying to trade on our business intelligence in our markets, in part that has been developed over 20 years of having a presence in these markets.
And while we can like a thesis a lot, we like it at a value and at a price. So, over the next couple of years, would I expect suburban to outperform urban?
Yes. I would, largely based upon what's happening on the supply – the supply dynamic and to a lesser extent on the demand side.
If you look at just – what's going to be growing over the next 10 years is that 35 to 44 aged cohort, their propensity to live in urban environment is less than the 25 to 34 cohort, which is going to start to flatten in terms of its growth. We're actually expecting to see twice the rental housing demand from the 35 to 44 cohort than the 25 to 34 cohort, and they have a higher propensity to live in the suburbs.
And so that was really kind of what was behind that comment. We do think there's been a little bit of a secular shift to urban living, all other things being equal to living in a urban an environment, but you can't ignore the demographics and life stage that people are in.
William Kuo - Cowen & Co. LLC
Okay. That's fair.
And then maybe just switching gears here, I wanted to see how you guys thought about to the extent that companies like Airbnb have had the effect of adding to hotel supply by potentially removing housing supply, have you assessed the impact of the passage of Prop F in San Francisco, the impact that would have on supply and how that would affect your internal outlook – internal growth outlook for that market?
Sean J. Breslin - Chief Operating Officer
Hey, Bill. This is Sean.
Really few things actually, one maybe as a follow-up to your last question, and then I'll address the Airbnb. Yeah.
Tim was talking about the performance of urban versus suburban over the next couple of years. Just as a follow-up to that, we are seeing that difference occur now in the markets.
We highlighted that a little bit in the last quarter call, and we continued to see pretty good spread between urban and suburban performance. At this point, just to give you some sense, in our portfolio the suburban assets are running on a year-over-year basis closer to about 6% as compared to the urban assets that are in the low fours.
Some of that's a function of geographic mix, but even if you look at the performance of the assets within the respective markets, for the most part we're seeing the suburban assets outperform and in some cases it's a reflection of sort of the lower price point B assets in certain markets, but also just to even some of the newer wood frame deals in some of our suburban submarkets as compared to the urban environment, where you are seeing a fair amount of supply, whether it's the core of Boston, downtown Seattle, downtown LA still a lot of inventory, South of Market in San Francisco, et cetera, et cetera, so just to follow up on that for you. And then as it relates to Airbnb, yeah, there's obviously a lot of chatter out there in the hotel space and it's sort of bleeding into our space, at this point, in terms of the impact of Airbnb on various businesses.
There is a number of initiatives out there including what you cited in San Francisco. It's being taken up in some other markets as well.
It's hard to know exactly how that's going to play out. There's a lot of money being thrown at it from both sides.
I would just say that we're continuing to evaluate the potential impact on our business in terms of listings that might be occurring at our communities, what opportunities we may or may not have to participate in it. There's a lot of land use regulations and zoning issues involved in it, there's tax issues.
So I think it's going to be several quarters before this is fully resolved and we understand the potential impact on our business. It's probably a little easier to understand on the hotel business at this point than it is in our business, but I'd say the industry overall is still studying the potential impact given the listings that we're seeing.
It's creating more inventory and supply in some of our markets and Tim may have a few...
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Yeah. This is a broader comment.
I mean, it's a disruptive technology, right? When you look at all disruptive technologies, whether it's Uber or others, the regulatory framework always follows and it can take a long time to play out.
It may not be a couple quarters. This may really be playing over the next 5 to 10 years in terms of the impact on our business.
And there's potentially ways for us to play it that are both potentially positive as well as potentially it could be detrimental in terms of the customer and the resident experience for those who aren't necessarily looking for transient demand right next door to where they live. So I think it's really not even in the first inning at this point in terms of the impact ultimately to the apartment space, but I think it's going to be a while before it fully plays out.
William Kuo - Cowen & Co. LLC
Great. Thanks so much.
And then maybe just a quick housekeeping thing, you gave renewals and new rents in October of 6%, 8% and 4%. What were they October 2014?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
October 2014, I don't have those right in front of me. I'd be happy to send you notes later with that data if you'd like it.
William Kuo - Cowen & Co. LLC
Okay. That'd be great.
Thank you. That's all I had.
Operator
Thank you. We'll take our next question from Tayo Okusanya with Jefferies.
Omotayo Tejumade Okusanya - Jefferies LLC
Yes. Good morning.
I may have missed this earlier on, but could you talk about the cap rate for the Lyndhurst disposition?
Matthew H. Birenbaum - Chief Investment Officer
Sure, Tayo. This is Matt.
That was the low 5s%. I think we said it was about a 5.1%.
Omotayo Tejumade Okusanya - Jefferies LLC
Okay. 5.1%.
Okay. That's helpful.
And then, in regards to operating expenses, thanks for the outlook on 4Q 2015. (58:45) parts of that that you guys can control, but I'm just curious how, again how confident do you feel like things like the property taxes and the insurance start to come back in the quarter?
Or how possible is it to kind of get another negative surprise as it pertains to some of those line items?
Sean J. Breslin - Chief Operating Officer
Yeah. Tayo, this is Sean.
As I mentioned earlier, on the property tax side I mean different things can happen, of course, but the level of an unknowns at this point sitting in October is far less than what it was certainly last quarter. And in terms of the change in taxes as an example I wouldn't say that was unexpected.
We had the supplemental assessment reversal on the accrual in Q3 of last year. So we knew that was coming and we expected third quarter to be a bit of a spike in taxes.
On the insurance side, we sort of know what the premiums are. Now, at this point, that's big, just the timing of recoveries and claims and things of that sort, so there's a little bit of noise in insurance and taxes potentially, but not nearly as significant as what we experienced in the third quarter.
And then the other categories, do reflect sort of our expectations based on lease expirations being down, turn volume likely being down. So unless you had a significant spike in lease breaks, you should see some of the R&M numbers sort of trend down.
And then typically you're going into a season where some of the scheduled projects that we have on the maintenance side start to thin out because a lot of that's done in the summer time. So we have reasonable visibility, it's not 100% confidence, that's why we provide a range.
But we have reasonable certainty as it relates to the range we have provided.
Omotayo Tejumade Okusanya - Jefferies LLC
Okay. That's helpful.
Thank you.
Sean J. Breslin - Chief Operating Officer
Yeah.
Operator
Thank you. We'll go next to Wes Golladay with RBC Capital Markets.
Wes Golladay - RBC Capital Markets LLC
Hey. Hello, guys.
Can we go back to the Airbnb topic real quick? I know you mentioned you might want to take part in the benefits of having Airbnb in your communities.
But what is your view on having a tenant run an operation currently? And is there any incremental liability for Avalon?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Still really too early to tell in terms of kind of all the implications. I mean, when I was talking about on the positive side, there's potential we could share in some of that revenue.
And I mean, honestly, when you look at some of the markets we do business in, and particularly in some of the urban markets, they are having sort of a virtual roommate. It allows people to pay more potentially for in terms of rent if they can off load some of those costs.
What we do know is generally people aren't taking in somebody that's taken a couch or an extra bedroom. They're usually taking a whole unit.
I think more than 85% are taking a whole unit and it tends to be a lot of international travel right now and it does violate a lot of zoning codes in terms of staying. So for the most part we – we've talked with Airbnb and they've been very transparent about it.
But for the most part, it's being done under kind of a cloak of secrecy by the resident who's meeting somebody at the coffee shop around the corner. And that will play itself out.
It's sort of the regulatory sort of world, sort of starts to sort itself out, and we develop our own strategy in terms of how much we want to embrace it and/or frankly not facilitate it. So like I said in my first remarks, we're not even in the first inning in terms of sort through that.
Wes Golladay - RBC Capital Markets LLC
Okay. That's fair.
I think everyone is trying to get a handle on the topic. Looking at rental rate increases, are you seeing any markets where there's price sensitivity or an increase in bad debt expense?
Sean J. Breslin - Chief Operating Officer
Yeah, Wes. This is Sean.
In terms of price sensitivity, I guess, what I would say to that is given where we are on the cycle with above trend rents, there's certainly more price sensitivity than if you look on average over time. Every market is a little bit different in terms of sensitivity.
I'd say the markets where it's probably most pronounced are the ones you might expect, which is Northern California and Seattle, where you've had high single-digit, double-digit rent increases now for two to three years in some cases. So there's probably more price sensitivity there.
But if you look at it from a global perspective, on a year-over-year basis, average income in our portfolio of our residents is up about 6.5%. And if you look at that as it compares to year-over-year change and sort of affected move-in rents running in the mid 6s is sort of a parity at this point.
So if you're seeing that kind of income growth out of our markets, we should be able to realize above trend rental rate growth on a sustainable basis.
Wes Golladay - RBC Capital Markets LLC
Okay. Thanks for taking the question.
Sean J. Breslin - Chief Operating Officer
Yep.
Operator
Thank you. We'll go next to Drew Babin with Robert W.
Baird.
Drew T. Babin - Robert W. Baird & Co., Inc. (Broker)
Good afternoon. Just wanted to dig in more on the 35 to 44 demographic.
It's obviously a demographic that tends to prefer the suburbs because school districts become relevant. But in this cycle, given kind of the Millennials' desire to be in the city and the amenities that come in the city, the move to the suburbs, do you think that just given that there aren't as many amenities in the suburbs, do you think that that demographic is more inclined to just buy a home at that point than rent in the suburbs?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
They might. It's interesting.
If you actually look at behavior of the 25 to 34 segment, which most people would consider kind of the heart of the Millennials, they've actually changed their behavior less than the 35 to 44 segment in terms of urban living. In fact, their – I mean, a lot of it just comes back to affordability.
In fact, their behavior, it hasn't changed hardly at all in the last five years in terms of the propensity to live in – it's like 30 basis points. Conversely, the 35 to 44 segment, that's where – and I think it's really in the 35 to 40 segment if I had to guess, they've changed their behavior the most.
And I think part of that is they're getting married a lot later, they're having kids a lot later, they're not at the school decision until maybe sometimes into their 40s when their kids are 5 or 6-years-old. And so, I think they're the ones that have probably been – and the data shows, that they've been extending their stay in an urban environment later.
I think a lot of it ultimately, like I said, I think a lot of it ultimately turns on schools and some of the options. People usually move sort of three big moves in their lives.
One is after college. One is when the kids are getting ready for school, and the other is retirement.
And there's certain things that can happen in a community that can help shape that. Certainly just urban environments being a more livable place.
Some of these emerging neighborhoods be transit, the quality of transit improving and everything else has helped stimulate some demand within that age cohort, but ultimately if schools don't get better, I still think there's a double back to the suburbs for most of that population.
Drew T. Babin - Robert W. Baird & Co., Inc. (Broker)
That's helpful. And, secondly, just on (1:06:12) going into next year, 2015 for the most part, obviously your West Coast markets have outperformed the East.
I expect that to probably be the case again next year, but as you look at your East Coast markets, supply does look to be dropping off some in D.C. and Boston in certain areas of the New York metro area.
What markets or submarkets on the East Coast are you most excited about kind of qualitatively going into next year?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Sean, you want to maybe take it?
Sean J. Breslin - Chief Operating Officer
Hey, Drew. This is Sean.
I'd make a few comments as it relates to the East Coast and I think it ties in really with what Tim referenced earlier in terms of the difference between suburban and urban in that if you think across even the East Coast markets, maybe starting up in New England, and you talk about supply, we're in a lot of very protected suburban submarkets in the Boston region. And if you think about what's happening there, supply is certainly starting to moderate in the urban core, but you're talking north of 5% in 2015, close to 3% in 2016 as compared to the suburban submarkets in Boston, 1.5% sort of this year, next year.
Feel pretty good about basically the suburban portfolio in Boston performing well. New York, it probably depends on really where you are.
In terms of our portfolio, we don't have a lot of stabilized assets in Manhattan but the supply protected pocket really for us is probably up at Morningside Heights. There's not much going on there.
That property that we have there has performed well. Midtown West is getting a fair amount of supply, so some expectation for that to be a little bit soft.
And then if you expand outside Manhattan into the Boroughs, we've get two large towers, Long Island City and Queens that pretty much the supply has been delivered there, performing well. Brooklyn is going to have some supplies.
We probably need to be a little bit careful there. We have one deal delivering at this point, a little bit early, which is good but there's going to be more supply next year.
So in and around New York City, it sort of depends on where you are and as you get into the suburbs there's very little supply in the suburban towns and there's been great development activity for us there in terms of value creation opportunities from a development perspective. In terms of the operating portfolio, as I mentioned earlier, as it relates to Connecticut, suburban New York is sort of the same in terms of slow and steady 3%, 4% kind of numbers probably in terms of rent change relative to being in Manhattan, it might be 6%.
I referenced that earlier. So, certainly it depends on where you are but overall the suburban market should do fine.
As you come down to the Mid-Atlantic, it's really, again, a function of position in the portfolio but expecting supply next year to be about the same. The expectation for job growth is about the same as this year, but you have other effects that we've talked about in terms of unbundling and stuff that's supporting better revenue growth.
But I still expect the D.C. metro market to be in a slow pace of recovery as compared to a spike recovery.
I don't think anyone is expecting that in D.C. given the nature of the job environment here, what happens you're going to have churn obviously as you move forward into next year with an election year, but I don't think anyone is expecting the Mid-Atlantic to spike in any form or fashion.
So hopefully that gives you a quick rundown on some of the East Coast markets.
Drew T. Babin - Robert W. Baird & Co., Inc. (Broker)
That helps. Thank you very much.
Sean J. Breslin - Chief Operating Officer
You got it.
Operator
Thank you. And our last question will come from Conor Wagner with Green Street Advisors.
Conor Wagner - Green Street Advisors, LLC
Good afternoon. I was hoping if you guys could quantify the impact of property tax abatement burn-offs over the next couple of years?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Yeah. Conor, I'll give it to you right now.
It's running about 45 basis points in terms of impact on property tax year-over-year growth. And we haven't run all of our numbers for next year, but I wouldn't be surprised if it's in that relevant range.
Conor Wagner - Green Street Advisors, LLC
Okay. So 45 basis points on total expense growth and – correct?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
No, 45 basis points of property tax growth.
Conor Wagner - Green Street Advisors, LLC
Okay. Of property tax growth?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Yeah, yes.
Conor Wagner - Green Street Advisors, LLC
Okay. Great.
Thank you. And then where did you guys add development rights this quarter, the three?
Matthew H. Birenbaum - Chief Investment Officer
Yeah. Hi, Conor, it's Matt.
Conor Wagner - Green Street Advisors, LLC
Hi.
Matthew H. Birenbaum - Chief Investment Officer
Those were all actually in New England and they were all kind of infill suburban. Two of them were actually kind of in transit locations, all wood frame.
Conor Wagner - Green Street Advisors, LLC
Okay. And then following up on that, Tim, you mentioned earlier that some markets are screening relatively unattractive for development.
Could you identify those markets or maybe not sub-markets but more broadly?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Yeah. We're certainly more cautious in Northern California, Conor.
Again, just given where a combination of land pricing, construction cost have been and then just aggressive behavior on the part of market participants and willing to take entitlement risk and where our view kind of risk and maybe long-term return have gotten out of sync and just sentiments gotten ahead of longer-term fundamentals. You know it well, Northern California and Seattle, to a lesser extent, are much more volatile markets and you have to take that into account in terms of your investment and your development strategy in those markets.
It's been their history since – I don't know maybe since the gold rush in the 1850s and I'm not sure it's going to be a whole lot different when it's serving the part of the economy. It's kind of on the leading edge.
It's always just going to be a little bit more volatile in terms of its underlying demand fundamental. So Northern California probably more than any other, I'd say Seattle to a lesser extent but we think it's probably got a little bit more – a few more stabilizers in that market relative to its size.
But it's prone to deeper cycles and certainly being very cautious about taking on any kind of new development risk, particularly if we can't get really a pure option on those opportunities. So in Northern California the focus has really been in a couple places, really trying to intensify existing low density wood-frame assets where in some cases you really have jurisdictions that are willing to work with you just given kind of the housing shortage in that market and try to take advantage of that from a public sentiment standpoint to generate some entitlements that you may not be able to generate in other parts of the cycle when they're less friendly to development sponsors.
But hopefully that gives you a sense. And I'd say, the New York, Manhattan, I'd say we're pretty – we're actually very cautious on right now just based upon supply and pricing, both land pricing and construction costs.
Conor Wagner - Green Street Advisors, LLC
That's helpful. Thank you.
Then last question, as you guys look at the supply picture in your suburban markets, how do you factor in the impact from rehabs and redevelopments closing that spread between B and A?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
In terms of...
Conor Wagner - Green Street Advisors, LLC
I mean, would those serve as competition for you if we have rehabbers coming in and bringing things up closer to the rent levels where you guys are?
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Yeah. It depends on what you're talking about.
I mean, people rehab assets at sort of all different tiers. So, people are making Cs, Bs and Bs, B+s that kind of thing.
So we track it at the submarket level in terms of what's happening and the potential impact on our portfolio. We benchmark our performance quarterly compared to our competitors, using ICO (1:14:12) data and others.
They'll have to take that into account in terms of what you expect them to produce. So it can create some competitive conversions, if you want to call it that, in certain submarkets, but it's really a sub market by sub market discussion.
And Conor, I don't think it's any different, whether it's urban or suburban. There's always going to be some percentage of the assets are going to go through development just like there's some assets that are really atrophying and kind of losing their competitive posture within the market.
And a lot of it's going to depend on the business model. Ultimately the owner or the sponsor, in terms of whether they're in a position to – from both a financial capital and the human capital standpoint to invest capital at the right time to keep an asset competitive, at least within the segment they think is kind of optimally positioned.
So it's going to be a mixed bag, but I don't think it's terribly different whether you're talking about suburban and urban.
Conor Wagner - Green Street Advisors, LLC
Great. That's helpful.
Thank you.
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Thank you.
Operator
Thank you. And with that, I'd like to turn the call back over to Mr.
Tim Naughton for any additional or closing comments.
Timothy J. Naughton - Chairman, President & Chief Executive Officer
Okay. Great.
Well thanks, Robbie, and thanks for everyone being on. I think probably a lot of you've dropped by now, but we look forward to seeing most of you in Las Vegas, next month.
Take care.
Operator
That does conclude today's call. Thank you for your participation.