Feb 2, 2017
Executives
Jason Reilley - AvalonBay Communities, Inc. Timothy J.
Naughton - AvalonBay Communities, Inc. Sean J.
Breslin - AvalonBay Communities, Inc. Kevin P.
O'Shea - AvalonBay Communities, Inc. Matthew H.
Birenbaum - AvalonBay Communities, Inc.
Analysts
Nick Yulico - UBS Securities LLC Nicholas Joseph - Citigroup Global Markets, Inc. Richard Allen Hightower - Evercore Group LLC Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Vincent Chao - Deutsche Bank Wes Golladay - RBC Capital Markets LLC Juan C. Sanabria - Bank of America Merrill Lynch John P.
Kim - BMO Capital Markets (United States) Robert Chapman Stevenson - Janney Montgomery Scott LLC Alexander Goldfarb - Sandler O'Neill & Partners LP Jeff J. Donnelly - Wells Fargo Securities LLC Richard Hill - Morgan Stanley & Co.
LLC Ivy Lynne Zelman - Zelman & Associates Omotayo Tejumade Okusanya - Jefferies LLC Conor Wagner - Green Street Advisors, LLC
Operator
Please standby, we're about to begin. Good morning, ladies and gentlemen, and welcome to AvalonBay Communities' Fourth Quarter 2016 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.
As a reminder, today's call is being recorded. 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 - AvalonBay Communities, Inc.
Thank you, Noah, and welcome to AvalonBay Communities' fourth quarter 2016 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 definition and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. This attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance.
And with that, I'll turn the call over to Tim Naughton, Chairman and CEO of AvalonBay Communities for his remarks. Tim?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. Thanks, Jason, and welcome to our Q4 call.
With me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum. I'll be providing management commentary on the slides that we posted last night, and then all of us will be available for Q&A afterwards.
My comments will focus on providing a summary of Q4 and full-year results, and discussion of our outlook for 2017. My remarks will be a bit longer than usual this quarter, but we think it is an important time in the cycle to provide our perspective, our fundamentals and how we're positioning the company in response.
So, let's get started, starting on slide four. Highlights for the quarter and the year include core FFO growth of 6.5% for Q4 and 8.5% for the year.
Same-store revenue growth came in at 3.3% in Q4, or 3.5% when you include redevelopment and for the full-year about 100 basis points higher, 4.3% and 4.5% when you include redevelopment. We completed $500 million in new developments this year and started another $1.6 billion, most of it occurring in Q4.
And lastly, we raised about $1.4 billion in external capital through debt and asset sales at an average initial cost of approximately 4%. Turning now to slide five; development drove strong external growth in 2016, both from recent completions and communities still in lease up.
The $500 million of new developments completed this year are projected to stabilize at an average initial yield of 6.7%, about 50 basis points above original pro forma and more than 250 basis points above the initial cost of external capital raise in 2016. Yields on existing lease ups of $1.2 billion of the development are currently 20 basis points above pro forma.
Turning now to slide six. You can see, so far this cycle, we've completed about $4.5 billion in new development and it's created approximately $2 billion in net asset value upon completion, or roughly $17 per share at NAV upon completion.
And currently we have another $4 billion under construction, including the $1.3 billion started this past quarter, across five projects shown on the next slide, slide seven. The five projects started in Q4 include three communities on the West Coast and two on the East Coast.
A couple are worth noting due to their size, the first is West 61st Street or Columbus Circle as we referred to in the past, which is a $600 million mixed use project on the upper West side at the corner of 61st in Broadway. And the second project that is AVA Hollywood, $360 million project, six acres in one of the more vibrant submarkets in LA and located across Santa Monica for many of the studios.
Both of these projects represent extremely unique opportunities and excellent submarkets and locations. Now, given the diversity and the wide range of product in submarkets of our current development pipeline, you'll note this quarter on attachment nine, that we've divided the development portfolio into three distinct buckets based upon product type, high-rise, mid-rise and garden.
These buckets roughly sync up with how we think about submarkets as well being urban or infill or suburban. Given that valuation and cap rates are often a function of product type in submarket, we thought this breakdown would be helpful in evaluating development portfolio.
Lastly, one note on Columbus Circle, as we've discussed in the past, we did explore different strategies to venture this investment with either a retail or a capital partner, but for a variety of reasons including control and current market sentiment, we've concluded that owning 100% of this investment is the best approach to optimizing value. Moving to slide eight now, our creative development platform along with healthy contributions from our stabilized portfolio has driven strong earnings growth this cycle and we've outperformed the peer group on core FFO growth per share by 350 basis points on a compounded annual basis over the last six years.
And on a cumulative basis, that translates into 3,400 basis points of outperformance in core FFO growth during that time. Let's now turn to slide nine and our outlook for 2017, highlights for outlook include core FFO growth of 5.5%, driven by same-store NOI growth of 2.75% at the midpoint of the range and from stabilization of new investment activity.
In addition, we plan to start $900 million in new development and complete $1.7 billion in 2017. Turning to slide 10, you can see that the lower growth projected in 2017 versus 2016 for core FFO is entirely the result of deceleration in the stabilized portfolio.
In 2016, the stabilized portfolio contributed 5.7% of the 8.5% growth that we achieved, while 2017 we're expecting a contribution of 2.7% or 300 basis points less from the stabilized portfolio. The projected contribution from the external growth platform in 2017 is essentially the same as 2016, right around 4% when you net out the impact of incremental capital costs in both years.
In both 2016 and 2017, this growth is offset or expected to be offset by about a 110 basis points of drag from increased overhead and the loss of fees from the liquidation of investment management funds. The reduction of fund-related fees results in a headwind to core FFO growth of roughly 50 basis points in both years.
Turning to slide 11, given our outlook for 2017, we did announce a dividend increase this year of 5.2%. The dividend is now up by almost 60% over the last six years or since the beginning of the cycle, has grown by almost 5.5% on a compounded basis over the last 23 years.
I want to turn now to some of the basic – to some of key assumptions and drivers for outlook this year. Starting on slide 12, I'm certainly not going to go into detail on this slide, but the overall picture is a continuation of modest economic and job growth with perhaps a little more upside relative to 2016, given the improved outlook for the consumer and a recent pickup in the business sector.
But also with more unknowns, with the new administration in place and the potential economic impact that could arise from any fiscal stimulus, tax, trade or immigration reform. Slide 13 through 17, drills down a bit more on some of these themes.
First, looking at slide 13, wage growth is accelerating in a tightening labor market and is most pronounced for our target customer, that being young professionals, who are seeing healthy wage gains in the mid-to-high single digit range, as you can see in the bottom right of that chart. Moving to slide 14, this in turn is helping to propel consumer confidence, which is now at a cyclical high and then when you combine that with healthy balance sheets, the consumer – it results in the consumer purchasing more autos and homes and also resulting in higher rates of household formation.
On slide 15, you see the corporate sector is starting to show some improvement as well, as business profits and confidence are on the rise. Although investment remains mixed still with equipment declining and investment in knowledge assets or IP still growing at a healthy clip.
It's hard to say whether this is a cyclical or secular trend, as the U.S. moves towards a more knowledge-based economy, but we think for our market this is generally a positive trend.
On slide 16, demographic should continue to support apartment demand really over the next few years and into 2017 for sure. The young adult cohort of that under 34 years is expected to increase by 600,000 in 2017 alone and are now experiencing job growth close to 4%, really the highest rate we've seen this cycle.
The rates of family formation as we've discussed in quarters past are continuing to decline, which in turn is extending the rental tenures of this segment and helping to grow primary renter demand. Moving to slide 17, while rental demand should continue to remain healthy, we are seeing an overall housing picture where overall housing demand is becoming more balanced between single family and multifamily for sale and rental.
Just about more than anytime over the last 15 years, it does appear that the for-sale recovery is taking hold after a long period of decline and/or stagnation, and supply is responding with single family driving virtually all the housing supply growth, while multifamily starts have flattened over recent quarters. Recently, we've seen starts and permits returning to historical patterns where roughly two-thirds are single family and one-third multifamily.
This trend has been further supported by capital market behavior as financing has cooled for multifamily investment over the last year or so. In the next two slides, slide 18 and 19 provide a demand and supply picture for our regions.
On slide 18, you can see that the job growth is expected to be flat or moderately down across most of our footprint. Whereas our wage growth is expected to rise on the order of 150 basis points over 2016 and importantly much of that is already occurring.
Personal income overall is projected to be up by about 100 basis points, which should provide the consumer more purchasing power and should help support rent growth, all things remaining equal. Turning to slide 19, we know that all things don't necessarily remain static and we see that on the supply side of the equation.
Apartment deliveries are expected to be up by about 50 basis points in our regions to 2% of stock, which is about a third higher than we saw in 2016. New England, particularly Boston is the only region where we expect deliveries actually to be down on a year-over-year basis.
And once again, new supply should be concentrated in urban submarkets. We should see almost twice the deliveries that suburban submarkets in our markets will see in 2017.
So how are these fundaments impacting our portfolio outlook? We show this on slide 20.
Overall, we are expecting 2% to 3% same-store revenue growth in 2017. On the East Coast, expecting growth generally on the lower end of that range of around 2% with DC showing some year-over-year improvement.
The West Coast is coming in towards the top end of that range at around 3%, although much more variable across the regions. Northern California is expected to lag in the 1% to 2% range, after years of just torrid performance.
And Southern California, Seattle, should lead the portfolio with same-store growth in the 4% to 5% range. Turning to slide 21; in terms of trajectory during the year, we do expect the same-store revenue growth to decline in the first half of the year, before turning to stabilize in the second half of the year in the low 2% range.
One thing to note from this graph, as you can see, we've already seen same-store revenue rebound once this cycle in 2014 and 2015. Similarly, we think, we could see some improvement in rental rate growth in 2018, once peak deliveries are absorbed into the market.
Let's shift now and talk about investment and capital activity. As I mentioned earlier, we started over $1 billion in Q4, we now have $4 billion under construction or did at year-end.
We expect to complete a record level of volume in 2017 such that by the end of the year, development underway should be in the $3 billion range or roughly about 10% of enterprise value, which is in line with the average so far this cycle. Turning to slide 23, with Q4 starts our charter (16:18) development pipeline is now down to $3 billion and land inventory, which is shown here, is at a cyclical low at around $100 million.
We plan to remain light on land over the balance of the cycle. This should position us well to take advantage of any dislocation that might occur during the next market correction, when many of the best land buys are often made.
Turning to slide 24, another way we're managing the risk of our development pipeline, we've talked a lot about over the last couple of years is through our strategy to substantially match funds new development. At year end, including the starts in Q4, we stood at 80% match funded on the $4 billion underway.
In addition, we actually have $800 million in interest rate protection for planned debt issuance later this year. This further protects us from shifts in the capital markets that might impact the cost of future funding and helps us lock in investment margins on that development that's underway.
Slide 25, this is a chart we've shown you before, but it also illustrates another benefit of match funding and that's the impact on our credit profile. With most of our pipeline match funded, we could actually fund the remaining portion entirely with debt without actually comprising our credit profile.
Of course some portion of the remaining cost would likely be funded with free cash flow and our asset sales, but this is a hypothetical calculation that we think is helpful in understanding how the development pipeline may impact our balance sheet and credit metrics from time to time. And now the last slide, slide 26, I think this shows just a final benefit of match funding, and that's the impact on liquidity.
We currently have $200 million of cash on hand and $1.5 billion line of credit was undrawn at year-end. With credit metrics at cyclically strong levels, we have an additional margin of safety and ample balance sheet capacity to fund new commitments that may provide additional growth opportunities.
So there are clear three benefits of a disciplined match funding strategy; first, it allows us to lock-in accretion on new development; second, as we see here, it enhances current liquidity; and third, it preserves balance sheet capacity and provides financial flexibility. From a risk management perspective, all three benefits become increasingly important as the cycle matures.
So, in summary, 2016 was another solid year for the company, healthy fundamentals and our competitive position helped contribute to the sixth consecutive year of strong earnings growth. In 2017, apartment demand should remain healthy, although we do anticipate that an increase in deliveries will temper growth in our stabilized portfolio relative to what we've seen in recent years and in 2016.
Development on the other hand should contribute meaningfully to both earnings and NAV growth just as it's done over the last few years. And lastly, we plan to carefully manage liquidity and the balance sheet to allow us to pursue our growth strategy in a risk-measured way, a strategy that's produced meaningful outperformance so far this cycle.
And with that note, we'll be pleased to open up the line for questions.
Operator
Thank you. We will take our first question from Nick Yulico with UBS.
Nick Yulico - UBS Securities LLC
Thanks. I was hoping you guys could just go talk a little bit about the Columbus Circle project.
And it looks like – I guest first off, how we should think about the retail value there, so we can get an understanding for what the cost per unit would be for the multi-family piece.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. Nick, this is Tim.
I'll take that. As I mentioned in my prepared remarks, we did explore partners there are both in terms of a capital partner and a retail partner.
And at the end, we decided control was important here for a few reasons, I may get into, but the economics of that deal are a roughly mid-4% in terms of yield. And I guess the way to think about it, the residential component is around a 4%, the retail component we think is a mid-5%s.
And if you look at – if you try to separate the cost of the retail and the residential, essentially the residential is right around $2,000 a foot on very large units, by the way, something maybe we could talk a little bit about that, but we are positioning – we're trying to position this asset pretty uniquely towards larger units. We think there is a family market there.
This is not a 421 – 421a deals, there are no affordable units. There's no pilot and so this does reflect full taxes.
I think that's something else to keep in mind we quote the yields. The retail is about $3,000 a foot in terms of basis.
And in terms of projected rents, we think the market for this deal is about in the $180 range – $180 a foot range on the retail and that's blended across the basement, the sub-basement, the main floor and second level and about $115 a foot on the residential component.
Nick Yulico - UBS Securities LLC
Okay, now that...
Timothy J. Naughton - AvalonBay Communities, Inc.
That's a rough outline in terms of the economics. Obviously, this is a location and asset that we think is going to be absolutely at the top of the market, and while the economics are thin or thinner than we had anticipated, just given what's happened kind of in the direction of rents and construction costs over the last couple of years, we did think just maintaining control really enhanced our flexibility.
To maximize an optimal time, just given that what you often see obviously in Manhattan and then some of the best locations in Manhattan. Evaluations could be more volatile and spike here.
And so, we think it's important to maintain that flexibility so that we might have the opportunity to monetize at some point down the road and not have to worry about partner consents or secured debt being in place that might create additional friction cost to making the right capital allocation decision.
Nick Yulico - UBS Securities LLC
That is helpful, Tim. And then the 100 – and I think you said $150 rents on the residential side.
Timothy J. Naughton - AvalonBay Communities, Inc.
$115.
Nick Yulico - UBS Securities LLC
$115, sorry. Where – are there already competing buildings in the market at that price point?
And how do you guys feel about getting that type of rent in a market where it seems like the high end is maybe under a little bit of pressure in New York?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yes, I am going to go and turn to Sean, there are a few comps that are I think probably, particularly relevant.
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, Nick, it's Sean. As Tim pointed out, one thing to keep in mind here is the average unit size is a little bit bigger.
It's about 1,100 feet for this deal, spread across studios all the way up to three bedroom units and above. So, in terms of current comps though, I mean the assets that probably come to mind most frequently for people and for our teams, what we've looked at are spread around, but probably three that I'd mentioned most specifically are like Grand Tier, which is at Broadway and 64th; The Corner, which is Broadway and 71st, and then the Brewster, which is 86th between Columbus and Central Park West.
If you go look at those on a unit-by-unit basis and it just sort of reflect our mix, they are basically at rents that we're expecting to achieve for Columbus Circle and obviously we have better location in our view and for product that will be brand new 2.5 years from now. So, we feel pretty good about the rent based on what we see today.
And beyond, when you look at the Central Park West sort of that kind of location, not a lot of products in the pipeline as compared to other submarkets within Manhattan like Midtown West as an example or going over to Brooklyn even, so feel pretty good about the rent based on what we're seeing.
Nick Yulico - UBS Securities LLC
Okay, and then sticking in New York, Brooklyn and Long Island City, what are your thoughts about performance of those submarkets for your portfolio this year given some of the supply underway right now?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes. So, for Brooklyn, there's certainly more supply coming in 2017 versus 2016, it's about doubling.
We really have one stabilized asset in Brooklyn and Fort Greene, which has been performing fine. Most of the supply that's come into Brooklyn didn't come until basically the third quarter, so we did expect 2017 should be softer than 2016.
That being said, it hasn't impacted performance much at our lease up there at Willoughby, we probably accelerated our lease up a bit at Willoughby just in anticipation of the supply that's coming online, but we did 29 leases a month there in the fourth quarter, which is pretty healthy and expect that to continue, January looks pretty solid. So in terms of Brooklyn, I would say we expect it to be softer, wouldn't see a lot of impact in terms of our same store portfolio given it's one asset.
Long Island City, there is more supply coming in there in 2017 as well. It's starting to become a little more concentrated in downtown as opposed to on the water, which is where we are positioned.
So the Riverview assets we have there, the two towers have been some of the better performing assets over the last few years in our overall New York portfolio and I would expect as the supply comes online, they'll probably become more middle of the pack is our expectation for 2017.
Nick Yulico - UBS Securities LLC
Thanks, everyone.
Sean J. Breslin - AvalonBay Communities, Inc.
Yes.
Operator
We'll take our next question from Nick Joseph with Citi.
Nicholas Joseph - Citigroup Global Markets, Inc.
Thanks. Just actually continuing on New York, what are your expectations for the more suburban New York portfolio and New Jersey?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, Nick, it's Sean. Happy to chat about that a little bit.
As you might expect what's happening. We do expect New York City to be the weakest performing market of our broader New York, New Jersey portfolio in 2017.
For New York City, the expectation is for revenue growth around 1% and one thing to keep in mind is that represents the assets that we have spread, kind of all throughout the city. We have Morningside Heights, the Bowery, Brooklyn, Long Island City, Midtown West, et cetera.
So assets anywhere from $50 a foot up to $80 a foot across those different submarkets as opposed to being all concentrated in one submarket where there is a lot of supply. But then as you get into the suburban markets, Westchester is closer to 2%, Long Island around 2% and then Northern and Central New Jersey around 2.5%.
Certainly the more suburban market outside the core of New York are expected to perform better in 2017 relative to New York City as an example.
Nicholas Joseph - Citigroup Global Markets, Inc.
Thanks, that's helpful. And then, Kevin, in the past sometimes you have included a heat map in terms of cost of capital of – or desirability of capital between equity, debt and asset sales.
So putting equity aside given where the stock is trading relative to NAV, what is the desirability or value of debt versus asset sales today?
Kevin P. O'Shea - AvalonBay Communities, Inc.
Well, I think from the standpoint of relative attractiveness both are – both forms of capital, asset sales and then unsecured debt are still pretty attractively priced today, even certainly on the unsecured debt side borrowing costs have increased a bit in the last three or four months here by about 40 basis points, 50 basis points. Bear in mind on that front, unsecured debt costs are still today roughly where they have been sort of the previous year or two in 2014 and 2015.
So, just to give you a sense of it, if we were to do 10-year debt today, we'd probably be able to execute a 10-year bond offering somewhere in the 3.5% range on fresh capital. As Tim alluded to on the call, we do have $800 million of hedges in place, 10-year forward starting swaps that we would expect to apply to a like amount of bond issuings on the 10-year front over the course of the year here and the – essentially the treasury rate on that basket of hedges is at 2.28% overall, so favorably priced relative to spot values today.
And our borrowing spreads on top of that, which of course are not hedged, historically have been about 135 basis points, today they are about 110 basis points. So, we think from the standpoint of the unsecured debt market, capital costs are generally still pretty attractive.
Given our hedges, we think they will be attractive as well with respect to the 10-year issuance, which we've got planned for this year. And then, Matt, can certainly speak to the asset sale market.
But we still think it's an attractive source of funds today, particularly relative to the returns on development that we would be redeploying some of that capital to fund.
Nicholas Joseph - Citigroup Global Markets, Inc.
Thanks. Matt, maybe just on that.
Have you seen any movement in terms of cap rates or the amount of buyers showing up to bid for assets or the spread between the bid and ask on specific deals?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
I think it's probably too early to tell. Certainly, we – some of us were out at (30:41) and there was a lot of talk about that.
So, I don't think we've seen evidence yet of any material movement in cap rates. We did sell two assets in the fourth quarter; one wholly-owned asset, which closed in October, so kind of before the election, and then there was a fund asset we sold in mid-November.
We have a couple of assets that are in marketing now, so we may have more information by the end of the quarter, by next quarter's call, but I think it's probably too early to say.
Nicholas Joseph - Citigroup Global Markets, Inc.
Thanks.
Operator
We'll take our next question from Rich Hightower with Evercore.
Richard Allen Hightower - Evercore Group LLC
Hey. Good afternoon, everyone.
Just want to go back to one of Tim's comments in the prepared remarks about winding down the land portfolio as we kind of get into the mature stage of the cycle. It's a broad-based question.
How do you sort of foresee the next few years playing out in terms of new opportunities arising? And are you seeing imprudent behavior among different developers, different investors in your markets and submarkets that would lead you to believe that those opportunities will be there a little farther down the road?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yes, Rich. You don't know.
I would tell you capital has been pretty disciplined. So the level of the stress is – probably would be somewhat a function of what is happening in the capital markets and the depth of any perhaps economic correction that might occur.
Generally you are seeing 2% or 1.5%, 2% supply growth as we have been seeing, that's roughly in line with the kind of job growth that we've been seeing. So it doesn't – absent an economic correction, it doesn't seem that things are getting distorted yet, but we are at the point in the cycle, given that capital has cooled a bit multifamily.
There is less of a need. There is less transactions that are closing say on an unentitled basis.
We historically have tried to make use of land options as much as we can. We oftentimes have to buy land maybe one to three quarters before we actually put it into production, but with all the entitlements in place and maybe the other half, we are able to close within a, say a quarter of a – a quarter to start, but you're not seeing, it doesn't seem like you're seeing lot of people sort of get stuck with a lot of land on their balance sheets yet.
So, we just want to be in a position where we've got the liquidity and the balance sheet kind of be first in line when the market turns. We don't think at this point any opportunities where we can buy land, using our liquidity to buy unentitled land, that there is enough of a benefit to do that and until there is distress, as I said, we're going to try to stay light on that, I mean, I think we typically get in trouble in the development game is being long on land at the wrong point in the cycle where you have an illiquid asset that doesn't cash flow, you may have to sit on it for a few years until the cycle returns, I mean that's one of the lessons learned, I think particularly when – from the private side of the business.
But – so it's hard to say in terms of how much – what kind of opportunities will be there, but we're obviously just trying to position ourselves to take advantage of once it is – once (34:13).
Richard Allen Hightower - Evercore Group LLC
That is helpful color, thanks. And then final question here.
In terms of expense growth in 2017, it looks like you guys are having a lot of good luck on – within many sort of types of expenses in terms of segmentation, but I think payroll is one that is starting to accelerate maybe to the more worrisome side. Can you talk about how you envision that growing over the next couple years perhaps?
And can you talk about the impact of new supply and its impact on wages and payroll and that sort of thing?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, Rich, it's Sean. I want to give you just a couple of comments about expense growth for 2017 overall and then address the specific question about payroll.
But in terms of 2017 OpEx growth, for us about 60% of the year-over-year increase is really going to be taxes, which we're expecting to grow at about 3.5% in 2017 for our same-store basket. We're also expecting some growth in utilities and payroll, both of those in the 2.5% to 3% range.
But we're going to see some offsetting reductions in a couple of areas, one is we're expecting insurance come down a little down, but probably more importantly is we're expecting some reductions in marketing and maintenance due to various sort of cost reduction initiatives that we've had underway. Maybe just mention a couple of those for you, first, as it relates to our prospect portal, we introduced some new functionality late last year to allow our prospects to book tours online, and we went from basically zero booked online to about a third of them booked online in last quarter of the year.
And so, we've taken out a significant chunk of cost for call center costs. So as opposed to booking online, someone may have sent an email or made a phone call that cost anywhere from a $1 to $6 depending on the channel versus essentially marginal cost of zero on the portal.
Same thing as it relates to our resident portal, we're up to about 80% of maintenance requests booked online, that takes call center costs down. So, we're going to take probably more than $0.5 million out of call center costs in 2017, both on the marketing side and on the maintenance side, and then we're starting to see some benefit from our investments we've made over the last two or three years in resilient flooring with less carpet replacement and things like that.
So, we're getting some tailwinds from some of those investments that we've made in the past. As it relates to payroll specifically, certainly seeing a more competitive market, we've been able to hold our own in terms of voluntary turnover below NMHC averages and things of that sort that we watch.
But certainly seeing some pressure there, particularly in the more competitive urban submarkets, where there's heavy lease-up activity, and the potentially for community consultants that are leasing apartment homes to jump from one property to the next to make another $1 or $2 an hour. Fortunately, we have some pretty tenured staff in some of these locations where they've been with us for long time.
They've seen this – had this play before, so to speak. And we've been able to hold turnover rates down, and then also as you may know, we don't have as many urban projects in lease up as maybe some others, so probably getting a little bit of relief there being in the suburbs.
But it's certainly an area that we're going to have to keep an eye on and stay competitive, but with other things we have underway in terms of how we're trying to be as efficient as we can, trying to contain payroll growth as much as possible.
Richard Allen Hightower - Evercore Group LLC
All right. Thanks, Sean.
Sean J. Breslin - AvalonBay Communities, Inc.
Yes.
Operator
And we'll take our next question from Jordan Sadler with KeyBanc.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Hi. Good morning, it's Austin Wurschmidt here.
Good afternoon, rather. In the same-store revenue guidance, the slides that you provided on page 20 and 21, you talked about a stabilization in the second half of the year, perhaps a little bit of an inflection.
Can you just talk about what markets you expect will drive the inflection and how you expect that could trend into 2018?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, Austin, this is Sean. I can talk a little bit about that.
It really is sort of an inflexion point for certain markets in terms of supply starting to fall off as you get into the back half of the year and then certainly as you get into the first half of 2018. To give you some examples, you start to see some softening in deliveries in Boston, Northern Virginia, LA, and San Jose as you get into the third and fourth quarter of 2017, and then it's more meaningful as you get into 2018.
And just one thing to keep in mind is, Tim did mention sort of stabilization as opposed to reacceleration. So, part of that is a function of how we see supply delivering in certain submarkets that are basically our neighborhoods and how it impacts our portfolio.
But it's also a function of comps in the third and fourth quarter of 2016 and what's going to happen with occupancy and things like that. So, there is a handful of markets, like I mentioned, and you start to see an abatement of deliveries to a certain degree that we think will start to translate to some stabilization.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Great, thanks for the detail there. And then just wanted to focus on occupancy for a minute.
You guys have been running at sort of the mid – low to mid-95% range now for the last several quarters and many of your peers are in that 96% plus range. And you guys had kind of been in that range in years past.
So just wondering how you are thinking about occupancy as a lever today and then maybe anything that you are doing different you think from your peers?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, sure, happy to chat about that. Yeah, I think I mean every portfolio is a little bit different, depending on whether you're heavily urban, heavily suburban, different geographies.
So for example, New York City tends to run higher typically than Southern California. So I think you have to look at sort of market occupancy across the footprint to determine if you want to be at the higher end or lower end, et cetera.
What we have found for our portfolio is that being sort of in the mid 95% range really does optimize rate growth, occupancy is such that we're delivering the best rental revenue growth. And the one thing that you also have to keep in mind is that we're quoting an economic occupancy, which includes various factors, it's not just physical.
So physical and economic are a little bit different, it's just something to keep in mind there, but we're comfortable operating sort of in that mid 95% range. As you may have noticed, in the fourth quarter, we picked up about 30 bps on a sequential basis from the third quarter in occupancy.
And if I give up a little bit of rate doing that, but that was our expectation going into the fourth quarter. Particularly in certain markets where we saw supply starting to ramp up a little bit more in Q4 and going into Q1 of 2017, but mid 95% is sort of a range we're comfortable with.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Thanks for taking the questions.
Sean J. Breslin - AvalonBay Communities, Inc.
Yes.
Operator
And we'll take our next question from Vincent Chao with Deutsche Bank.
Vincent Chao - Deutsche Bank
Hey, good afternoon, everyone. I just want to go back to the development side for a second here.
Thanks for the color on Columbus Circle, sounds like that's about 4.5% expected yield. But just trying to get a sense for the other $700 million or so that was started in the quarter.
What the expectations on yields are for those assets just given the fairly large decline in the overall pools. Expected yield from 6.4% to 5.9% would suggest that the other starts are sort of sub 5%, but just trying to see if there is anything else in there.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure, Vince. This is Matt.
I can speak to that one. It is about obviously what goes into the bucket and what goes out of the bucket in any particular quarter.
And this quarter we didn't have any completions, we have the five starts, as you noted. The other four, Belltown Towers is a new high-rise in Seattle, that's kind of a high-5% yield basis around $515 a unit after you allocate something for the retail, so we think that's a phenomenal location and a great long-term asset and a strong spread there relative to what that cap rate would be.
We also started a wood frame deal in Emeryville called Public Market, which is a mixed-use project where we will own the residential and we have a retail partner there, that deal is about a 6% yield on today's rents. And that's a deal that – both of those are land deals that were struck probably two to three years ago, when the land market was not necessarily reflective of where rents went kind of over the intervening two years.
The AVA Hollywood deal, that's a low-5%s yield, basis around $500 a unit there and that's a market where we think there is still strong rent growth in front of it. And then the fifth start was Teaneck, that's kind of low to mid 6%s, mid-rise in suburban North New Jersey.
So, the basket as a whole did pull it down, but Columbus Circle would be kind of the outlier.
Vincent Chao - Deutsche Bank
Okay, yes, yes, when I do the backwards math it seems like the starts would have to be a little bit lower than we just quoted, unless the existing projects – did the yields change on those? It seemed like some of the rent per homes did come in for a couple of the projects.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Yeah. No, I think, I mean, rents were down just a very small amount on the existing lease-ups, so yields might have ticked down a couple of basis points there, but nothing material.
It's more about the basket.
Vincent Chao - Deutsche Bank
Got it. Okay, okay, and appreciate the breakout between mid-rise, high-rise and garden.
But I guess if you think about just the suburban urban definitions that you kind of outlined, how would that break up – or how would the pipeline break up right now, along those lines.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
In terms of what's currently under construction?
Vincent Chao - Deutsche Bank
Right.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
I think it's about almost half and half.
Sean J. Breslin - AvalonBay Communities, Inc.
It is about half and half between suburban and urban in terms of what's currently under construction, (44:50) value perspective.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
We talked about how the starts for this year they are all planned to be suburban. So, it's a very different characteristic.
Just to go back, I'm sorry, to the prior question, the other reason why the yield basket would have changed was in last quarter's number we also included some deals that completed in Q3 that fell off in Q4, and those deals had higher yields.
Vincent Chao - Deutsche Bank
Got it, got it. Thanks.
Okay. And then just in terms of the trajectory that you mentioned, you specifically called out Boston, Northern Virginia, San Jose as seeing some slowdown in deliveries to year end.
But just broadly speaking I guess, is your demand outlook shifting at all over the course of the year and should we think about the heaviest supply sort of being behind us by the middle of the year broadly speaking?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, Vince, this is Sean. In terms of, I guess, the broader way to think about it across our footprint at least is that the supply as a percentage of stock, the footprint is relatively static through the first three quarters, starts to fall off in the fourth quarter and it really starts to fall-off in a more meaningful way in mid-2018.
The composition among the markets does shift from quarter-to-quarter. So, while you might see a modest deceleration in Q3 and Q4, some are up, some are down, the ones that I mentioned previously are the ones that are down in such a way that it starts to impact our portfolio more in the second half of the year, that's why I highlighted that.
Vincent Chao - Deutsche Bank
Got it. Okay.
And the demand side we should be thinking about is relatively stable?
Sean J. Breslin - AvalonBay Communities, Inc.
I think though – yeah, I mean, if you look at it, job growth Tim talked about, we're expecting job growth to be similar to 2016 levels and depending on which market you are thinking about, there is a lot of different perspectives in terms of the potential for upside or downside. There's a lot of discussion about deregulation and the potential impact on financial services in New York, but people are also concerned about how long can Microsoft and Amazon be the anchors in Seattle.
So, each market – there's probably commentary for each one in terms of the pros and cons on that job growth outlook.
Vincent Chao - Deutsche Bank
Okay. Thanks guys.
Timothy J. Naughton - AvalonBay Communities, Inc.
And maybe just one thing to add, I mean, demand of course tends to be seasonal as well. So you would generally expect demand to be stronger in the middle of the year relative to the end of the year.
That generally gets reflected in average rent growth.
Vincent Chao - Deutsche Bank
Okay. Thank you.
Operator
Our next question comes from Wes Golladay with RBC Capital Markets.
Wes Golladay - RBC Capital Markets LLC
Hi, guys. Sticking with the job picture, it looks like you guys are forecasting that 20 bps decline and your forecast for business is quite strong.
So are you seeing any structural issue, just not enough high – college educated employees to take those jobs? Or is it election uncertainty that's causing you to taper back your forecast this year?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. This is – Wes, Tim here.
I think it's really a function of availability of labor when you are looking at unemployment starting to mark towards the low 4% and as you know, for college grads it's probably more in the 2.5% range, which is the majority of our portfolio and our markets tend to be more college educated in general. So, I think, it's as much as – it's probably being driven more by that just the availability of labor than anything else.
Wes Golladay - RBC Capital Markets LLC
Okay. Now looking at 11 West, you guys booked that JV in the asset.
Do you expect maybe at some point this year to revisit that? Or is the bid/ask too wide, you just want to de-risk the project some more?
Timothy J. Naughton - AvalonBay Communities, Inc.
No, unless sentiment changed a lot so that it started to impact the market's view of value. I think right now there is just – when you're looking at high-end residential and the street retail, the market sentiment has been as chilly as it has been in probably anytime this cycle.
So, I just don't anticipate – we don't anticipate that turning around, we just think that is sort of the wrong environment to capitalize or sell a part of a project. So, it's one of the benefits of having a great balance sheet and plenty of liquidity that you're not forced to sort of capitalize or sell into the face of potentially a declining market or poor market sentiment or declining market sentiment.
So I suspect we'll – it's probably something – it will be revisited when we see, maybe as I mentioned in prepared remarks maybe a little bit more spikier kind of valuations and we'll just see it as a more opportunistic time to transact.
Wes Golladay - RBC Capital Markets LLC
Okay, great. Thanks for taking the questions.
Operator
Our next question comes from Juan Sanabria with Bank of America.
Juan C. Sanabria - Bank of America Merrill Lynch
Hi. Thanks for the time.
Just curious what changed with regards to your outlook on supply now being more comfortable saying 2017 would be the peak versus kind of comments at NAREIT in November? What kind of – what did you get your head around where you feel comfortable making that statement at this point?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, Juan, this is Sean. I can take that one and then Tim rather you can speak to it as well.
I mean, we refresh our pipeline essentially every quarter and it gets a good scrub at year end as we take a look at what's been capitalized, what hasn't et cetera. So, what we've experienced in the past is that, and this is maybe what we alluded at NAREIT is the construction duration on what has been built this cycle, particularly in some of the markets like San Francisco and New York, it's urban and it's high rise, it's a different construction cycle, there is more risk involved in an execution what we have seen is typically that, a number of those deals end up getting delayed into the subsequent year for a variety of reasons.
So, what we try to do is estimate as best we can given the data that we have from third-party sources, from our internal teams, both operations and development, permit data, et cetera and then handicap it. So based on what we see today, our expectation is as I alluded to earlier, but certainly there is still some risk that given the nature of the product being developed that some of it slips into 2018.
Similar to what we saw in terms of some of the 2016 completions slipping into 2017. Our initial expectation for 2016 deliveries was higher than where we actually ended up.
And that may be the case for 2017 as well, just too early to tell.
Juan C. Sanabria - Bank of America Merrill Lynch
Okay, great, thanks. And then just wanted to circle back on sort of the cap rate questions that have been asked around New York specifically.
It seems like a part of the reason you decided not to JV the Columbus Circle was just a widening of the spreads there. Can you help us quantify kind of what that delta has been or could potentially be given the bid/ask spread or for high-end apartment core assets?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. Juan, to be clear, I don't know that we've seen movement in cap rates, we just – there hasn't been much in the way of trade.
I think there is a different view around – sentiment around risk and development risk, and what that might command in terms of a risk premium, but Columbus Circle, as I mentioned it's not a 421a deal, I mean it doesn't have a pilot – it doesn't have – so it has fully loaded taxes, which tend to impact cap rate, it doesn't have affordables, which might impact cap rate. So this deal, to the extent that it traded in the market, it will trade at the very, very low end.
I can't think of an asset that would trade at a lower cap rate. So, even in today's market, if we took this to market, we think it would be probably in the low 3%s.
And then on the retail side, the other part of it was that when we took – when we went to market, we just – there was interest at a reasonable value, but the kind of commitment that people – that organizations were able or willing to make against the forward obligation to take out the retail upon completion, we didn't think sort of justify the risk. For instance we – the market was telling us that maybe we get a $10 million to $15 million to $20 million deposit against what might be a couple hundred million dollar obligation.
And so at the end of the day just we felt sort of the risk-reward of that from the seller standpoint just didn't justify sort of stepping into that kind of transaction and felt we'd be better off owning it through construction ourselves, and then ultimately start to capture some of the development profit maybe at some point down the road.
Juan C. Sanabria - Bank of America Merrill Lynch
Okay, and just lastly if I could ask about San Francisco, about your view on rent growth in 2017 across the different submarkets and at what point do those markets trough, if at all, in 2017?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, Juan, this is Sean. In terms of Northern California, and San Francisco specifically, we are expecting it to be pretty weak in San Francisco all year, the weakest of the three markets within Northern California when you consider performance in San Jose, Oakland, and San Francisco.
In terms of our revenue outlook, we're expecting the East Bay to be strongest, roughly 3%, San Jose probably around 2%, and San Francisco lagging considerably probably between 25 basis points and 50 basis points, in terms of revenue performance. And we're really not expecting much rate growth there at all in San Francisco, sub 1% certainly as you get into – get through 2017 based on the supply that's pretty leveled throughout 2017, doesn't really trail off until you get into 2018?
Juan C. Sanabria - Bank of America Merrill Lynch
Thank you.
Sean J. Breslin - AvalonBay Communities, Inc.
Yes.
Operator
We'll take our next question from John Kim with BMO Capital Markets.
John P. Kim - BMO Capital Markets (United States)
Good afternoon. So on Columbus Circle the development is not branded as an Avalon product, is that by design?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
It is actually...
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah, Matt, go ahead, I'm sorry.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
This is Matt. We haven't made a final decision on that.
We're still a couple of years away from leasing it, but given the rent levels and frankly the service level, while Avalon is our flagship brand and kind of highest level product and service experience, we do expect this to be a level above anything that you would find in a typical Avalon and so there is brand equity in the Avalon name, I think, particularly in New York, but it is a pretty unique and special product offering and it may be that it merits kind of its own brand identity.
John P. Kim - BMO Capital Markets (United States)
And so, the yield you are expecting on a stabilized basis is not going to be as earnings accretive as your other developments. But you did mention the cap rate would be lower in the market.
So are you basically saying that you are planning to sell the asset or joint venture the asset once it is complete?
Timothy J. Naughton - AvalonBay Communities, Inc.
John, not necessarily. I think what I was saying, this kind of location, this kind of asset, it just – there can be opportunities to take advantage of sometimes a market where somebody else has a very low cost of capital, maybe it's a sovereign that just has to own the best asset in the market and we have to be responsive to that if those opportunities arise.
And I think particularly when you are looking at a trophy asset like this. So, I think it's just the recognition that by controlling it, it just gives us a lot of flexibility.
We have two pieces here, residential could potentially be converted to condominium at $2,000 a foot, it's a pretty good basis for that location and it's going to be at a I think a pretty high level finish. We're talking about 10 feet ceilings for instance, which is unusual in a rental offering, and retail floor plates that are around 20,000 square feet, again pretty unusual in that part of the city.
And so, they just recognize by having control it just gives us optionality and the best option at some point maybe selling a piece of it or all of it at some point. So, it's really about unlike a lot of our portfolio, which are – when you think about just kind of long-term kind of core hold that the sort of asset valuation doesn't necessarily fluctuate as much as it might at the very high end.
John P. Kim - BMO Capital Markets (United States)
On your development pipeline and the breakdown between high-rise and mid to low-rise, can you provide that same breakdown on your development rights?
Timothy J. Naughton - AvalonBay Communities, Inc.
No, it's mostly – it's very little high-rise, in fact, I'm not sure there is any high-rise. I think it's been – I think at this point high rise has pretty been cleared.
It's almost entire – it's mostly until mid-rise with some suburban garden. Matt, I think you actually have a more detailed breakdown.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Yeah. As of the end of the year here, our development rights 10% were garden, 70% were mid-rise, and 20% were high-rise, but that's really almost completely or maybe just the East 96th Street deal, which is public-private partnership, which is we've talked about in the past is still a few years away from starting.
So, it is heavily weighted towards that, mid-rise kind of infill, suburban, and again that's kind of all of our starts in 2017 are either garden's or mid-rises and actually our projected yield on today's underwriting on our 2017 starts is actually in the high 6s. So it will start to pull that average back up.
John P. Kim - BMO Capital Markets (United States)
So, if you include East 96, it seems like your urban/suburban mix on the development rights is about the same as your current development pipeline?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
No. No.
The current development rights are about one-third urban, whereas the current under construction is actually 60% urban.
John P. Kim - BMO Capital Markets (United States)
All right, okay. And then on page 18 of your presentation you discuss how the Pacific Northwest and Northern California are expected to have the highest amount of personal income growth next year or this year.
How much does this impact your ability to push rents if that somehow drops off a little bit?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yes. It impacts purchasing power.
I mean when there is more income in a catchment area and housing is one of the biggest expenses of any consumer, the more income they have. They tend to allocate a reasonably sort of stable level, a percentage of their income to housing.
So at the end of the day, as long as demand and supply are roughly in line, what drives our business is really – it's really income growth and it's one of the reasons why places like Seattle and Northern California, in particularly this cycle have dramatically outperformed. When you look at sort of the quality of jobs and the level of wage growth that we've seen and kind of innovation knowledge based centers.
John P. Kim - BMO Capital Markets (United States)
Thank you.
Operator
We'll take our next question from Rob Stevenson with Janney.
Robert Chapman Stevenson - Janney Montgomery Scott LLC
Good afternoon, guys. Sean, on page 20 of the slide deck, where you've got your same store growth, most of this candle sticks look all to be the same size to me.
I mean when you think about it, which markets have the greatest potential, variability operations wise this year, between the possible range of outcomes?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, Rob. I mean, I'd say it's probably the markets where you are seeing more significant supply, combined with a job base that tends to be probably more volatile just based on its history.
So, certainly San Francisco, we have dialed that in where we think it should be based on all of our history, but it's the tech factor, it can be volatile, we've got a baseline, but we know what the supply is and if the demand doesn't show up where we expected, you could see more deterioration there. But on the other side of the coin, some people are calling for potential reacceleration of job growth there later this year, it could go that way.
I'd say probably there in New York are the two places New York City specifically, where you could see that that have the most significant impact on our portfolio, given our allocation. You could also say the same thing about Seattle and my comments earlier related to Microsoft and Amazon, but it's only about 6% of the portfolio, so it's not going to move the needle on a material way, given how much we have allocated there.
Robert Chapman Stevenson - Janney Montgomery Scott LLC
Okay. How close are you guys to signing an anchor tenant on the retail or anchor tenants at Columbus Circle?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
This is Matt. We have not really started marketing it in earnest yet.
I think we will be at ICSC in May, so we're really just now at the point that we're ready to start engaging in those discussions and we have brokers on board, so more to come over time.
Robert Chapman Stevenson - Janney Montgomery Scott LLC
Okay. And then just lastly, either Kevin or Sean, what do you guys think is the appropriate level in 2017 for recurring but non-revenue producing CapEx per unit?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, Rob, it's Sean. In terms of CapEx, we came in around $900 a unit in 2016, and for CapEx in 2017, we're expecting it to tick up some to maybe about $1,000 a unit, about 5% of NOI.
Robert Chapman Stevenson - Janney Montgomery Scott LLC
Okay. Thanks guys.
Appreciate it.
Sean J. Breslin - AvalonBay Communities, Inc.
Yes.
Operator
We'll take our next question from Alexander Goldfarb with Sandler O'Neill.
Alexander Goldfarb - Sandler O'Neill & Partners LP
Good afternoon. Thank you for taking the question.
Just two really quick ones. You mentioned New York and San Francisco I think as being your sort of most volatile markets.
But just curious on the concession side from what you are seeing in the landscape, would you also say that those are the two markets where you see the most amount of concessionary competition? Or are there other markets that flag up for heavy concessions, but aren't having an impact on your operations?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, Alex, it's Sean. The Northern Cal market is the majority of the concession activity for us on a stabilized basis.
It's about – in Q4, as an example, it was about 60% of the cash concessions we issued. In New York, where you're going to see that is all the lease-ups.
There's not a lot of concessioning on the stabilized assets at this point. You'll see a little bit here and there certainly depending on which submarkets you're in.
But for the most part it's ramp it across all the lease-up assets regardless to which submarket that you're falling in just given the nature of the ramp regulations and the policies there in New York City. So, but for the most part from a market perspective on stabilized assets, you're seeing it in Northern California.
Alexander Goldfarb - Sandler O'Neill & Partners LP
Okay. And then the second question is, as you guys morph towards more of your starts being in the suburbs are you seeing more competitor developers coming back into the suburbs?
Or is that still pretty muted for all the aforementioned reasons whether it's the difficulty in labor, land or getting construction financing?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yes, Alex. It is Tim.
I mean, you've seen a pickup probably over the last two or three years, but as I mentioned in my remarks, it's still on the order of half as much. I think we expect that to persist at least as it relates to deliveries, over the next several quarters.
We're seeing roughly – our markets – if we're expecting 2% of total supply growth, this maybe on the order 1.5% in the suburbs and closer to high 2%, almost 3%, in the urban submarkets.
Alexander Goldfarb - Sandler O'Neill & Partners LP
Okay. So, Tim, as you look over the next sort of 12 months to 24 months, you don't see more developers coming into your suburbs, you still see it as muted.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. We actually, as we mentioned, we do expect supply – the deliveries to fall in 2018, but pretty commensurately between – proportionally between urban and suburban.
We expect suburban supply to be on the order of 1.25%, maybe in 2018 and urban from about 2.8% to about 2.3% in 2018. So, drop of about 1.5% to 1.2% on the suburban submarkets and from about 2.8% to 2.3% on the urban markets.
So pretty proportionate.
Alexander Goldfarb - Sandler O'Neill & Partners LP
Okay. Thanks, Tim.
Operator
We'll take our next question from Jeff Donnelly with Wells Fargo.
Jeff J. Donnelly - Wells Fargo Securities LLC
Good afternoon, guys. Tim, I know it's maybe a little early to ask this, but with just the moderation in land inventory how should we think about the potential for starts in 2018 compared to the volume you are expecting this year?
I am just curious if you expect that could level out or just later into the cycle as you discussed in your management letter. Should we expect maybe further pullback in starts?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yes, Jeff. As it relates to 2018, as I mentioned, we have about $3 billion in the development right pipeline that tends to be kind of deals that are going to start over the – with the exception of maybe East 96th, but tend to be deals that are going to start over the next three years or so.
So, I don't think you'll see a $1.6 over the next few years. I do think it's likely to be in the $800 million to a $1 billion range, just based upon deals that we can identify today, that are just going to take another 12 months to 20 months to get going.
Jeff J. Donnelly - Wells Fargo Securities LLC
That's useful. And then I guess, Kevin, maybe can you just talk about some of the major variables that bring you to the top or bottom of the guidance range for 2017?
I am just curious if it's capital markets activity, development stabilizations or maybe some of your same-store metrics?
Kevin P. O'Shea - AvalonBay Communities, Inc.
Yeah, I think the biggest variable there is just going to be performance in terms of same-store, that's the biggest driver obviously of our NOI and FFO. The capital side of the equation could be an issue but, as I mentioned earlier, we've got against the $1.7 billion of net external capital we anticipate raising this year, we have $800 million in hedges in place that are mapped against the 10-year debt issuance that we expect to have this year.
So probably not as many variables overall as there otherwise would be outside of community operations.
Jeff J. Donnelly - Wells Fargo Securities LLC
And for the contribution that is coming from the development stabilizations, I am just curious, how have the assumptions around that changed maybe in the last three, six, nine months? Just – have you guys kind of altered maybe your lease up velocity or sort of concessions?
I am just curious what might have shifted in your expectations.
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, in terms of lease up velocity and that type of thing, hasn't really changed materially. I think the contribution really depends on the mix of assets, which markets they're in, et cetera from year-to-year, but Tim indicated in his prepared remarks, it's pretty similar between 2016 and 2017 in terms of the contribution from the external growth platform.
Jeff J. Donnelly - Wells Fargo Securities LLC
And just maybe one last question for you, Sean. I recognize that supply is expected to be maybe higher into accelerating the Pacific Northwest for example or the mid-Atlantic.
But as you look across your portfolios, in which cities and submarkets do you see the greatest overlap between the product coming online and your actual assets in – your own assets in the submarket?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, that's probably a few minute discussion to go through, kind of submarket by submarket. I'm happy to do that with you maybe offline, so that we don't run the call too long, if you like to go through kind of market-by-market assessment.
Jeff J. Donnelly - Wells Fargo Securities LLC
Happy to do it. Thanks.
Sean J. Breslin - AvalonBay Communities, Inc.
Okay.
Operator
We'll take our next question from Rich Hill with Morgan Stanley.
Richard Hill - Morgan Stanley & Co. LLC
Hey, guys. Just in terms of expenses, there has been I guess some increasing dialog about rising construction costs, primarily due to a lack of available skilled labor.
I was curious how much of that is baked into your forecast and how are you thinking about that?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Rich, this is Matt. You're talking specifically about construction costs and development costs?
Richard Hill - Morgan Stanley & Co. LLC
Yes, primarily construction costs related to lack of availability of people that know how to do things.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Yeah. I mean we've certainly seen pressure in our construction budgets as deals go through our pipeline from development right to development community.
When we start a community and we report it as a development community, at that point, we have what we call Class 3 budget and that is based on bid coverage on almost all of the major trades and usually a pretty significant amount of the total budget has already been bought out by that point. So, what you see is, there is usually not a lot of variability or not a lot of risk in, whether we'll be able to deliver the project on the budget once it starts.
The risk for us is probably more in the deals that haven't started yet that if we underwrote, we felt the hard costs a year ago were going to be x, and now that might be x plus something. And if NOI hasn't grown to cover that, then we might have some erosion in the economics.
And that is a risk. And that also speaks to what Tim's talking about, about how we manage our land positions and most of the land we're controlling at this point, the vast majority of those 25 development rights is on land that we have under longer-term purchase contracts, very little of it do we own given the starts that we have last quarter.
So, there is some exposure there. I will say, what we've seen is hard cost growth in most of our markets, it's still rising faster than rents, but not by perhaps the same margin as it was a year ago.
So, hard cost growth is not – and again that's a reflection of the fact that start activity is starting to stabilize and perhaps the next leg is down. So, hard costs are still rising, but they are not rising as aggressively, the question is will NOIs keep up.
Richard Hill - Morgan Stanley & Co. LLC
Got it. Got it, that's helpful, thank you.
Back to your presentation on page 17 of the presentation. I always like the charts that you guys provide.
I was maybe curious, maybe even a little bit surprised about the comment that housing demand is more balanced. I take that to mean housing demand itself is not relative to multi-family, right?
Because I guess our thoughts are that maybe the homeownership rate has stabilized but we don't see it really going higher. So I was curious if you are seeing sort of the same things.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. I mean, I think we're saying the same thing.
Homeownership rate in 63% range is starting to stabilize and that's what we really meant. The fact that it's stabilizing is evidence that we're seeing more balanced housing demand between for sale and rental.
Whereas, obviously, earlier this cycle virtually all net new household formation was rental. We saw the opposite early in the 2000s and in my remarks I had mentioned, it's about as balanced as we're seeing since 2000, 2001.
And that was not – that was the norm for the 30 years before 2000. It hasn't been the norm in the last 15 years.
But increasingly when you look at demographics, and kind of look at the distortions that have sort of been wrung out of the market, we think we're just going to see a more balanced housing picture. I think a lot of people are still calling for the homeownership rates to tick down a little bit, but we're operating under the assumption that we're seeing some normalization right now.
Richard Hill - Morgan Stanley & Co. LLC
Yes, that's consistent with our view. I am curious, are there any markets that you operate in where you might be seeing more housing demand than you were expecting.
Or is it pretty much the same trend nationwide?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. Rich, it's Sean.
I mean for the most part if you're talking about customers leaving our communities to go purchase homes, now pretty much across all the markets, it's well below long-term averages. The only one that is sort of running at long-term averages is in New England, people are buying homes at a consistent rate, at least consistent with long-term averages, all the other markets, it's still well below long-term averages.
Richard Hill - Morgan Stanley & Co. LLC
Thank you. I appreciate it.
Nothing else for me.
Operator
We'll take our next question from Ivy Zelman with Zelman & Associates.
Ivy Lynne Zelman - Zelman & Associates
Hey, thanks, guys. Good afternoon.
Maybe we can talk about the fourth quarter a little bit and tell us what, if you could, what your renewal and new lease figures were; and then maybe what so far in January in 2017. And then I have a follow-up, please.
Sean J. Breslin - AvalonBay Communities, Inc.
Sure, Ivy. This is Sean.
In terms of the fourth quarter numbers, blended rent change was 1.3%, which is a reflection of renewals at 4.7% and new move-ins down 2.25%. And then as we get into the January, it's around 80 basis points move-ins similar to the fourth quarter, but renewals were down to about 3.5%.
And then if you look forward in the renewal offers, they're running around 6% for February and March, so starting to accelerate relative to the last few months and more consistent with the trends we saw last year.
Ivy Lynne Zelman - Zelman & Associates
And just to follow on that assumption for 2017, as you recognize some of the pressure from supply and assumingly through the first three quarters, what assumptions are you using for concessions in your forecast for renewals?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, for renewal specifically?
Ivy Lynne Zelman - Zelman & Associates
Specifically, yes, because as consumers recognize that rents are down in places like New York and other more competitive markets, I assume that there is something baked in that there will be concessions for those renewals to keep those tenants in the occupancy rate.
Sean J. Breslin - AvalonBay Communities, Inc.
Yes. Typically for us and for most, we don't do really concessions for renewals.
The question is what the rate you're going to get? And so, for example, if we are making renewal offers at 6% for February and March, those probably going to settle maybe in the high-4%s as an example, so there is a little spread there in terms of what you negotiate to versus the original offer.
Concessions really come into play on new leases.
Ivy Lynne Zelman - Zelman & Associates
No, actually I apologize. I apologize, I meant recognizing what you are going to give them in concession on rate.
I'm saying the absolute rate. So is it you pressuring it 2%, 200 basis points?
So I appreciate that is not an actual concession.
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, the range is normally around 110 basis points or so. I would expect it potentially be a little bit wider this year.
So, as I mentioned, it might be 125 basis points, so if we're going out at 6%, maybe it's coming in at 4.75% or so, in terms of where they settle out. That number does move around quite a bit, but I'd say in the long-term, it typically is spread of about 110 bps between what your initial offer is and where it settles out, and what you actually get.
Ivy Lynne Zelman - Zelman & Associates
Okay.
Sean J. Breslin - AvalonBay Communities, Inc.
So, that's how to think about it for renewals.
Ivy Lynne Zelman - Zelman & Associates
Great. And then just lastly with respect to the back half of the year and appreciating your assumptions that you are making on employment and wage growth; do you have any sense in variability if employment growth is not, let's say, what it has been running in 2016, and it's something less than that?
Like how much of a range and/or wage growth is dependent on achieving your expectations for 2017 within the assumptions?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah, Ivy, it's Tim. I can't tell you the exact sensitivity to the model, but as I sort of think about it kind of simplistically, if personal income growth is growing by roughly 5% in your markets and you're adding supply at 2 to 1, all things being equal, again not all things are equal, but to the extent you have a relatively balanced housing demand picture, which we do relative to recent years, that ought to equate into somewhere in the 2.5% to 3% same store revenue growth from our perspective.
So, as people are spending – assuming people spend around a relatively stable percentage of their income on housing. Now those trends tend to sort of follow kind of on a more multi-year basis than they might in one quarter or a couple of quarter time period.
So, I don't want it sounds overly precise, but that's why we generally – we only see negative, really consistently negative rental rate growth when we're in a period of recession, when you're actually seeing job declines and income declines in the face of – even though in the face of no new housing deliveries.
Ivy Lynne Zelman - Zelman & Associates
Got it. Okay, guys, good luck.
Thank you.
Operator
We'll go next to Tayo Okusanya with Jefferies.
Omotayo Tejumade Okusanya - Jefferies LLC
Yes. Good afternoon.
Just a couple from me. Just given the comments about supply and, again, deliveries starting to slow down in the back half of 2017 going into 2018, and some of your thoughts around demand.
Could you just give us a sense of how you expect – what kind of same-store NOI growth you are generally expecting on a quarterly basis? Is the idea it is going to be tough in the first half and improve in the second half?
Is it going to be better in the first half and tough in the second half?
Kevin P. O'Shea - AvalonBay Communities, Inc.
Yeah. I mean Tayo, I think the chart that we provided on slide 21 gives you a sense of sort of trajectory of revenue growth throughout the year, starting a little bit stronger in the earlier part of the year and then trailing off and stabilizing as we get into the back half.
Expenses are pretty choppy, so we provide a full year number, but the timing of tax appeals, insurance claims, things like that generally result in volatility from quarter-to-quarter that we try not to predict too much, because we generally will get it wrong in terms of the timing of the appeals and things like that. So payroll maintenance, the other things we can project pretty well, but those things create some volatility from quarter-to-quarter that we typically try not to provide much guidance on.
Omotayo Tejumade Okusanya - Jefferies LLC
Got you. That's helpful.
And then in regard to some of your new development starts in – construction starts in fourth quarter, could you talk specifically about the Seattle and New York projects? And again, what I'm kind of looking for is there are some concerns about supply in that market.
I am just trying to get a sense of where these two assets are relative to where some of the supply hotspots may be in both markets.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure, Tayo, it's Matt. The Seattle asset is in Belltown, so it's kind of on the Northern edge of downtown, that is a sub-market, in general there is a lot of supply in downtown Seattle, so unlike say our East Side development communities, which are currently in lease-up, which are enjoying a little bit less competition, that is in the fray.
Having said that, it's kind of on the North side of it, so it's a little bit removed from where kind of the heart of all the supply is and it's not going to deliver for two years. So, by that time, it should be coming on the back side of that wave of supply, but certainly, that is going to be competitive sub-market.
The West 61st Street by comparison one of the things that we have loved about that place from the beginning is, it is a very unique and special location and there is not a lot of supply coming there, particularly if you look out two years, it should have almost nothing to compete with, now there is going to be supply in Hudson Yards, there is going to be supply in other parts of Manhattan and to the extent, it's a kind of regional market, obviously there is competition there, but for folks that want to live in that neighborhood, with access to the schools, with access to that environment, all the amenities, cultural amenities, everything that's there, we think that actually we should be pretty well positioned in terms of the timing of when that's going to deliver.
Omotayo Tejumade Okusanya - Jefferies LLC
Got you. And then for some of the other starts during the quarter, any of them close to supply hotspots or no?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Not really, I mean, you look at public market, there's not a whole lot in the East Bay, which again, East Bay has held-up better partially because of that, so we like Emeryville. Hollywood is an area that is getting a reasonable amount of supply.
Obviously, we're delivering in West Hollywood, which is about a mile away this year. So that's a market that's going to continue to be competitive, but a very, very deep market there, and that's at a more – not at the kind of price point that say, relative to its sub-market, let's say Belltown or Columbus Circle would be.
And Teaneck, there continues to be very limited supply, once you get-off the Gold Coast into New Jersey, once you're in land, that market continues to be very solid and steady for us, and we continue to deliver, beat our performance on the New Jersey stuff, partially because of that.
Omotayo Tejumade Okusanya - Jefferies LLC
Got you. Thank you.
Operator
And we'll take our next question from Conor Wagner with Green Street Advisors.
Conor Wagner - Green Street Advisors, LLC
Good afternoon. Matt, earlier you mentioned that you haven't seen cap rates move, and I want to be clear that was a commentary in recent months.
Could you comment on the level at all that you have seen them move in the last year? And if they haven't moved, is that an indication to you that people are willing to accept lower expected returns?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure. I guess, what I'd say is, I think over the last year, they've been relatively flat.
And I think, your all numbers, I think show that at least in terms of CPPI. Underneath that overall bucket, I mean what you hear is that maybe they're up a little bit on kind of core stuff.
There's still every bit probably as low on value-add, where there's more capital chasing less assets. So the composition of it might have changed a little bit.
I think you're right in the sense that people probably are underwriting softer rent or NOI growth than they would have been a year or two ago, so if cap rates haven't moved then, presumably they are accepting lower underwritten IRRs, so that's why I say, it remains to be seen, not a lot of deals have been struck since the latest move up in interest rates. So, there is talk that there might be a little bit of a bid-ask spread on some of the core stuff and that's why, some of that stuff isn't trading as much yet.
But, so there is a dynamic, there's still a lot of capital looking to get out, albeit underwriting is probably not as aggressive as it was. And I don't think there are sellers that really need to sell assets, so it's going to be interesting to see how that dynamic plays out.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yes, Conor, maybe just to add to that. I know based on how we underwrite assets, when we look at residual cap rates, it's really not that much of a function what's happening currently, because we're looking out whatever 10 years, 15 years, 20 years depending upon the pro forma you're on, it's really more of a function of kind of normalized levels of interest rates and cap rates.
So, I think to the extent that the market and my sense is, you are seeing more of that – to the extent the market assumed that you would expect maybe asset values to fluctuate a little less and just in terms of our underwriting and how we think about the value of our assets, it hasn't changed much over the last year.
Conor Wagner - Green Street Advisors, LLC
Okay, thank you. Then, Tim, a follow-up.
Your presentation you give a fairly optimistic view of the economy with business confidence, consumer confidence increasing. So in that environment and if you are also forecasting for stabilization or re-acceleration of rent growth, do you think that that would once again make development more attractive?
So how long do you think that the debt side can be a constraint on development either stabilizing or re-accelerating?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yes, that's asking me to project behavior, I guess the side of it that we had – you didn't bring up really is what's going on in the construction cost side. So the margins aren't what they have been, just mainly because of what's going on the construction side.
So that alone plus I just think regulated behavior. That tends not to change overnight.
We'll see whether new administration changes that, but you talked to banks. I mean the one thing they're definitive about is we're not making – we're not accommodating multifamily capital requests like we were a couple of years ago and part of that is just the regulators leaning on them.
So I think there is other factors that play just in terms of just kind of the pure economics of the business, but I think you make a fair point. I mean to the extent that it's still a profitable business, it's going to attract some capital and we don't see it going from 2% to 0.5%, which it happened in cycles in the past.
I think it is likely to go down may be into the 1.5% range over the next two or three years, but even in our markets, which tend to be a little bit more supply constrained, not as much as cycled because of what's happened on the urban side, but I don't anticipate seeing the same kind of drop-off that we've seen may be in past cycles.
Conor Wagner - Green Street Advisors, LLC
Okay. Thank you very much.
Operator
And that will conclude today's question-and-answer session. I'd now like to turn the call back over to the company for any additional or closing remarks.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. Thank you, Noah.
I think we've been on for a while, so we try to respect people's time and thank everybody for joining us today and remarkably I think we'll see a number of you in just a few weeks. Thank you and have a good day.
Operator
And that does conclude today's conference. Thank you for your participation and you may now disconnect.