Oct 31, 2017
Executives
Jason Reilley - AvalonBay Communities, Inc. Timothy J.
Naughton - AvalonBay Communities, Inc. Sean J.
Breslin - AvalonBay Communities, Inc. Matthew H.
Birenbaum - AvalonBay Communities, Inc. Kevin P.
O'Shea - AvalonBay Communities, Inc.
Analysts
[0B8FLS-E Nick Joseph Juan C. Sanabria - Bank of America Rich Allen Hightower - Evercore ISI Nick Yulico - UBS Securities LLC Austin Wurschmidt - KeyBanc Capital Markets, Inc.
John P. Kim - BMO Capital Markets (United States) Drew T.
Babin - Robert W. Baird & Co., Inc.
Wes Golladay - RBC Capital Markets LLC Hardik Goel - Zelman & Associates John William Guinee - Stifel, Nicolaus & Co., Inc. Richard Hill - Morgan Stanley & Co.
LLC Alexander Goldfarb - Sandler O'Neill & Partners LP Omotayo Tejumade Okusanya - Jefferies LLC Conor Wagner - Green Street Advisors, LLC Richard Anderson - Mizuho Securities USA, Inc. Jeffrey Pehl - Goldman Sachs & Co.
LLC Michael Jason Bilerman - Citigroup Global Markets, Inc.
Operator
Good morning and welcome to the AvalonBay Communities' Third Quarter 2017 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. 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. Aaron, and welcome to AvalonBay Communities' third quarter 2017 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 of AvalonBay Communities, for his remarks.
Tim?
Timothy J. Naughton - AvalonBay Communities, Inc.
All right. Thanks, Jason, and welcome to our Q3 call.
With me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum each of us will provide some comments on the slides that we've posted last night and then we'll all be available for Q&A afterwards. I'll start with a brief overview of Q3 results and then Sean will provide an update on operations and how the portfolio is positioned headed into Q4.
Matt will talk about development activity and how we are positioned to deliver growth through that platform over next two years to three years, and Kevin will discuss the close out of Fund II and provide some insight into the balance sheet at this point in the cycle. And lastly, I'll wrap up with some thoughts about our recent announcement to enter the Denver market and our intention to enter Southeast Florida in the future.
Just starting now on slide 4. Results for the quarter included a core FFO per share growth of 5.8%.
Same-store revenue growth was at 2.2% or 2.3%, including redevelopment; year-to-date same-store revenue growth stands at 2.6% or 2.8%, including redevelopment. And then lastly, same-store sequential growth came in at 1.3% for the quarter and 1.4% once you include redevelopment.
We completed another $95 million in new development in Q3, bringing total completed year-to-date to $1.15 billion. We expect to complete another $650 million or so in Q4, which will result in about $1.8 billion, completed for the full year.
Year-to-date and full-year completions are expected to stabilize, at an initial yield in low 6% range, well above prevailing cap rates for this basket of assets. In his comments, Matt will describe in more detail how these completions along with development underway will drive earnings and NAV growth over the next couple years.
I'll now turn it over to Sean, who'll discuss portfolio operating results.
Sean J. Breslin - AvalonBay Communities, Inc.
All right. Thanks, Tim.
Turning to slide 5, our same-store portfolio continues to produce rent change that's generally consistent with supply and demand being essentially in equilibrium. We've been trending in the 2% to 2.5% range all year long, with renewals consistently in the low 4%s and new move-ins following a more seasonal pattern.
For Q3 renewals averaged 4.1%, while new move-ins were 90basis points. In terms of the regions, Seattle continued to lead the way with rent change north of 5% for the third quarter, followed by Southern California in the low 4% range.
Boston produced rent change in the low 3%s, while Northern California, the Mid-Atlantic, and the Greater New York, New Jersey regions, all deliver change in the 1.5% to 2% range. Moving to slide 6, the same-store portfolio is very well-positioned for the seasonally slower fourth quarter.
Our same-store average physical occupancy rate for October is about 20 basis points above last year and availability is trending roughly 30 basis points lower. For the development portfolio, we met our revenue and NOI expectations for the third quarter.
In addition our deliveries during the third quarter were consistent with our mid-year update that we're comfortable with the expected pace of both deliveries and absorption for the fourth quarter. And, with that, I'll turn it over to Matt to talk about development in more detail.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Great. Thanks, Sean.
Turning to development, our development underway should provide good future growth to both earnings and NAV as those communities are completed and finish their lease ups. Slide 7 shows the $225 million in NOI, that we're expecting to realize from our current development with nearly half of that NOI to come from communities that have not yet even started any leasing activity.
Only $17 million worth of NOI was generated by these properties in the current quarter. So, there's clearly a lot of additional NOI to come.
On slide 8, we translate this future NOI into core FFO. We have raised most, but not all of the capital required to fund this $3.8 billion book of business.
Because the earnings accretion depends on what the ultimate cost of that capital turns out to be we've shown a range of earnings impacts here based on weighted average initial cost of capital between 3.5% and 4%, which in turn translates into $0.53 to $0.67 of incremental core FFO upon stabilization. Slide 9 shows the spot value creation from this development translated into NAV per share accretion.
The current weighted average initial yield on this basket of properties is 5.9% and we believe if these assets were completed and available for sale in today's market they would sell for a weighted average cap rate of roughly 4.4%. This translates into $1.3 billion of value creation on completion or $9.42 per share.
Turning to slide 10, we have a very long track record of delivering strong risk-adjusted returns from our development activity through all stages of multiple market cycles. As Tim mentioned, we expect to deliver a company record of $1.8 billion in development completions in 2017 at profit margins of close to 30%, consistent with the margins we've achieved throughout this cycle.
The chart on the left shows our development yields by year of completion going all the way back to the late 1990s and compares those yields to cap rates in that same year. With the exception of the single year of 2009 at the height of the global financial crisis, we have delivered positive spot value creation on completion every year for 20 years running.
And because we're long term investors and not merchant builders, even those deals completed in the worst-case scenario year of 2009 are today yielding 7% on cost, allowing for plenty of long-term value creation from that book of business as well. The long-term returns can be seen in the chart on the right where we have sorted our unlevered development IRRs by the point in various cycles at which they were completed.
While the deals which were completed earlier in the cycle have delivered stronger long-term returns, the returns across all time periods have been well in excess of our cost of capital and have delivered strong NAV creation for our shareholders. Now, I'll turn it over to Kevin to discuss Fund II performance and the balance sheet.
Kevin P. O'Shea - AvalonBay Communities, Inc.
Thanks, Matt. Matt just touched on the primary way in which we allocate capital to new investments, which is through development; another way we do so is through acquisitions.
In this cycle, one vehicle we've employed to create value through acquisition is our second value added fund through which we commenced investment activity in 2009, and sold our last community this past quarter. In addition to receiving asset management and property management fees, AvalonBay as general partner, received attractive investment returns, as well as, a promoted return of $35 million above our participant share of the fund's investment returns for performance achieved in excess of certain thresholds.
As you can see on the bottom Slide 11, AvalonBay's investment returns on Fund II were strong. Excluding fee income, AvalonBay achieved a gross levered cash flow multiple on its invested equity of 2.4 times and a gross levered internal rate of return of 19.2%.
Turning briefly to the balance sheet on Slide 12, we thought it might be helpful to highlight the evolution of a few balance sheet metrics across this cycle. Specifically, we show how four items, our net debt-to-EBITDA ratio, our unencumbered NOI percentage, composition of our debt, and our credit rating have evolved over three periods 4Q 2009 during the last downturn, 4Q 2013 not long after we completed the Archstone acquisition and then today.
As you can see our credit profile and financial flexibility have significantly improved over the cycle and are arguably as strong as they have ever been in the company's history, which bodes well for capacity to provide continued strength, stability and growth throughout the cycle. And now, I'll turn it back to Tim to discuss our market expansion into Denver and Southeast Florida.
Timothy J. Naughton - AvalonBay Communities, Inc.
Thanks, Kevin, and we're now on slide 13. As you know, we previous – previously announced our entry into the Denver market with a recent acquisition.
In addition, today we're announcing our intention to expand into Southeast Florida as well. We've talked with a number of you over the years about our geographic footprint and some of the key factors that inform our thoughts with respect to market selection and portfolio allocation.
We thought it'd be helpful to provide a little more color behind our decision to expand into these two markets. First, I guess I'd like to preface my comments by saying that while we are generally viewed as having had a stable strategy over the years, it's not been a static one.
In fact, over time, our strategy has evolved to expand into high rise and mixed-use product, which allowed us to enter many urban, TOD and infill suburban submarkets. And through our brands, we now target multiple customer segments, including a value oriented customer through the Eaves brand, and a younger social seeking demographic through AVA.
And we have entered and exited markets over the years, entering markets like Seattle and Baltimore, while exiting markets like Chicago and Minneapolis. So, our decision to enter Denver and Southeast Florida just does not reflect a shift in strategy, but rather an evolution and implementation of our strategy.
And when it comes to market selection, some of the key attributes that we look for and demonstrate on this slide include markets with, first and foremost, the higher percentage of knowledge based employment, over-indexing in stem finance, education, and healthcare related jobs. Increasingly we believe that there will be winning and losing MSAs as economy migrates to more of a knowledge-based economy.
A second and related factor is that we favor markets that appeal to our target customer profile, as we prefer markets that again over-index to the younger, college educated and higher income boomer segments. Third, we prefer markets characterized by lower housing affordability, which helps support demand for rental housing, and higher rental propensities.
Fourth, we prefer markets where the public sector is active and invest in infrastructure and cultural amenities, both important factors to support growth and quality of life within the market. And lastly, importantly, we like markets that we believe play to our competitive advantages as a value-added investor.
Markets characterized by tougher and lengthy entitlement processes that help either constrain or regulate supply, where a talented developer can grow its portfolio and create significant value through a deep level of understanding of its markets and skillful navigation of local politics. Moving now to slide 14.
Of course, these attributes hopefully are correlated with markets that demonstrates strong rent growth over the long-term, which is a critical component of return for a long-term investor, and something we consider to validate this preferred attributes. As you can see from this slide, over the last 15 years, Denver and Southeast Florida have actually compared favorably to our overall portfolio.
This chart reflects market level rent growth over that time. Performance at the REIT level has been somewhat stronger.
As you can see, Southeast Florida has performed stronger than our East Coast footprint, while Denver has performed in line with our Western markets. Now to slide 15.
One last point, I'd like to make is that these expansion markets enhance overall portfolio diversification. Southeast Florida in particular is not well correlated with our existing markets and both markets provide some diversification from the areas of greatest concentration, that being California and the Northeast.
At target allocation levels the portfolio is roughly split into three thirds; a third California, a third Northeast, and a third higher-growth markets. In terms of market penetration strategy, we expect that we'll invest both through acquisitions and development.
And in addition, may choose to capitalize local developers to initially leverage their market knowledge and pipeline to help accelerate our expansion objectives. Of course, our tactics will ultimately be a function of value and opportunity as we have no set timetable to reach any target allocation.
Smart capital allocation will remain the priority, it's always been, and we look to deploy capital appropriately across the cycle. So, in summary, turning to slide 16, it was a solid quarter with core FFO above our outlook and the portfolio is well positioned headed into Q4.
Development deliveries are tracking our mid-year reforecast and development should contribute meaningfully to FFO and NAV growth over the next two years to three years. Our balance sheet is well-positioned to fund additional growth and protect the company from downside economic scenarios.
And lastly, our strategy continues to evolve, as we are excited to add Denver and Southeast Florida to our market footprint, as we believe those markets contain many of the key attributes that allow us to create even more value for shareholders over time. So, with that, Aaron we'd be happy to open the call for Q&A.
Operator
Thank you, sir. Ladies and gentlemen, And we'll go first to Nick Joseph with Citi.
[0B8FLS-E Nick Joseph
Thanks. Tim, I appreciate your comments on the market expansion.
But just wondering why now is the right time to expand into these new markets, and then how did you weigh market expansion against going deeper into your existing markets?
Timothy J. Naughton - AvalonBay Communities, Inc.
Nick, yeah, a fair question from a timing standpoint. Obviously, we're several years into the current cycle.
Denver in particular just had a very nice run this cycle. I guess, I'd say a couple things; one, as it relates to acquisitions, we will be more cautious particularly with respect to sub-market focus, really trying to focus more on the sub-markets that we think are a bit more supply constrained given just sort of current recent trends.
As it relates to development, as I mentioned, we do anticipate using really, both acquisitions and development. I guess I'd say these markets as well as our existing footprint, the land frenzy is sort of behind us at this point.
And we've also learned over time that to take advantage of any distress or downturn that might occur from any economic correction, you need to be in business. And so, it's our attention to establish sort of beachheads in both those regions so that we are positioned to take advantage when the markets do turn.
And then I did mention, willingness to look at development JVs, which we do think is a good way to tap into deals maybe that might deliver two years to three years out. And so, when you think of sort of a mix of timeframes that you might get from acquisitions, development JVs or our own sponsored development, we think it sort of diversifies kind of our risk against any cycle risk that may be out there, as they have timeframes from now to four years or five years from now.
As I mentioned, our long-term objective is to have a full-service office in each region. And I think one of our key competencies has been able to build great teams in our regions and to support them appropriately, essentially.
As it relates to our existing markets, we're always looking to penetrate those markets more deeply. So it's always something to consider, and we don't think we're missing out opportunities today in our current markets.
But we do think there is an opportunity to expand our horizons a bit. As you know, as I mentioned earlier, we favor knowledge-based economies, and AvalonBay's markets, while we're heavily indexed there, we don't have a monopoly on knowledge-based jobs.
I think it's kind of interesting, I think the Amazon HQ2 project is sort of evidence of that. Recently I've heard that Google, who as I understand allows employees to move to almost any market they want, has shutdown Denver recently because it was such a popular destination.
So, it's a recognition that we think both these regions in a way provide a bit of a release valve – the Northeast in the case of Florida, Southeast Florida, and Denver in the case of California particularly, and particularly Northern California. So I don't know if that's entirely responsive to your question, but just a few thoughts.
[0B8FLS-E Nick Joseph
Thanks. Yeah, that was very helpful.
And then just one follow-up, were there any other markets that you considered expanded into and then could further expansion be announced in the near or medium term?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. No.
Thanks, Nick. Thanks for the follow-up.
Well, first of all, I mean, every couple years, we always take a sort of a comprehensive look at our markets, and so it's something we've been thinking about honestly for the last 10 years or 15 years, whether we had the right footprint. In most cases, it resulted in us maybe exiting markets, as opposed to entering markets, and doubling down on our existing footprint, sort of along the lines of your earlier question.
But one of the reasons we're announcing Southeast Florida is because we did get that question a lot after we announced the acquisition in Denver, and this represents the two markets that we made a decision on today. So I don't think you should expect that that there's any near-term announcement of further expansion beyond this.
[0B8FLS-E Nick Joseph
Thanks.
Operator
We'll go next to Juan Sanabria with Bank of America.
Juan C. Sanabria - Bank of America
Hi. I was just hoping you guys could give your latest thoughts on supply, kind of what we should expect for 2018 versus deliveries.
In 2017, there's been some slippage. And which markets across your main regions stand out as improving or getting weaker in 2018, as you see it presently?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, Juan, this is Sean. I'm happy to address that.
What I can tell you is based on what people are communicating to us at present regarding the delivery of communities that may have under construction is, for deliveries in 2017, it's about 89,000 units. In our footprint, that's about 2.1% of inventory.
And based on what's on the books today that we can see across our footprint – in 2018, it's about 98,000 units or about 2.3% of inventory. Based on recent history, particularly the difficult construction environment today in terms of labor availability and things of that sort and recent precedent in terms of delays that we're hearing from multiple developers out there, I'd expect a 2.1% for 2017 to actually come down a little bit as we get through the end of the year into January and look what actually completed, probably in the high 1% range would be my guess is where that comes out.
And so across the footprint, we would expect an increase in supply next year. My guess is, Q3 will look like 2.3% to 2.5%, maybe when you get to January.
But what actually gets delivered next year probably will be less than that. But if you just look across the footprint, probably more supply in 2018 versus 2017.
As it relates to the regional distribution, I can tell you that New England is expected to come down about 60 basis points next year, primarily a function of supply in the Boston market coming down. And then, all the other markets are you know flat to up a little bit.
The markets that are probably going to be up more significantly in the Pacific Northwest is projected to be up about 40 basis points from 3.5% to 3.9%. And then Southern California across all three major markets there, L.A., Orange County, and San Diego, it's expected to be up about 40 basis points.
Most of that relates to an increase in supply in the Los Angeles market. So what I'd generally say is, a little more supply in 2018 with the exception of the markets that I mentioned, and Boston in particular.
And when you see a slowdown, it'd really be second half of 2018 deliveries before you start to see that. You know, we're running about 60 basis points of inventory on a quarterly basis right now.
That's not expected to fall off until you get to basically Q3 of next year. So Q3 and Q4 start to fall off.
So that's sort of the broad way to think about it, if that's helpful.
Juan C. Sanabria - Bank of America
That is. And just a follow-up to that, if you can comment on your expectations for Northern California, and then also have you seen any impact on the availability of labor post the hurricanes in trying to complete developments?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. So, why don't I take the first one, and we can talk about the second one as well, probably Matt or Tim.
But the first one, when you say expectations are you talking about supply expectations or...?
Juan C. Sanabria - Bank of America
Yes. Sorry.
Sean J. Breslin - AvalonBay Communities, Inc.
Okay. Yeah.
No problem. So, in terms of supply expectations, if you look into 2018, the only market that really of the three is expected to see a deceleration in deliveries is San Jose.
It's running a little north of 3% of inventory right now. And for next year, we're expecting it to be in the low 2% range.
So, we expect to see a pretty material drop off in deliveries in the San Jose market in 2018, but it's relatively flat when you look at the East Bay and you look at San Francisco.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
I guess, I'll speak. This is Matt.
I can speak a little bit to the second question about labor availability, and the impact of the hurricanes. It's probably too early to tell, it certainly seems reasonable to assume that it's going to impact the labor market particularly for construction, particularly for less skilled construction labor.
We haven't really seen that yet, obviously we're not building in the markets that have – were most directly impacted by the hurricane, but certainly, it's something to watch for as the rebuilding efforts gets started, which usually there is a little bit of a lag effect on that.
Juan C. Sanabria - Bank of America
Thank you.
Operator
We'll take our next question from Rich Hightower with Evercore ISI.
Rich Allen Hightower - Evercore ISI
Hey, good morning, guys. Sean, really quickly, if you could run though new and renewals by market in the third quarter?
And then I've got a follow-up to that. Thanks.
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. As opposed to going through each one of the markets, there's 16 markets out there across six regions, happy to share that with you maybe offline as opposed to consuming a lot of time on that.
But broadly speaking across the portfolio rent change for the third quarter was 2.5%, which is 4.1% on renewals and 90 basis points on move-in, as I mentioned in my prepared remarks, but if that's okay, we can take the rest of the detail offline.
Rich Allen Hightower - Evercore ISI
Yeah. No, that's fine.
I appreciate that.
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah.
Rich Allen Hightower - Evercore ISI
Second question, in the presentation the $111 million of NOI from development not in lease-up. Can you guys give us a sense of when over the course of the future that's supposed to hit roughly?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
I think that represents kind of all the deals that are on our development attachment that haven't yet started leasing. So, if you go to that attachment aid, it will lay out kind of which quarter they all start to expect leasing, but it's basically over the next, call it, two years, they'll go from starting leasing to stabilization.
Rich Allen Hightower - Evercore ISI
Okay. All right.
Thanks, Matt. That's it.
Operator
We'll go next to Nick Yulico with UBS.
Nick Yulico - UBS Securities LLC
Oh, thanks. In the past, you've talked about having around $1 billion of development starts annually.
I'm wondering if that's still a good number, and whether you're thinking about raising that level because of signs of the apartment cycle lasting longer than expected?
Timothy J. Naughton - AvalonBay Communities, Inc.
Nick, this is Tim. If you look at our development rights pipeline, it kind of telegraphs kind of where development volumes are headed.
I think, we have about $3.2 billion in development pipeline that tends to be you know the three years, three-plus years, maybe three and a half years' worth of pipeline. So it's still kind of in that $1 billion range, maybe a little less.
As we've said in the past, we think it's probably going to trail off a bit, just given – even though the cycle is going longer, the economics are less compelling and less deals are sort of making it through the screen, if you will, and kind of hitting targets and we saw maybe earlier in the cycle just given where really the construction costs have gone and are going right now relative to rents.
Nick Yulico - UBS Securities LLC
Okay. Thanks, Tim.
One other question is you know for the future development projects you have on 96th Street in Second Avenue, there's been some press about this that the governor is kind of looking into the – the – whether it's parkland or not, and whether the project can go forward. Any sense on when and how this may get resolved?
And if you could just remind us what the level of your investment is in that project? How much of that you know development right that you have on in the supplemental for New York accounts for that project?
Thanks.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure, Nick. This is Matt.
Yes, that's an interesting question about what's the difference between a park and a playground, which apparently there's a legal distinction there, which matters to the governor and the mayor. So, we fully expect that that will get worked out, but it will take some time.
I don't think we have great visibility yet in terms of how much time that might add to the predevelopment schedule. That is not a project that we expected to start in the next year, so we really view that as a next cycle deal in some ways, you know, maybe it's two years to three years away from starting, depending on how everything shakes out.
It does represent – I want to say, it's about $700 million, $650 million of the $3.2 billion in development rights. And just to be clear, that's a – that is a ground lease, so that actually doesn't reflect the value of the real estate.
Nick Yulico - UBS Securities LLC
Thank you.
Operator
We'll take our next question from Austin Wurschmidt with KeyBanc Capital Markets.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Hi. Good morning.
Thanks for taking the question. Just looking at the like-term rent growth that you outlined in your slide deck, track in a little bit ahead of last year, it looks like are in line-ish.
I was just curious what markets are really driving the inflection? And then with the supply backdrop that you talked about, do you think that that remains stable into next year or we could see a pullback a bit?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. Austin, this is Sean.
Just to be clear as it relates to the rent change this year versus last year. Jason can probably walk through the numbers with you, but overall rent change is down this year relative to last year, as a function of really two things.
One is the supply that we've talked about, and two is just a slower pace of job creation generally across the U.S. and in our markets, so rent change is down.
In terms of inflection point, I think, the point we're trying to make is that rent change appears to be leveling off. We're basically around 2% to 2.5% all year long, and that we certainly aren't really talking much about guidance as it relates to next year, but trying to provide some context on the supply side in terms of what we might expect, which is similar to essentially slightly greater supply in 2018 as it relates to 2017.
Timothy J. Naughton - AvalonBay Communities, Inc.
And just then maybe just to add to that, this is Tim. Just in terms of the macro, – as Sean said, we're not giving guidance for next year certainly, but in terms of the macro environment, I guess, we probably see more cross-wins than anything else.
It is our expectation, Sean mentioned earlier, supply to tick up a little bit. I think, all things being equal, we probably expect job growth to tick down a little bit, just given unemployment being at such a low rate right now, and the difficulty of finding skilled labor, but those – that is offset by some sort of positive trends as well.
The Consumer and business confidence continues to increase, labor participation rates are on the rise a little bit, and wage growth is on the rise as well. We think all those things could help stimulate household formation.
So, I think, there is – I think, there's probably going to be some offsets, but in general, we think it – it's probably shaping up to be a decent environment for 2018, without getting into much more detail in terms of how that might be translate into our portfolio.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
I appreciate the detail, Tim. And then, just lastly for me, I was just curious what your thoughts were on, what you attribute the above average rent growth in both Southeast Florida and Denver over the last 15 years versus kind of the overall portfolio?
Timothy J. Naughton - AvalonBay Communities, Inc.
Well, it's really, it's been on the demand side. I mean, that the – the markets haven't suffered from supply and Denver is probably – probably has more than it should have right now.
But – the – I'd say, the Sunbelt has actually performed quite well this cycle. Supply growth hasn't been – and at least in the Sunbelt hasn't been that much greater than some of our coastal markets, and it's had some pretty strong growth even in the – even in some of the areas that we thought we – our markets captured a lot of the – for instance, a lot of the higher tech jobs.
We're seeing a lot of that – seeing a lot of that accumulate in some of the Sunbelt markets, and certainly it's true of Denver as well. So I think, they've become – Denver has become a – become somewhat like – we're seeing that somewhat like we saw Seattle 10 years ago, becoming another kind of tech anchor in the Western U.S.
And you know Southeast Florida certainly has benefited from some of the anti-growth initiatives perhaps in the Northeast over the last cycle or so.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
And just one quick follow-up to that. I'm just curious how you think about the volatility of these markets through the cycle versus the existing portfolio?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah, you know, great question. So, Denver would tend to be more volatile, and Southeast Florida would tend to be more stable.
So, which- as I mentioned in my earlier remarks, Southeast Florida like D.C. is the one market that's sort of negative or not – not well-correlated with the rest of our footprint.
So, there's some appeal to us for that, and whereas Denver would be – would tend to track more what you see in the West Coast, which means you – you got to be careful in terms of how you allocate capital over the course of the cycle, and be a lot more sort of thoughtful from a timing perspective.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Great. Thanks for taking the questions.
Operator
We'll take our next question from John Kim with BMO Capital Markets.
John P. Kim - BMO Capital Markets (United States)
Thanks. Good morning.
GGP discussed on its earnings call a JV agreement with you to build multi-family in one of their Seattle malls. How big of an opportunity is this for you as far as developing an existing retail?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. This is Tim here.
Yeah, we are aware that GGP announced an agreement in principle on a single project in Northern Seattle. You know, there's – you know, every time there's been a structural change in the economy that's resulted in massive repurposing of real estate.
It's tended to happen over a longer period of time when you move from agriculture to manufacturing, as you move from manufacturing to more information based economy. I think, there are a number of trends right now that we're going to – that's just only going to accelerate, whether it's – it's happening in the area of digital commerce, which is relevant to GGP.
But in terms of things we're seeing in the sharing economy, the blurring of work with play, just the nature of work changing just based upon knowledge-based jobs. I think, that's – we think that's going to have a big impact in terms of the need to repurpose real estate over the next 10 years to 15 years.
And a lot of great real estate has been consolidated over the last 15 years to 20 years. And so, we think there is an opportunity to partner with some of these owners that have consolidated great – great real estate during that period time, when high density housing is part of the solution, when it comes to repurposing.
In terms of the form of that partnership, it's going to take different forms than it has already on deals that we've done. It might just mean helping them re-plan it and splitting the property, and just taking a piece of it for residential for ourselves and letting the existing owners sort of re-plan or take the rest of the property.
It may be more of a condo structure, like we had at Assembly Row with Federal, where we may be building the retail and deeding it back to them, sort of in a condo structure. We own the retail – own the residential, they own the retail; or maybe a JV structure, which we're working through with GGP, where we own together the residential component, and generally we'll be amenable to that structure where we think we have a partner on the other side, where there's a clear alignment of interest, or long-term owners.
Both believe sort of in the long-term viability of that location and the real estate. But we think it's going to be a big opportunity over the next 10 years or 15 years to be playing a role sort of in the repurposing of, like I said, just really great real estate that's going to need to shift its usage based upon some of these larger longer-term trends that we're seeing.
John P. Kim - BMO Capital Markets (United States)
So as far as control rights or ownership of land, are the characteristics pretty similar to freestanding multi-family, are there major differences, or it depends on the benchmark?
Timothy J. Naughton - AvalonBay Communities, Inc.
So, I think, it's – I think, it depends. I kind of outlined three structures there and one – in the first case, it'd be analogous to what we do today.
And you basically own and control the residential component. And the second case, it may be again sort of a more of a condo structure, where we're owning one piece of it, of the sandwich, so to speak, and they're owning the ground plain.
And in other case, is this going to make sense to venture it. And we're going to have to -- we're going to – there is going to be mutual consent rights, as it relates to – as it relates to the asset, whether financing sale or anything else.
John P. Kim - BMO Capital Markets (United States)
Okay. And then a question on CapEx on our numbers AvalonBay spent least amount of CapEx both revenue enhancing and maintenance CapEx in this sector.
Can you just describe why that's the case? Do you just see better returns in developments or asset recycling, or is it just a reflection of the average age of your portfolio?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah, John, I'm happy to address that. You know, if you look at our CapEx for last year and this year, call it roughly 5% of NOI.
And – but if you look at – that's kind of the recurring CapEx. If you look at revenue enhancing, yeah, fair point, we're spending about $50 a unit on that, which is dramatically lower than most of our peers.
As you may know, the -we separate out our redevelopment bucket and we invest in our asset separate from the same-store pool, which is something that we think is important for investors to understand in terms of how we're allocating that capital and the returns that we generate on that capital. So that certainly has something to do with it.
In terms of the nature of the portfolio, certainly you can go through our portfolio relative to others and look at age and things of that sort. But all those factors play into it and we want to make sure that we're being thoughtful about the timing of CapEx whether it's both defensive and offensive in nature to make sure that we're investing at the appropriate time in the asset and that we're also demonstrating to investors the returns that we're earning by investing in sort of offensive-oriented CapEx.
So, hopefully that makes sense, and your other questions have been answered.
John P. Kim - BMO Capital Markets (United States)
I'll follow offline. Thank you.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah.
Operator
We'll go next to Drew Babin with Robert W. Baird.
Drew T. Babin - Robert W. Baird & Co., Inc.
Hey. Good morning.
I noticed in the development disclosure quite a bit of progress on the leasing front, if you look at projects delivering over the next – really the first units delivering over the next three quarters or four quarters, at the same time, the average yield on the pipeline ticked down a bit. I'm just wondering if there is anything strategic going on in terms of maybe conceding a little bit on price to increase the velocity of leasing or is that something that's just related to things moving in and out of the pipeline?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. Drew, this is Sean.
I'll take part of that, and then if Tim or Matt want to jump in, they're welcome to. But in terms of leasing velocity, there is no question that in some markets in particular to the extent that we're either trying to close out the leasing of a community or we're starting – kind of jumpstarting it, particularly in the third quarter that we will yield a little more on price to get that velocity, either to get the initial lift as I mentioned or to finish up.
And I said that was particularly the case as it relates to both North Station and Dogpatch this quarter. To give you a sense, on Dogpatch, as an example, we leased and occupied 32 and 36 a month during the quarter, and rents certainly took a little bit of a hit on that one as it relates to trying to push the velocity before we get into the seasonal slower fourth quarter.
In addition on Dogpatch, it's early in the delivery, it's going to have all the amenities, just still heavy construction. So, you tend to yield a little bit more on price during that period of time.
So the real rents there we probably won't know until the spring. And now in North Station, we were just trying to accelerate the completion of that project in terms of the lease-up.
We're in the 70% plus range there in terms of lease and occupy percentage. We delivered some larger penthouses late this summer that we're trying to get occupied instead of having them sit there for the winter.
So, things like that come into play at asset level, execution plans and you certainly see that reflected in the rents on some of the assets on the development attachment.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Hey, Drew. This is Matt.
Just to follow-up on that, as it relates to the overall yield, the yield on the development bucket last quarter I think it was a 6.0% and this quarter it's a 5.8%. And probably about half of that 20 basis point reduction is just changes to the bucket, deals that completed in the second quarter that are not in that bucket anymore that were higher yielding.
And then the other half of it call it the other 10 basis points is the little bit of erosion from last quarter in developments that we're leasing both quarters, and a lot of that's just the deals that Sean mentioned.
Drew T. Babin - Robert W. Baird & Co., Inc.
Great. That's very helpful.
And then I wanted to dig in a little bit on the Lakewood acquisition being that it's kind of the only case study so far in this growth market plan for Denver and Southeast Florida. Specifically in Lakewood, what's unique about that market in terms of barriers to entry, sort of, the Mindy concept, and specific demand drivers that may be directly in that market?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure. This is Matt, I can take that one as well.
It is definitely a submarket that's seeing a lot less supply than most of the submarkets in Denver. A lot of the product in Denver is being delivered downtown.
This is Lakewood North, it's really on the border between Lakewood and Golden, it's off of I-70 in a master planned kind of controlled community called Denver West, which includes the National Laboratory for Renewable Energy, it includes a fair amount of office, there is Mills Mall across the freeway that was part of it. So the immediate environment is, it's highly controlled by one family that's kind of built it out over the course of decades.
But then even beyond that when you get out into the broader submarket of which it's a part, Golden is on a permit allocation system, so there is a lot of supply constraints there. And then Lakewood has its own jurisdiction.
It's not as restrictive as Golden, but it's certainly not as permissive as Denver. So it is an area that's seeing less supply, and I think generally what you see in Denver is the further west you go, the more supply constrained it gets, and some of that's regulatory and some of that is topographical, you start to get up into the mountains.
And this asset is really in the foothills. It's a great place to live, it's for people that are looking to get out on the mountains on the weekend, which is part of that Denver lifestyle, which is so appealing to so many folks.
So, we were pretty excited about it, and I think it is a reflection of kind of the locational strategy we're going to take there. At this particular point in the cycle, there's a lot of activity and a lot of excitement about downtown, a lot of people want to live there.
There is a lot of new product being delivered. At some point, pricing may make sense to us there, but for right now we felt that this offered a much better risk adjusted return.
Drew T. Babin - Robert W. Baird & Co., Inc.
Great. That's very helpful.
Thank you.
Operator
We'll go next to Wes Golladay with RBC Capital Markets.
Wes Golladay - RBC Capital Markets LLC
Hey. Good morning, everyone.
Looking at the retail densification opportunity, do you underwrite the developments on a standalone basis looking at supply and demographics or does the quality of the retail asset influence the decision?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. This is Tim here.
Well, certainly, the quality of the retail asset is oftentimes reflective of the quality of the location. And so, to the extent it's a better location, we're going to demand probably a lower going in yield, with the expectation we're going to make more of a return on growth over time.
But certainly the existing retail, if it's dying retail, and the whole site needs to be sort of redeveloped, that's a very different kind of risk profile. We'd consider it, but it's more of a master plan exercise, and it is sort of surgically where you're going in and maybe pick off part of the parking field or taking down one of the anchors and sort of re-planning some sort of a lifestyle project that integrates into the existing mall.
Wes Golladay - RBC Capital Markets LLC
Okay. And at what point do you enter these decisions, are the projects largely entitled or do you take your skillset and work through the local entitlement process?
Timothy J. Naughton - AvalonBay Communities, Inc.
No, we're partnering in many cases with the owner of the real estate. We think one of the things we offer them is both capital and skill and talent, and so they're leveraging both as part of the relationship.
So, typically, it's kind of the deals I just described; we'd be sharing in the pre-development work, we'd be taking most of the lead, as it relates to design and entitlement, but obviously we'd be working alongside with them during that process.
Wes Golladay - RBC Capital Markets LLC
Okay. And then lastly, you guys talked a lot about volatility, returns and correlations, just wondering how you at the top down view your portfolio.
Do you view like sort of a Sharpe ratio and is that the reason, maybe the volatility in Northern California, New York was a little too volatile this quarter, and you just wanted to balance it out, is that why there's was a reduction in those regions?
Timothy J. Naughton - AvalonBay Communities, Inc.
No, not really. I mean, when you look at New York and Northern California, probably just- with respect to going to California, thinking long term, we just felt like we're probably a little more over-indexed there at 20% of our existing portfolio relative to the size of the market and our overall portfolio.
I mean, Southern California is a much bigger geography, and so even if we were at a market index at Southern California, and over-indexed in Northern California, Southern California would still be a bigger part of our portfolio. So, it's probably we're not necessarily scared by volatility, because a lot of times you can diversify that way through other markets.
But we are mindful of when the markets are more volatile is how we invest through the course of the cycle, because total returns do matter, when you enter – when you invest the initial capital.
Wes Golladay - RBC Capital Markets LLC
Okay. Thank you.
Operator
We'll go next to Hardik Goel with Zelman & Associates.
Hardik Goel - Zelman & Associates
Hey, guys, thanks for taking my question. Just on the like-term rent change, you guys did 1.9% in October and then if you look at occupancy, it was up 20 basis points, so you could say like-term revenue was up 2.1% in October.
What was that compared to last year?
Kevin P. O'Shea - AvalonBay Communities, Inc.
I don't have October last year right in front of me, so I am happy to get back to you on that offline.
Hardik Goel - Zelman & Associates
All right. And just one more quick follow-up.
When you say your exposure, you're going to take it out in New York, I guess, the target exposure is lower there, where in New York, because your portfolio is so diversified, and there's a lot of urban, there is a lot of suburban. Have you guys kind of outlined which assets you're going to look to sell and where are those assets typically?
Timothy J. Naughton - AvalonBay Communities, Inc.
Maybe a mix of urban and suburban over time. Right now, we're at 24%, we talked about our target being 20%.
I don't have numbers right in front of me, but it's sort of roughly split between urban and suburban right now. More recently, we've been selling some of our suburban New York portfolio, in part because that's where we have a deep development pipeline.
We've been able to create a lot of value in Northern New Jersey. And then to some extent, it's strategic.
We've been selling out of parts of Connecticut, particularly the Northern Fairfield and areas north of that.
Hardik Goel - Zelman & Associates
Thanks. That's all from me.
Operator
And we'll take our next question from John Guinee with Stifel.
John William Guinee - Stifel, Nicolaus & Co., Inc.
Oh, John Guinee here. Thank you very much.
Talking a little bit about development. First, hard costs last 12 months, how much have they gone up, and has land adjusted down yet to reflect that increase in hard costs?
And then second – and if you answered this, I apologize, but what yield on cost do you expect in Denver and South Florida, higher yield on cost, or lower yield on cost? And what kind of product do you build in for example the various South Florida markets, where Miami to West Palm Beach is probably 75 miles, 80 miles distance?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure, John. This is Matt.
As it relates to the first question, we see hard costs have been growing probably through the course of this year in kind of the mid-to-high single-digits, depending on what market you're in. So, they're still growing well faster than inflation and faster than rents.
So you're right. In the long run, that would impact land valuation.
I'm not sure we've seen land values drop yet, but we've certainly seen terms start to soften a little bit in most markets, and land pricing in general is not continuing to go up, maybe with one or two exceptions. So that's always the first step and it does take a while for the market to adjust, and there's plenty of deals in the pipeline that are out looking for financing.
But some of those deals are not penciling the way that sponsors thought they would. So we do expect that there should be continued softening there.
But it's certainly, as we sit here today, it's definitely continuing to get harder to find business that underwrites today because it takes a while for that to play itself out, that process. As it relates to yields and product in the expansion markets, cap rates I think in Denver and Southeast Florida are probably pretty similar to what we see, say, in our DC markets or in Boston.
They're a little higher than the West Coast, they're little lower than some of the suburban Northeast stuff. So, therefore, we'd be looking for yields probably roughly similar to that kind of low-to-mid 6%s, depending on the product and the submarket and the location.
And our early indications are certainly that folks are finding success and finding deals that meet that criteria over time. Yes, Southeast Florida is a very diverse market, that's one of the things we like about it.
And ultimately over time, just like in our other markets, we would look to have exposure. You look across kind of our portfolio in Metro New York, in Metro DC and Metro Boston, we have everything from wood frame, garden, apartments, there are three stories in some of the further out suburbs to a lot of kind of mid-rise wrap and podium products that's in field suburbs to high rises downtown.
And all of those products can be supported in Southeast Florida at different levels. One of the big differences in Florida obviously, just because of the hurricane curse (52:43), none of its wood frame, it's all concrete but the costs are very different in these different markets.
So, you can develop. Certainly what we've seen is many private developers have been able to develop profitably in that market as well across all those different product types.
Timothy J. Naughton - AvalonBay Communities, Inc.
Hey, John, it's Tim here, maybe, just follow-up, just briefly on the land question. Yeah, Matt is right, I mean, the land markets really haven't adjusted.
Our focus really has been on, one, as it relates to new development, in some cases, densifying our own assets where we've got excess parking, where we could take advantage of it, do negotiate the transactions either with folks that are looking to repurpose some of their assets and, thirdly, RPs where we're negotiating basically land residual values with jurisdiction. So, those efforts are bearing more fruit than just kind of going through the open market because in many cases the land economics still make no sense.
I don't think we've tied anything up in Northern California maybe in three years, from terms of land standpoint. So, we're using a lot of different strategies to continue to sort of look at opportunities, but most of them are strategies that do allow for some adjustment to the land bases through a negotiated process.
John William Guinee - Stifel, Nicolaus & Co., Inc.
Excellent. Don't slow down.
Thank you.
Operator
We'll go next to Rich Hill with Morgan Stanley.
Richard Hill - Morgan Stanley & Co. LLC
Hey. Good morning, guys.
So, what are the, I guess, more macro trends we're seeing is some declines in bank lending to multifamily, maybe that's because there's less demand from owners given decline in transaction volumes or maybe that's because of tighter lending standards. But I am wondering if you're seeing any slowdown in supply as a result of declining loan growth, or is the supply that's in the pipeline pretty much baked at this point?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. Rich, this is Sean.
In terms of what's in the pipeline today for 2017 and 2018, that's pretty much baked given the duration of the construction cycle. What you're really referring to is deals that might be starting in the fourth quarter or sometime in 2018 and delivering in 2019 and 2020.
Richard Hill - Morgan Stanley & Co. LLC
Right.
Sean J. Breslin - AvalonBay Communities, Inc.
Certainly, we're hearing about the exact trend you're speaking to, as it relates to the tighter lending environment. Several of us were just at ULI just over a week ago, and heard about that a fair bit from a number of the private developers, both longer-term owners and particularly on the merchant builders side, and they're going to their second, third or fourth tier bank to try to get a deal done.
So, certainly it's putting more pressure on them in terms of how they're thinking about their deals and the equity sources that are available to fund the gap because typically the deals that are getting done, the loan to cost ratios are coming in a little bit lower than earlier in the cycle. So, between that – between where construction costs are today and the expectation that based on what we see in the environment, there is the potential for construction costs in some markets to run above rent growth.
It certainly is going to be a regulator on supply beyond what's already in the pipeline.
Richard Hill - Morgan Stanley & Co. LLC
Got it. And is there any markets that makes you maybe more bullish or less bullish on?
Sean J. Breslin - AvalonBay Communities, Inc.
As it relates to the same-store portfolio or...
Richard Hill - Morgan Stanley & Co. LLC
Well, really just overall in terms of – look, you are a well-capitalized entity, some of the maybe merchant builders are less well-capitalized. And so, are you seeing opportunities in some markets where maybe some of the smaller competitors are starting to pull back or is it too early to see that?
Sean J. Breslin - AvalonBay Communities, Inc.
I'd say at this point and Matt and Tim can certainly come in as well. But I'd say it's probably a little too early for that, people have their deals capitalized sort of already started obviously.
Question is what they may have in their pipeline that once they get the permits, once they figure out what the costs are, what the economics are, does it make sense? I'd say we've probably seen a little bit of that, but not a substantial amount at this point.
It'll probably take a little bit of time for that to bleed through in terms of opportunities don't get done, and therefore someone's looking to recycle land, so probably a little early in the cycle for that.
Timothy J. Naughton - AvalonBay Communities, Inc.
This is Tim. And we have seen, we've started to see some opportunities sort of recycle, maybe land deals we looked at two years or three years ago that maybe less experienced sponsors guided to, and didn't sort of fully understand the economics of what they were taking on either in terms of predevelopment requirements, or frankly the construction costs.
So you're starting to see a little bit of that. It's happening more in some of the markets, as I mentioned earlier like Northern California or Seattle, which tend to be a little bit more volatile and maybe there are some folks that are experiencing sort of the wrong side of that volatility at the moment either in terms of what the numerator or the denominator is telling them when they're running their performance.
Richard Hill - Morgan Stanley & Co. LLC
Got it. Thanks, guys.
I'll follow up offline with any further questions.
Operator
We'll go next to Alexander Goldfarb with Sandler O'Neill.
Alexander Goldfarb - Sandler O'Neill & Partners LP
Good morning. Just two quick questions here.
First on Southeast Florida geographically, did you guys outline – are you more concentrating in Miami and the immediate market sort of a little north, a little south or are you going all the way up to West Palm, if you could just outline your thoughts?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Yeah, this is Matt. We are interested in having a presence in all three of the metro areas there: Fort Lauderdale, West Palm and Miami.
So, it's going to be a function of where transaction volume is both on the acquisition and development side, but we certainly, over time would be interested in having a presence in all three of those submarkets.
Alexander Goldfarb - Sandler O'Neill & Partners LP
Okay. And then, Tim, on your comments on a little deemphasizing New York and San Francisco, how much of that is just a function that the markets on an absolute basis have gotten too expensive, whether it's on cost to develop or acquire or the absolute rent levels needed to make sense and sort of the other markets may have a broader tenant base and economic base to allow more deals and allow a broader renter profile.
So, how much of de-weighting Northern California and New York is based on pure economics and cost?
Timothy J. Naughton - AvalonBay Communities, Inc.
I guess, Alex, it's partly that – in the case of New York, I mean part of it's just the total size of our overall portfolio. So, we're more comfortable with something closer to 20% than 25%, as it relates to weighting and particularly, when you combine it with Boston.
In the Northeast, those have been good markets, long term, but there are some challenges at the same time, whether it's California, Northeast just from a tax base and the like. So part of it is, just a little bit of additional diversification providing other growth opportunities beyond Northeast and California, which as I said earlier, some of these markets tend to be a little bit more volatile.
Timing is important, it's important in New York, it's important in San Francisco, and so sometimes, you just sort of need to be out of the market. In some of these other markets, provide some opportunity to fill in some of the holes as you just kind of pursue your growth strategy.
Alexander Goldfarb - Sandler O'Neill & Partners LP
Okay. Thank you.
Operator
We'll go next to Tayo Okusanya with Jefferies.
Omotayo Tejumade Okusanya - Jefferies LLC
Hi. Good afternoon.
Just following up again on the Denver and Southeast Florida strategy, these two markets were also the markets that EQR got out of about two years ago. I am just wondering, could you talk a little bit about what their exposure was versus what you're targeting to kind of get a sense, it's the same stuff?
Are you looking at different property type, are you looking at different submarkets? I'm just trying to get a sense of, they got out two years ago and now you guys are getting in and I'm just trying to understand why?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah, I mean I think you probably need to talk to EQR to ask them why they got out. But I don't think their portfolios were particularly urban, and I think they are probably older.
And as Mark said, maybe that played a role, I don't know, but that's them, obviously, they've made a bet on more of an urban footprint, so that may have played a role. In our case, we're starting from scratch and so we're looking at trying to build the portfolio that we want to build long term in each of those markets and as Matt had mentioned earlier, I think the Denver West acquisition was representative of the kind of business we want to do when we think that there is a – when there is maybe an opportunity in a supply constrained market – when there is plenty of supply generally in the market and there'll be other times when there'll be opportunity in supply-driven markets, so.
But we said many times, we're agnostic between urban and suburban. We're capable of developing and operating both, and we're going to be looking for value at different parts of the cycle where it's most compelling.
Omotayo Tejumade Okusanya - Jefferies LLC
Okay. That's helpful.
Second question, the installation of the Amazon Lockers at some of your locations, could you talk a little bit about just exactly what you are hoping to gain from that? Is it just better management of that process, is it actually something that ends up dropping to your bottom line?
Could you talk about any kind of cost savings that you expect to kind of get from this and just how much more could you kind of see a rollout of Amazon Lockers in your properties?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes. Tayo, this is Sean.
Just to address this briefly, we did reach an agreement with Amazon to install either lockers or a package room across our portfolio, or at least a percentage of our portfolio, and if it goes well, we'll probably expand that. I mean the benefit is multiple and just highlight maybe a couple of things.
One is just customer convenience that you can pretty much access. The package has been delivered to you 24x7.
So regardless of your lifestyle, your work hours, whatever it may be, you can have access to it whenever you want as opposed to when someone's there. And also, it allows us to probably be a little more efficient in terms of our team given the number of packages that we receive.
There is more than a couple of million packages here. So, it's a pretty significant time allocation in terms of labor hours associated with each one of those packages.
Just to give you some simple numbers, we've kind of run through the math and by the time you receive a package, log in a package, store it, when the customer shows up, you retrieve it, you log it out, you have them sign it, et cetera. It can be three minutes or four minutes of time for each one of those packages, so labor hours definitely adds up.
So that's the primary economic benefit associated with the Amazon Lockers at this point. And we'll see how it plays out in terms of other opportunities with them as well.
Omotayo Tejumade Okusanya - Jefferies LLC
But could you talk a little bit about just on a estimated cost savings, something like this could give you, whether it's on a per building basis or something like that?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah, it's a little too early to lay that out. I mean, you pick up some time for someone who's there doing that but they also are doing various other things.
So across the portfolio, we certainly expect to pick up something, but we haven't quantified it yet since we're early in the process.
Omotayo Tejumade Okusanya - Jefferies LLC
Okay, great. Thank you.
Operator
We'll go next to Conor Wagner with Green Street Advisors.
Conor Wagner - Green Street Advisors, LLC
Good morning. I saw retail bad debt expense picked up in the quarter.
Could you speak to a little bit of that, and then given that you're seeing opportunities to redevelop other retail, could you tell us a little bit about your strategy for your existing retail?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, Conor, it's Sean. I'm happy to address the first one, and then Matt or Tim may have comments on the second one as well.
But on the first one, it was really one tenant that blew out in New York City, that we wrote off during the quarter, it was around $600,000, and this was reflected in the write-off in the comments, in the office operation section of the expense attachment, so it's that one write-off.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
As it relates to the existing retail – Conor, this is Matt – we have about 600,000 feet I believe and across our stabilized portfolio and existing retail, and we've actually focused quite a bit in the last couple of years on increasing the occupancy, that I think we brought the occupancy on that retail up from maybe low 80%s to high 80%s, around 90%, over the last three years or four years. So, it's mostly small shop space.
So, I'm not sure if there's any huge opportunities there, but there are select situations. We have a couple of high profile retail locations where there might be opportunities over time as tenants turnover coming out of some longer term, older leases, but it really is a grab bag and it's a 1,000 feet here, 2,500 feet there.
So, I don't know if there's any huge opportunities there.
Conor Wagner - Green Street Advisors, LLC
Great. Thank you.
And then given that your current development rights are pretty heavy on New York and New Jersey, and your longer-term plan to decrease your allocation in that region. How does that fit or how should we think about you're going to be backfilling the development rights pipeline?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Yeah, Conor. This is Matt again.
I guess one of the reasons why you've seen our disposition activity in the last couple of years be a little more heavily concentrated in Metro New York, New Jersey is because of that. So, I think we've sold something like $900 million or $1 billion out of Metro New York in the last couple of years.
Mostly in the suburbs, we did sell Christie Place maybe three years ago now. So, we are mindful of that in terms of keeping the portfolio in balance.
And we have not been doing many acquisitions in that region. So, all of our growth there has been through development.
So, over time, it's a big ship and how you turn it, it gets to kind of the incremental decisions you make on dispositions, but it is still where we're finding tremendous yield in terms of development opportunities. So, we're mindful of that and try and balance that with decisions.
I think Tim wanted to add something on it.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah, yeah, Conor. I think when we talk about target portfolio, it's in the future.
I mean, we are expecting to grow the overall portfolio. So, we may not necessarily shrink on an absolute basis the New York Metro area, but we will look to recycle capital within our market as we develop.
So, I think that's kind of the short answer.
Conor Wagner - Green Street Advisors, LLC
Okay. Great.
Then finally, on that same theme within the Bay Area, do you have any plans to shift your allocation within the three regions or hold it pretty constant?
Timothy J. Naughton - AvalonBay Communities, Inc.
Nothing too specific at the moment, Conor. We're pretty well distributed between the three regions today.
So, I think it's going to be probably a little more asset by asset. Over the 20%, we're roughly between 6% and 8% split between Oakland, San Francisco, and San Jose today.
So, we like having a presence in each of those markets. So, it's probably going to be probably a bit more opportunistic in terms of what we think sort of the better value from a dispo standpoint sort of presents itself.
Conor Wagner - Green Street Advisors, LLC
Great. Thank you.
Operator
We'll go next to Rich Anderson with Mizuho Securities.
Richard Anderson - Mizuho Securities USA, Inc.
Thanks. Tim, in the beginning of the call, you said you're expanding into other markets in part just kind of be in business should there be an opportunity if the cycle turns downward or something along those lines.
Can you just describe your mindset there? Are you feeling just because the number of years is increasing in terms of how long we've been in this cycle that you have to be a little bit more cautious on the future, despite the view on supply maybe coming down next year or am I reading into that too much?
Timothy J. Naughton - AvalonBay Communities, Inc.
No. Richard, I think it's a good question.
Yeah. It's just a recognition that economic cycles don't last forever.
Having said that, they don't generally die of old age, they die of distortion and we're not seeing a lot of distortions today whether it's in the capital markets or labor markets that suggests we're at the end of the road today. But we do see construction costs and rents that are kind of above trend and those tend to sort of migrate back towards trend over time.
But the one mistake I think a lot of developers make at times is they wait for markets to recover and to see clear evidence that development is profitable before they get in and oftentimes it's three years or four years after you want to be in from a – particularly from taking a land position, so you kind of need to be feeling what the land markets are like today to be able to sort of understand when the opportunity might be more right rather than sort of do it on a hindsight basis. So it's just kind of what our experience tells us.
Oftentimes, the best land deals are either done after there's an economic correction or just before if it's done on an option basis where you can often times sort of renegotiate your transaction sort of after the dust has settled.
Richard Anderson - Mizuho Securities USA, Inc.
Okay. And second question is, and this can be a simple yes or no answer, but as preeminent developer of apartments in the U.S., have you been approached by any cities as a means to sort of sweeten the proposal to attract Amazon's HQ2 like Denver, for example?
I'm just kidding about that but anything along those lines?
Timothy J. Naughton - AvalonBay Communities, Inc.
There's really nothing there, Rich.
Richard Anderson - Mizuho Securities USA, Inc.
Nothing there. Okay.
Thanks.
Operator
We'll go next to Jeff Pehl with Goldman Sachs.
Jeffrey Pehl - Goldman Sachs & Co. LLC
Hi. Good morning.
Just wondering if you could touch on your urban versus suburban rent growth in Northern California and Metro New York/ New Jersey, and Boston? You had a slide in your 1Q 2017 presentation, and I'm just wondering if you can give an update on that?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. Jeff, this is Sean.
Maybe the way I can answer that for you is say a little bit about blended rent change in what you might think about, you said Northern California was one market I heard. Just to give you a sense in terms of blended rent change in the third quarter, not a lot different.
The East Bay basically was 1.8%, San Francisco was 1.4%, San Jose was only 70 basis points, but that was constrained by the Mountain View rent ordinance, rent control ordinance that was put into effect. So it's got some noise in it in terms of San Jose, so be mindful of that.
And I am sorry the second market that you indicated was?
Jeffrey Pehl - Goldman Sachs & Co. LLC
Metro New Jersey and New York and then Boston?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, okay. Boston, I don't have it broken out right in front of me in terms of urban versus suburban rent change during the quarter.
Boston overall was in the low 3% range. In terms of New York/New Jersey, that's a little bit easier to break out, because it's represented by the geography.
But to give you a sense, the strongest performing market within our footprint of New York/New Jersey was Long Island, where we had rent change around 3%, followed by Central Jersey at about 2.5% and then the city of New Jersey, both around 2%. The weakest was actually our Westchester portfolio, it was around 1%, which is a relatively small basket, and it has some movement of one or two assets, it can move the needle.
So I wouldn't read too much into that.
Timothy J. Naughton - AvalonBay Communities, Inc.
Hey, Sean, but maybe you could just talk just suburban versus urban rent growth, East Coast versus West Coast what we're seeing right now, maybe how that compared sort of couple of quarters ago just to...?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, in terms of urban versus suburban performance, we typically look at the Axiometrics data, and then overlay that with our own portfolio data in terms of urban versus suburban performance. One thing just to keep in mind is when we started talking about these kinds of numbers, sample size does matter.
And we're about two-third suburban, so just keep that in mind. It's not going to be consistent across each and every market in terms of our portfolio allocation between urban and suburban, but across the footprint for our portfolio, urban growth was around 140 basis points versus suburban about 260 basis points.
So, 120 basis points spread in the third quarter, as it relates to performance. And again, that's our own portfolio of data as compared to Axiometrics, which is a little bit wider in terms of suburban versus urban, it's closer to 300 basis points, but they have a much bigger sample obviously that they are reporting against as compared to our own portfolio.
Jeffrey Pehl - Goldman Sachs & Co. LLC
And do you think suburban can continue to outperform urban in 2018?
Sean J. Breslin - AvalonBay Communities, Inc.
Based on what we know about supply, that would be the expectation. If you look at the deliveries both 2017 and 2018, skew high on urban submarkets.
So, if you break apart that, call it roughly 2% of inventory, it's in the high 1% range for suburban, and then, it's also north of 3% for urban. So, you blend it together and you get to sort of that 2.1% to 2.3% that I was mentioning earlier.
So, given that expectation for deliveries, there certainly is good absorption in the urban submarkets, but there is just too much supply coming online this year and next year in those environments.
Jeffrey Pehl - Goldman Sachs & Co. LLC
And then, just my second question real quick. The U.S.
homeownership rate has ticked up a little bit recently. Just wondering if you have an update across your portfolio on move-outs to purchase a home, and if there's any markets maybe that are above average for that?
Sean J. Breslin - AvalonBay Communities, Inc.
Sure. The move-outs to purchase home still has not moved really.
This cycle, it's still running around 13% of move-outs. And one thing that we've noticed, and it's been highlighted by a couple of different research firms, is that what we're seeing in the data would indicate that people that have been in some single family rentals are moving into home ownership.
And I think, not only for ourselves, but a number of our peers in our markets aren't really seeing the move-outs to home purchase change much. It sort of makes sense based on what we're seeing., And then as it relates to any particular markets that are above or below their long-term average, typically what you'd see is the Northeast, particularly Boston is a market that's trending right around or slightly above its long-term average in terms of move-outs to home purchase, which is running right around 22%, 23%.
Pretty much all the other markets are at or below their long-term average. And to give you a sense, Northern California is trending around 9% or 10%.
The long-term average is closer to 14%. Southern California is pretty much right at its long-term average, so Boston is really the only region where we're seeing that occur at this point.
Jeffrey Pehl - Goldman Sachs & Co. LLC
Thanks. Thanks for taking my questions.
Sean J. Breslin - AvalonBay Communities, Inc.
Yep.
Operator
We'll take our next question from Nick Joseph with Citi. Mr.
Joseph, your line is open, sir. Please check your mute function.
Michael Jason Bilerman - Citigroup Global Markets, Inc.
Can you hear me? Can you hear me, now?
Operator
Yeah. We got you.
Michael Jason Bilerman - Citigroup Global Markets, Inc.
All right, it's Bilerman. Tim, I was wondering, I know 10 years could be a pretty long time in terms of where the company is going to be, and I think back to last 10 years, you've almost tripled in size.
This is pre-Archstone obviously, from $13 billion of assets to $34 billion today at that market. And even post-Archstone, you've grown probably by about a third from call it $25 billion to $34 billion.
So, as I think about your 10-year forward look in terms of your portfolio construction, how do you think about the sizes, the portfolio look in that context? Could we see that growth continue or do you really view this as sort of a steady state type plan, where everything is self-funded, both development as well as growth into new markets via acquisition and new development?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah, Michael that's a pretty loaded question. I mean, first of all, on scale, we do think there are certain advantages of scale.
There's a lot of advantages of scale at the regional level, it's one of the reasons why we have been committed to the footprint that we have been committed to, and in many cases had exited markets to redeploy that capital into existing markets to develop scale. You can recruit higher caliber talent into markets when you've got a bigger presence, you can leverage business intelligence in ways that are important particularly if you're a value-add investor or developer in those markets.
So we are clearly believers in scale at the regional level. We're a believer in terms of the kind of capabilities that you can build over time, whether it's things like revenue management and other things that you can deploy where it's not just a matter of just turning a button on, it's supporting that with great market research and data analytics that allow you to sort of optimize it.
So all things being equal, we like scale, but this is a capital-intensive business, it's only going to make sense to grow the balance sheet at certain points in the cycle, and at other times, it may make sense to contract the balance sheet or to recycle. So I would say, we have no hard and fast objectives about how big this company should be or ought to be.
To some extent, we're a little bit beholden to the capital markets or cost of capital in terms of how we deploy. But we do want to achieve certain levels of presence within the markets that we choose to be and we wouldn't go in the Southeast Florida or Denver unless we thought we could build a portfolio of a few thousand units over time that would allow us to achieve some of those other strategic advantages.
Michael Jason Bilerman - Citigroup Global Markets, Inc.
And it sounds at least from your initial comments that doing some potential development JVs, approaching acquisitions cautiously is at least some initial ways. I remember back, I can't remember if it was 2011 or 2012 when you did the exchange with UDR, the SoCal Boston exchange.
Could that be an avenue where other REITs may be over indexed or under indexed to the markets you want to get out of, and over indexed to the ones you want to get into. Is that something that we potentially could see you execute?
Timothy J. Naughton - AvalonBay Communities, Inc.
It's something we would have interest in to the extent that there was complementary objectives within that. I don't know whether it's public or private.
And then with respect to development JVs, one thing I didn't mention, we are sponsoring local developers. It's going to generally be a structure where I think there's a path to getting sort of full fee ownership of the asset, that's different than maybe kind of a retail JV that we're talking about earlier with respect to GGP where that really is strategic and where interests are aligned long-term and where it might be more of a 50-50 structure on a go forward basis.
Michael Jason Bilerman - Citigroup Global Markets, Inc.
And then moving to last question just on that slide 13, the conceptual presentation of your circles on the quarter moons, half moons, just visually when you look at those items, right, everything in Southeast Florida and Denver is below what your legacy markets are. And so, I guess if these are your market attributes and even though Southeast Florida and Denver arguably are higher than what you define as the U.S.
market metro average is a half moon. They're still relatively below what your legacy markets are, right.
If you did this chart in 10 years and you exceed your plan, all your legacy, your new moons would all have more white ones?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. This is a current assessment of these markets.
First of all, if they were more filled in than our existing markets, we would be there already. And so to some extent, you are projecting a little bit too with respect to these markets in terms of how they might perform in the future for instance on these sort of knowledge-based economy.
Do we think Denver will get more than its fair share of those kinds of jobs, we do kind of going forward.
Michael Jason Bilerman - Citigroup Global Markets, Inc.
Right.
Timothy J. Naughton - AvalonBay Communities, Inc.
So I mean, when you look at public investment and infrastructure, I mean, what Denver and the State of Colorado are doing and what's happening in Southeast Florida, it's pretty impressive, whether it's public transportation or some of the amenities that the public sector is supporting and investing in. So I mean, we are in the long-term investment business and so we are looking at longer-term trends as to where people want to live, the kind of people we rent to as well as what's the posture of the government sector in terms of supporting those metro areas.
So, we'd like to think that these circles will continue to fill in a bit over time as we get to understand these markets and they continue to mature.
Michael Jason Bilerman - Citigroup Global Markets, Inc.
Right. Do you feel like the institutional core capital will come as well, right?
You think about your current markets, that strong institutional core bid that will allow you to exit at times you feel like...?
Timothy J. Naughton - AvalonBay Communities, Inc.
It's already started, Michael. We're already investing in these markets.
Michael Jason Bilerman - Citigroup Global Markets, Inc.
All right.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. And see, now there may not be a big REIT presence in these markets, honestly, it's one of the reasons we're kind of attracted to them at this particular moment in time where there's not a lot of people that bring the full complement of advantages that we could bring to these markets, whether it's talent or capital.
Michael Jason Bilerman - Citigroup Global Markets, Inc.
Yeah.
Timothy J. Naughton - AvalonBay Communities, Inc.
So, it kind of presents sort of an interesting opportunity from a competitive standpoint.
Michael Jason Bilerman - Citigroup Global Markets, Inc.
Great. Thanks for all the time.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. Thank you.
Operator
Ladies and gentlemen, this does conclude the question-and-answer session. I'd like to turn the call back to Tim Naughton for closing remarks.
Timothy J. Naughton - AvalonBay Communities, Inc.
Okay. Well, great.
Thanks, Aaron and I know it's been a long call, but I appreciate you all staying with us. We look forward to seeing you in just couple of weeks' time in NAREIT in Dallas.
Enjoy the rest of your day.
Operator
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.
You may now disconnect.