Apartment developer AvalonBay focuses on renters in their 20s

By V. Dion Haynes
Washington Post Staff Writer
Monday, March 1, 2010; A14

For the first time in about a year, Alexandria-based AvalonBay Communities is building two new apartment complexes -- one in New Jersey and the other in Massachusetts -- to take advantage of lower construction costs and the possibility that an improved job market will push 20-somethings out of their parents' homes and into the rental market.

AvalonBay owns 23 properties in the Washington region, including Avalon at Foxhall in the District and Avalon at Ballston Washington Towers in Arlington, as well as buildings in California, Illinois and New York. Like many other developers, AvalonBay, the nation's No. 2 publicly traded apartment management firm, suspended construction as the economy faltered. Credit tightened, making it difficult for developers to get construction loans, and rising unemployment rates shrank the market for renters.

But the company, while not planning any new apartments in the Washington area, said it is in a better position than most developers because it has $300 million in cash and a $1 billion credit line to finance construction. The company said it decided to launch construction projects in Northborough, Mass., and West Long Branch, N.J. , based on lower lumber and labor costs resulting from the housing slump and evidence of growing demand and dwindling supplies of rental properties there.

The company said it plans to start $400 million in other construction projects, mainly in the Northeast, later this year.

"People in their 20s have a high propensity to rent instead of buy. We expect demand for that age segment will grow stronger as the economy gets better. Many of those living with parents will want to establish their own household and move into their own apartment," said John Christie, a director of investor relations and market research, adding that the company anticipates growth from some other age groups as well.

"We're starting to see the job market stabilize. Each month brings less job cuts," Christie said, adding that the company wants a jump on its competitors. "We'll be delivering apartments into what we think will be favorable market conditions at a time when no one else is delivering construction."

After a dismal 2009, real estate analysts say they expect improvement this year across the United States and in the Washington region in demand for multifamily units -- the only segment of the commercial real estate market projected not to decline. Growing demand, experts say, will help reduce the glut of apartments in the market and spur construction.

Like the residential market, the multifamily segment is experiencing its worst slump in years. Last year, construction of 98,000 multifamily units was started, down from 266,000 in 2008, according to the National Multi Housing Council.

But in a report last week, the National Association of Realtors predicted apartment vacancy rates would drop to 6.6 percent by the end of the year from 7.4 percent during the same period in 2009. The association says the rates could fall further -- to 6.1 percent -- by 2011. Rents also are projected to decline 3.4 percent this year, making the apartments more attractive to tenants.

In the Washington region, experts say, a surge in hiring by the federal government should propel the demand for apartments. The Center for Regional Analysis at George Mason University estimates that the region experienced a net loss of 24,500 jobs from December 2008 to December 2009, but will have a net gain of 24,900 jobs by the end of 2010.

With few new projects in the pipeline, experts said, developers, if they can get loans, will be looking soon to jump back into construction. The expectation is that "2011 will be the turnaround year when we're finally back to rent growth and construction starts," said Grant Montgomery, vice president and director of apartment practice at Delta Associates, a real estate research firm in Alexandria.

Analysts say they also are seeing an increase in investors scooping up high-end properties -- such as Lenox Club in Arlington, Lenox Park in Silver Spring and the Grand in Bethesda. "This is a hot market now -- as hot as it can be in a downturn," said Katie Pelczar, a real estate economist at Property and Portfolio Research.

The Washington region is one of AvalonBay's best markets. Last year, rents in this area remained flat, but dropped 3.1 percent across the company's U.S. portfolio, Christie said.

Christie said the company has not decided when it will resume construction here.

"We have a few sites holding," he said. "We have several development sites in the metropolitan area which are going through the zoning entitlement process."

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