AvalonBay Communities Q4 2024 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
February 6, 2025
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Operator

Good afternoon, ladies and gentlemen, and welcome to Avalon Bay Communities 4th-Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following remarks made by the company, we will conduct a question-and-answer session. You may enter the question-and-answer queue at any time during this call by pressing star one. If your question has been answered or you wish to remove yourself from the queue, please press star 2. If you are using a speakerphone, please lift the handset before asking your questions. We ask that you refrain from typing and have your cell phones turned-off during the question-and-answer session. Your host for today's conference call is Mr Jason, Vice-President of Investor Relations. MR. Riley. Riley, you may begin your conference call.

Jason Reilley
Vice President of Investor Relations at AvalonBay Communities

Thank you, Sherry, and welcome to AvalonBay Communities 4th-Quarter 2024 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, the 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 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 will turn the call over to Ben Shaw, CEO and President of AvalonBay Communities for his remarks. Ben?

Benjamin W. Schall
Chief Executive Officer & President at AvalonBay Communities

Thank you? Thank you, Jason, and thank you, everyone, for joining us. I will start with a brief synopsis of Q4 and 2024 results and then turn to our view of the strategic focus areas that we are confident will continue to deliver superior growth in 2025 and in the years ahead. Kevin O'Shea, our Chief Financial Officer, will provide our outlook for 2025 and the components of growth on a year-over-year basis. Sean, our Chief Operating Officer, will then cover the macro and micro setup for 2025, along with our latest market-by-market expectations. And Matt, our Chief Investment Officer, will discuss our rich menu of investment opportunities.

Let me start by expressing our condolences to those who lost loved ones in the L.A LA fires last month and to all those impacted by the horrific damage. While we were fortunate that none of our communities incurred meaningful damage, some of our associates were impacted, including a few who lost their homes. At Avalon Bay, in keeping with our core value of a spirit caring, we activated our internal emergency relief programs to assist associates and provided incremental funding to our long-time partners at the American Red Cross. I also want to thank our wider L.A. Based residential services team, led by Eric Osgarden for their tireless efforts and dedication through these events. As I look-back on Q4 and 2024, we had a very successful year, delivering revenue growth of 3.4% and core FFO growth of 3.6% as highlighted on Slide 4.

Our suburban coastal portfolio with steady demand and limited levels of new supply continued to outperform. Our operating model transformation drove incremental revenue and operating efficiencies and our lease-ups exceeded expectations, driving incremental earnings and value-creation. We also remain nimble in capital allocation and sourcing during 2024. We increased our development starts by almost $200 million to $1.1 billion and we proactively raised growth capital sourcing $2 billion of new capital at an attractive 5.1% initial cost. As we head into 2025, we expect much of our operating and investment momentum to continue and are confident that our strategic focus areas, as outlined on Slide 5, will continue to deliver superior internal and external growth for shareholders. Slide 6 details our successes and key next steps in our operating model transformation. As of year-end 2024, we're generating an incremental $39 million of NOI from these initiatives, running $2 million ahead of plan. In 2025, we expect to generate an additional $9 million of revenue and operating efficiencies and we are well on our way to our updated goal of $80 million of annual incremental NOI over the next few years. We continue to be one of the industry leaders in the utilization of centralized services, which is now handling more customer-facing interactions, including an expansion this year to provide centralized leasing support.

We also continue to be on the forefront in the use of AI in the apartment industry, having been an early investor and adopter of a lease AI and with a further expansion this year into additional components of the customer journey. Our investments in technology and centralized services, along with the efficiencies we achieve in managing clusters of assets are providing meaningful scale benefits for our platform and driving incremental NOI throughout the existing portfolio. As investors, you can see these results in various financial categories. For example, our implementation of ancillary services for residents resulted in 15% other rental revenue growth in 2024 and is projected to produce almost 9% growth in 2025. In the area of labor efficiencies, our same-store payroll expense declined in 2023 and was zero in 2024.

I'd like to thank our operating teams for their continued execution of these initiatives and delivering these results. Importantly, the benefits we're generating via our operating initiatives also facilitate external growth with new assets more valuable on our platform, allowing us to underwrite incremental yield on acquisitions and new development. Slide 7 highlights our continued progress in optimizing our portfolio for superior growth. In the near-term, our conviction for our suburban coastal portfolio is reinforced by the outlook for both steady demand and limited new supply. In the medium to longer-term, we also believe that our suburban coastal portfolio is well-positioned to capture future renter demand and particularly the lifestyle preferences of many aging millennials and downsizing baby boomers. We're now 73% -- suburban, up from 70% just a year-ago, making strong progress toward our 80% target allocation.

We're also focused on further optimizing our portfolio by increasing exposure to select Sunbelt markets and submarkets as we detailed at our Investor Day. An increasing number of Avalon Bay customers live in these markets and we also see the benefits of diversifying away from certain risks, including increasing our exposure to areas with less regulatory risk. We increased our expansion market presence to 10% from 8% in 2024 and we expect to make further progress toward our 25% expansion market target in 2025 and believe that we're in an attractive window to facilitate this portfolio shift by acquiring and developing assets at a cost basis meaningfully lower than it has been over the past few years.

Our third strategic focus area, as referenced on Slide 8, is continuing to leverage our unique development capabilities to generate consistent and accretive external growth. In 2025, we are planning to increase development starts to $1.6 billion at a point in time when overall starts in the industry will be coming down, allowing us to secure stronger deals and returns. These developments will also face less competition when they lease-up in roughly two years' time. By the end of this year, we expect to have $3.5 billion under-construction, which is 50% higher than where we are today, setting the stage for a further uplift in earnings growth and value-creation in 2026 and 2027. We plan to fund the bulk of this new development from the equity capital that we proactively secured last year as highlighted on Slide nine. In total, we sourced via equity forwards $890 million of equity at an average price of $226 per share and an initial cost of around 5%, providing a 100 plus basis-point spread to our expected development yields on new projects. Our balance sheet is as strong as it's ever been, which provides the capital to leverage our strategic capabilities to fuel further growth in 2025 and beyond.

And with that, I'll turn it to Kevin to discuss our initial 2025 outlook.

Kevin O'Shea
Chief Financial Officer at AvalonBay Communities

Thanks, Ben. On Slide 10, we provide our operating and financial outlook for 2025. For the year, using the midpoint of guidance, we expect 3.5% growth in core FFO per share, driven by our same-store portfolio and by stabilizing development, partially offset by the impact of funding costs associated with capital markets and transaction activity. In our same-store residential portfolio, we expect revenue growth of 3%, operating expense growth of 4.1%, and NOI growth of 2.4% for the year. For development, we expect new development starts of about $1.6 billion this year, and we expect to generate $30 million in residential NOI from development communities currently under-construction and undergoing lease-up during 2025.

As for our capital plan, our outlook calls for $2.1 billion of capital uses, consisting of $1.3 billion of investment spend and $835 million for debt maturities and amortization. In terms of sources, we anticipate raising new capital of $960 million in 2025, which we currently assume will be sourced from the unsecured debt issuance later this year. Additionally, we expect to settle our outstanding forward equity contracts to source an incremental $890 million in 2025, which brings the total of capital to be sourced to $1.85 billion this year. We also expect to generate about $450 million in free-cash flow after dividends in 2025. And as a result of this capital plan, we project unrestricted cash at year-end 2025 of about $275 million.

On Slide 11, we illustrate the components of our expected 3.5% growth in core FFO per share to projected $11.39 per share in 2025 from $11.01 per share in 2024. We expect $0.31 per share of earnings growth to come from NOI growth in our same-store and redevelopment portfolios, and we expect another $0.33 per share of earnings growth to come from NOI from new investment, primarily from development. Partially offsetting these sources of growth is an increase of $0.29 per share from capital markets activity. Within this bucket, we have called out on the slide the components of capital markets costs, including lower interest income of $0.13 per share as our projected cash positions will be lower on a year-over-year basis in 2025 and an $0.08 impact from higher share count as we sell our equity forward contracts over the course of this year in connection with match funding development starts. These two items combined for $0.21 of the $0.29 from cost and from capital markets activities. As for the remaining $0.08 of costs from capital markets activity, these consist of modest headwinds from refinancing existing debt and net disposition activities, partially offset by modestly higher capitalized interest and earnings growth from SIP activity. So with that summary of our outlook, I'll turn it over to Sean to discuss our operating business.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

All right. Thanks, Kevin. Moving to Slide 12 and the outlook for apartment demand in 2025, third-party forecasts reflect a moderating but healthy environment for job and wage growth with wage growth specifically in the high 3% range, which should support relatively stable effective rent growth throughout the year. For our portfolio specifically, we're also likely to benefit from the expected increase in job growth in two important sectors, professional services and information, which over-index to our established regions and produce above-average wages. Growth in these sectors was relatively weak in 2024, but is expected to rebound nicely in 2025. Turning to Slide 13, demand for apartments in our established regions will continue to be supported by two other important factors. First, somewhat stable rent-to-income ratios, which remain below pre-COVID levels given healthy income growth the last few years, it indicate rental affordability in our coastal markets shouldn't be a material issue. And second, the relatively unaffordable nature for-sale housing in our established regions.

Currently, renters looking to trade into the median price home in our established regions would experience a cost increase of more than 2,000 per month relative to the median price department and that excludes the ever-rising cost of insuring that home, which has risen materially over the last few years. Pivoting to Slide 14 and the outlook for supply, our established regions are expected to see the lowest level of supply as compared to both the US overall and the Sunbelt with new deliveries representing just 1.4% of stock. And when you look at our suburban submarkets, where roughly 3/4 of our same-store portfolio is located, the story is even better as suburban deliveries are only forecast to be 1.2% of stock in 2025. Additionally, as we look beyond the current year, it's important to remember that it can often take years to get a new development entitled in our suburban coastal markets. So we may experience low levels of new supply in these regions for an extended period of time.

Moving to Slide 15 and our outlook for 2025 revenue growth, there are three primary drivers of our expected 3% increase in same-store total rental revenue growth. First, higher lease rates, which reflects our embedded growth from last year and our forecast for long-term effective rent change of 3% for the calendar year 2025. Second, strong growth in other rental revenue, which is estimated at almost 9% in 2025 as we continue to deploy various operating initiatives. And third, improvement in uncollectible lease revenue from residents, which is forecast to decline by approximately 40 basis-points from 1.8% in 2024 to 1.4% in 2025.

Turning to Slide 16, our established coastal regions are expected to produce rental revenue growth north of 3%, while the expansion regions are projected to deliver sub-2% growth, its heavy levels of unleased inventory from 2024 and new deliveries in 2025 continue to weigh on near-term performance. In our established regions, the Mid-Atlantic is projected to lead with mid-4% revenue growth, followed by Seattle in the low 3s, Northern and Southern California at roughly 3% and then New York, New Jersey and Boston in the mid-2% range.

Moving to the outlook for operating expense growth on Slide 17, we expect same-store operating expense growth of 4.1%, consisting of an organic growth rate of 3%, the net impact of profitable operating initiatives adding 50 basis-points and the phase-out of property tax abatement programs, most notably in New York City, adding another 60 basis-points during 2025. Additionally, we expect operating growth -- operating expense growth to be higher in the first-half of the year as compared to the second-half for several reasons, including year-over-year comp issues related to our Avalon Connect deployment, our renewal for insurance in 2024 and merit adjustments for our associates, which will occur in the first-half.

Now I'll turn it to Matt to address our investment activity for 2025.

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

All right. Thanks, Sean. Turning to Slide 18. We are looking-forward to an active year across our various external investment platforms this year, supported by the funding already in-place from last year as indicated in Kevin's remarks. We expect to continue to ramp-up our sector-leading development platform with $1.6 billion in new starts planned at yields in the low-to mid-6s. We also look to continue to be active in the transaction market with portfolio trading activity as we pursue our long-term portfolio allocation goals, selling assets out of our established coastal regions and redeploying that capital into acquisitions primarily in our expansion regions.

Given the decline in operating fundamentals and associated asset values in many of our expansion regions over the past two years, we do view this as a more attractive relative trade-in the current environment and we'll look to increase our portfolio trading where we can. In our structured Investment Program or SIP, which is our mezz lending platform to provide high-yield capital to merchant builders in our markets, we have continued to be highly selective and did not originate any new loans last year. However, we do have several attractive opportunities in the current pipeline and expect to be able to grow this book of business from its current $190 million balance by another $75 million in 2025 as we advance towards our program goal size of $400 million in total. And we continue to grow value-add investment in our portfolio with highly-accretive opportunities to add more resident solar, kitchen, bathronovations and accessory dwelling units in California.

Slide 19 provides a bit more color on our development starts for the year. All are located in suburban submarkets and are less expensive wood frame construction with the volume concentrated in our expansion regions and in California. It has been exceedingly difficult to get the mass to work for new starts on the West Coast for the past several years as reflected in the extremely low levels of supply in those markets. This should provide strong support for future performance for the over $500 million in new development we plan for Northern and Southern California in 2025.

And with that, I'll turn it over to Ben to wrap things up.

Benjamin W. Schall
Chief Executive Officer & President at AvalonBay Communities

Thanks, Matt. To recap on Slide 20, 2024 was a very successful year for Avalon Bay with the organization delivering strong financial and operating results. Going-forward, we continue to execute against our strategic focus areas with a laser-focus on delivering superior growth, apartment fundamentals in 2025 continue to look favorable in our established regions. We have a rich menu of investment opportunities and have a balance sheet well-positioned to pursue accretive opportunities. And with that, I'll turn the call to the operator to facilitate questions.

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Operator

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For a participant using speaker equipment, it may be necessary to pick-up your handset before pressing the star keys. Our first question is from Eric Wolfe with Citibank. Please proceed.

Eric Wolfe
Analyst at Citibank

Thanks for taking my questions. How should we think about the development accretion you're going to see in earnings this year versus last year? Obviously, you have the capitalized costs moving higher, but not sure if there's an offset in terms of total increasing capital costs. So I was just trying to understand how you're thinking about the potential for earnings accretion this year versus last.

Kevin O'Shea
Chief Financial Officer at AvalonBay Communities

Yeah, Eric. This is Kevin. There's obviously a number of puts and takes that go into that calculation. You do have slightly higher capitalized interest this year, about $0.06. On the other hand, we do have lower occupancies this year versus last. We have occupancies this year in our outlook about 3,000 units. Last year was about 2,200 units, so a little less of that. So -- and some of that occupancy fall-off a little bit in the front-half of this year. So -- and there are other things going on as well. We've got, as you can see, lower cash levels, so lower interest income. And then also we have the equity forward issuance this year, which will increase our share count relative to '24. Our expectation in regard to the equity forward is probably that's -- we're likely going to be pulling down those shares in the back-half of the year. When you roll it all together, roughly, we anticipate about $0.15 of growth from our investment platforms primarily from development, which is really kind of a few areas, the NOI from investment, $0.33, SIP net earnings growth maybe around $0.03, higher CAP interest about $0.06 and then partially offset by the lower interest income of $0.13. The share issuance under the forward is about $0.08 and probably another $0.06 attributable to the net dispositions that we use to fund the development activity. So that's how you get to the $0.15 give or take. And that's about 140 basis-points of growth all-in. And so that's one-way to sort of look at. That's how that's how we take a look at that issue.

Eric Wolfe
Analyst at Citibank

Thank you. And you've talked about continuing to deploy capital in the PPR product and liking it given the larger units and suburban locations. I guess, are there any additional challenges to developing or operating those communities that you've seen thus far versus more traditional multifamily. To the extent that there's some portfolios that are being marketed of product that thekin to what you would develop, would you be willing to take a look at those?

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Thanks., yeah. Hey, Eric, it's Matt. To the extent that there are portfolios that are aligned with our strategic priorities, we would absolutely take a look at them. I will tell you, as it relates to BTR, a lot of what's been built to date has been in tertiary markets or in a pretty far-flung kind of third ring suburbs of our major markets. So not a lot has been out there. We did buy the one asset last quarter in Austin that kind of checked all those boxes. It was 100% three and four-bedroom town homes and we -- so we expect we will probably grow more of that product through either DFP where we're funding kind of middle-market builder developers of the product or building more of it ourselves. We have a number of communities we expect to start this year that are gardened that have townhome components to them as well. We started one of those last year as well in Austin. So that's more likely to be the case, but we're certainly open to it. And on the operating side, we don't really have enough history of operating 100% VTR communities to speak to it yet. Again, we do have several thousand townhomes in mixed communities within our own portfolio and I'm not sure the profile of those has been materially different. I don't know, Sean, if you want to add?

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yeah. The only thing I would add, is if you think about the way people operate BTR, particularly for these smaller communities, there are 100 to 150 units. It's typically not dedicated staff. There's a maintenance team, there's a sales team, they roll around from community to community. It's more where the multifamily industry and for us specifically have been moving over the last two or three years is to have a more mobile enabled flexible workforce. So I think it's pretty well-aligned to the extent of the assets to Matt's point are with any reasonable proximity of sort of core multifamily assets, it makes it relatively easy for us to operate those.

Eric Wolfe
Analyst at Citibank

Got it. That's helpful. Thank you.

Operator

Our next question is from Jamie Feldman with Wells Fargo. Please proceed. Great. Thank you for taking the question. Can you provide more color on your thoughts on new renewal on new leases, renewal leases and what the trajectory looks like throughout the year? If you look at Slide 12 of the presentation, it shows a meaningful pickup sequentially in the job outlook, employment outlook. So I'm just wondering, are you assuming a similar acceleration into 4Q on blends as you did in last year?

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yeah, Jamie, this is Sean. I'm happy to take that one. So yes, so as I mentioned in my prepared remarks, we're expecting like term effective rent change to average 3% for the year. And to your point, we are expecting slightly stronger growth in the second-half of the year as compared to the first-half of the year, which is actually the opposite of what occurred in 2024. The combination of different factors influencing that in terms of year-over-year comp issues, more declines in supply expected in the second-half of the year as opposed to the first-half of the year and various other things. So slightly better growth in the second-half of the year is the way to be thinking about it today.

Jamie Feldman
Analyst at Wells Fargo & Company

Okay. But so can you provide more granularity on what you're thinking on new leases versus renewal? And then specifically in 4Q, it tends to be the seasonal slowdown, is that -- are you still expecting a pick? Like I know in 4Q you expected inflection higher, it didn't play-out. Are you thinking something similar this year?

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yeah. Yeah. So for the full-year, the expectation is that renewals will average probably in the mid-4s and new move-ins will average kind of mid 1% range. And then as it relates to the first-quarter, consistent with sort of historical norms, we would expect sequential improvement as we move through the first-quarter into the prime leasing season. So as it relates to Q4, we did have slightly softer rates on both new move-ins and renewals, given slightly lower occupancy. But net-net, it wasn't terribly material given the volume of leases is pretty light during those two months.

Jamie Feldman
Analyst at Wells Fargo & Company

Okay. And then I guess just thinking with -- sticking with the 4Q results, I mean, were there any markets that surprised you? Looking at the -- what you provided in the earnings release, I think just Denver seemed like it really rolled over in November, December, nothing else seemed to really stand-out. So can you provide just more color on what played out differently than you expected or if there's any markets that caught you off-guard?

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yeah. So as you pointed out, I mean, Denver was the only one that's maybe a little bit of a surprise. I mean I think as you think of the 4th-quarter, one thing to keep in mind here is on a net basis, it was not terribly material. We're talking about the Q4 shortfall was about $700,000 on $670 million of revenue. And for the full-year, total revenue growth was like 3.4%, so it was up three or four basis-points from what we originally anticipated. So the primary driver being, as I mentioned, slightly higher -- excuse me, vacancy than we anticipated, which did impacted the move-in in renewal rates across most of the markets as we move through November and December. So net-net, not a material number, but at the margin, when you have a small sample size of leases, it can move the rent change calculation..

Jamie Feldman
Analyst at Wells Fargo & Company

Okay. So it sounds like your outlook in each of the markets hasn't really changed.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

No. No, I'd say, like I said, it was a little bit of a rounding error in Q4, but the fundamental outlook for 2025 is intact.

Jamie Feldman
Analyst at Wells Fargo & Company

Okay. All right. Thank you.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Sure. Thank you.

Operator

Our next question is from Steve Sakwa with Evercore ISI. Please proceed. Steve you please make sure your phone is not muted. Okay. We're going to move on to the next one, which is Austin Wurschmidt with KeyBanc Capital Markets. Please proceed.

Austin Wurschmidt
Analyst at KeyBanc Capital Markets

Great. Thanks and good afternoon. I'm just curious if you guys, Matt, maybe if you've seen any pickup in the transaction market and just how that's kind of playing into your ability to use the disposition capital to rotate into the expansion markets and whether you still expect to be net neutral on the buy-sell side this year.

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Yeah, hey, Austin. So the transaction market has been pretty volatile, I would say. We did see a pretty significant pickup in Q4. 4th-quarter multifamily closings were up quite a bit over 4th-quarter of '23 and over 3rd-quarter. But almost all that business was deals that priced before when the tenure was closer to 4% than 4.5. And so what we see is anytime that the 10-year starts to get down towards that level, transaction volume starts to pick-up because there is a lot of capital that's still on the sidelines. But when you see rates move back up to where they are today, the volume comes back-down again because cap rates for most of these assets are trading still below the debt rates and there's just limited buyers that will fit that profile. So we saw a number of larger deals closed in Q4. I would expect Q1 to be much quieter. We just had the big NMHC conference. If you'd ask people 90 days ago, they would have said there's going to be all these listings come out and everything is all geared up. Now they came out, they all said, yeah, maybe second-half. There needs to be some more stability in debt rates for the market to pick back up. For us, we actually last year wound up being a net seller of a couple of hundred million. That was not our expectation. We thought at midyear that we were going to be net neutral. So we didn't -- we did get more sold than we expected relative to what we bought. So we start the year and we have a couple of dispos currently working in the market that we expect to close here in Q1. So we start the year with a little bit of a head-start on our trading activity. So we do think that we have some spending money, so to speak, and we are looking to be more active understanding though that the limit is there enough for-sale that we would want to buy. And that has yet to be seen because we are selective in terms of what fits our box.

Austin Wurschmidt
Analyst at KeyBanc Capital Markets

Yeah. So I guess, I mean, is the approach to continue to kind of have assets teed-up to give you that buying power to the extent that the market does free-up and you see opportunities arise? And I guess, I mean, how do you -- how do you kind of take advantage of where the balance sheet is today with the forward equity available to fund developments, stock prices at a level, you guys have been willing to issue some equity. And clearly, there's fundamental improvement ahead over the next few years within those expansion markets. So just curious how you're thinking about all the different sources and uses and whether you'd be willing to look at other sources of capital if the disposition markets a little -- remains volatile. Thank you.

Benjamin W. Schall
Chief Executive Officer & President at AvalonBay Communities

Yeah, I'll speak to that a little bit and Kevin may want to chime in as well. But yes, so the first thing is, we are not counting on the disposition market to fund our development. We're looking to grow development significantly this year and that is being funded primarily through the equity forward that was sourced last year and through free-cash flow. So again, we're starting from a good place where we're a little ahead on our dispos relative to our acquisitions. And yes, to the extent that we see more -- we continue to see buying opportunities, we're hoping we can increase our asset trading to roughly $1 billion on both sides, both buying and selling this year. And to the extent we see the buying opportunities we like, and you're right, the basis is getting pretty interesting. We can certainly use some of the dispos we've already prefunded, so to speak, we will pull more dispo assets off the bench and then we could also consider other sources of capital to the extent the yields were appealing.

Kevin O'Shea
Chief Financial Officer at AvalonBay Communities

Yeah, Austin, this is Kevin. Maybe just to add a couple of things. I think you're looking at it the right way and Matt's comments high-end of that. I mean, we are in a strong position from a financial point-of-view. We've got a lot of capacity to lean into opportunities should they make sense to do so. Naturally, we need to look at sort of the incremental return relative to our funding cost and given where debt rates are, that does narrow the opportunity set somewhat. But I think what that really speaks to is, you know, not only our capacity be flexible, but having a mindset of being nimble and responding to opportunities not only in the investment market, but also the capital markets to try to create that spread so that what we can deliver is a cost-effective capital to the investment uses that kind of move us down the field towards our strategic objectives in terms of portfolio positioning and funding development.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

And also, I'll add a third area of emphasis, which is increasingly as we think about opportunities, we also want to bring our strategic capabilities to bear and particularly the operating model initiatives. We're now in our underwriting on specific new acquisitions and new developments to tune a 30 to 40 basis-points of incremental yield by having those assets on our platform. And I'd also to emphasize that we're now at a point in most of our expansion markets where we've got our teams in-place, we've got the density of assets starting to build-up where I really do feel like we're at the point where we can leverage those investments we've been making over the last four or five years to step into further growth.

Austin Wurschmidt
Analyst at KeyBanc Capital Markets

That's all very helpful. Thank you.

Operator

Our next question is from Jeff Spector with Bank of America. Please proceed.

Jeff Spector
Analyst at Bank of America

Great. Thank you. Just a big-picture, Ben, on recent demographic shifts, changes that we're seeing. Any anything impacting your decision on the future allocation of suburbs for 80%? Are you confident to stick with that at this point? Is there any thought to decrease that? Thank you.

Benjamin W. Schall
Chief Executive Officer & President at AvalonBay Communities

Yeah, I appreciate that, Jeff. And we go through a fairly robust updated strategic assessment each year looking and trying to identify are those that -- are there shifts that have happened that as we think forward a couple of years, we want to start to get ahead of. So that's a constant process, constant part of how we think about evolving our platform. And a lot of the demographics is obviously longer-term trends, demographics, migration shifts, regulatory environment. So we are still at this point focused on moving increasingly to the suburbs with a target of getting to 80% suburban exposure. We made good progress this year. And then the other big shift is our expansion market shift to get to 25%. And then the other elements, which you're increasingly hearing us to talk about is evolution of product, right? It's not just market and submarket, but it's also the right product at the right price point. And I think we have taken a different approach in terms of how we've built-out our portfolio over-time, but particularly recently in the expansion markets with a heavier suburban focus, a focus on lower density, slightly older products that we believe will be less susceptible to new supply and deliver stronger growth over a cycle.

Jeff Spector
Analyst at Bank of America

Okay. Thank you. And then my second question, probably a tough one to answer given the changes we're seeing on tariffs, but development costs and the risk of tariffs, right? We've seen homebuilders come out with projections of higher costs. Of course, I'm assuming that would really more hit garden-style. But how should we think about the risk of tariffs and the development costs. I think they're fairly set-in '25, but '26, how are you thinking about it? Thank you.

Benjamin W. Schall
Chief Executive Officer & President at AvalonBay Communities

Yeah, I'll start at a high-level and ask Matt to talk a little bit more specifically. It's challenging at this point in time to forecast what policies -- policy changes are going to come through, equally challenging to figure out what the flow-through of that's going to be from the economy down to the apartment market, tariffs being one of those areas where we can, we are trying to get ahead of those potential impacts. So thinking about securing supply channels, thinking about locking in and pricing. There's aspects of it that could flow-through to some contract services. And on the development and construction side, not huge swings, but potentially some headwinds there. Matt, you want to provide some more details?

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Yeah. We do look at it all-the-time. And Jeff, what I tell you is, when you think about what goes into the cost of a new apartment community, land is on average maybe 15% of the total budget, 10% to 20, maybe even 25% depending on the location, but on average, Call-IT 15 soft costs, interest, A&E, permits and fees, overheads probably 30% to 35%. So your hard -- your actual hard cost is probably about 60% to 65% of the total capital cost. And of that cost, most of it, probably two-thirds of it is labor depending on the trade. And so we have gone through and if you look at it on a typical deal for us, you know, based on assumptions you make about what percentage of product is foreign sourced and so on, it might add a couple of percent to a total budget, maybe $5,000 to $7,000 a unit if it all gets 100% pass-through. And so that would be a little bit of a headwind to future new business. But I think much more important is labor. You know what makes up hard costs, it's the materials, that's the smallest piece of it, it's the labor and then it's the subcontractors profit margin. And what we're seeing in the current market today with the slowdown in multifamily starts and with the slowdown in single-family start is the subcontractors are hungry for work. So we're seeing great success on the buyout right now on the things that we currently have in the market. And you can see that even in our current -- the deals we just completed this past quarter actually finished under budget, which is the first time I think I've been able to say that in probably six years. And the deals we have currently under-construction are also tracking a little bit under budget. So much more of it's going to depend on the macro-environment, the subcontractor, the trade base, how busy they are and ultimately their labor costs. But so right now, there's more tailwinds than headwinds, but obviously that could change.

Jeff Spector
Analyst at Bank of America

Thank you. And then just one more if I can. On the prior call, they were -- the company was a bit cautious on Boston. Can you talk about Boston, your thoughts between supply-and-demand? And then is pharma biotech slowing down Boston more than expected? Thank you.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yeah, Jeff, this is Sean. I would say our experience in Boston is relatively positive. We do not have a cautious outlook for Boston whatsoever. It's been a strong performer, particularly our primarily suburban portfolio, well insulated from new supply, a highly educated high-income workforce there in Boston. And we don't have a lot in the sort of inner core. We have a handful of assets where there's been a little more supply. So it may just be portfolio differences that are creating a bit of a cautious note as compared to our experience.

Jeff Spector
Analyst at Bank of America

Thank you.

Operator

Our next question is from Nick Yulico with Scotiabank. Please proceed.

Nick Yulico
Analyst at Scotiabank

Thanks. I was hoping to get what the development completion expectation is for this year relative to the $1.3 billion that was completed last year.

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Yeah, Nick, it's Matt. I think we're only looking at completing about $300 million, $350 million this year, $400 million -- $350 million. Yeah. So that's why you're going to see -- our expectation is if we start a $16, we only complete $350. The development underway would grow from, Call-IT $2.2 billion today to 3.5 billion by the end-of-the year.

Nick Yulico
Analyst at Scotiabank

Okay. Yeah, that's helpful. Thanks, Matt. And I guess the follow-up on that is, I know page 11 of the presentation, you guys gave that helpful math on the NOI from new investment and then the capital markets activity and there's not -- the net of those two is a slight benefit this year. So I guess based on what you just said that $0.33 from new investment, that's a sort of lighter number, I guess, than normal and perhaps the capital markets activity is eating into that more so than it would in a in a given year, meaning that like this feels like this might be a little bit of an abnormal year for how development overall is contributing to earnings growth. Is that the right way to look at it?

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Yeah. Nick, probably that's probably true to some degree. The capital costs are a little heavier this year. You do have a cap interest benefit of $0.06 that goes the other way. And then per your discussion with Matt, where we're delivering a little bit less, our occupancies this year, which is what gives us this development NOI is expected to be -- is expected to be a little less this year at 2,200 per units this year versus 3,000 units in '25. So when you kind of roll it all together, you can see this in our development NOI itself, which is a component of that $0.33. And for 2025, our development NOI is expected to be $30 million, whereas for last year, it was -- it was a higher number last year at about, I think probably 41 million or something like that, $40 million, $45 million. So when you put it all together, there's a little bit less development NOI coming through, but there's some puts and takes. And I guess I'd refer you to kind of the answer that I gave to Eric at the top of the call here in the Q&A session where I kind of walk-through the development accretion with our SIP earnings growth. What we think we get from our investment platforms in terms of earnings growth this year is about $0.15, which equates to about 140 basis-points of growth. That's probably a little lower than a normal year, which is probably more like 150 to 200 basis-points contribution from our investment activities. And again, if you want to walk-through this offline, we can certainly do that.

Nick Yulico
Analyst at Scotiabank

Yeah, no, very helpful. Thanks guys.

Operator

Our next question is from John with Green Street Advisors. Please proceed.

John Pawlowski
Analyst at Green Street Advisors

Thanks. Thanks for the time. Matt, just two transaction market questions for you. I'm curious in the markets you're looking to buy-in, what rough range of replace -- discounts or replacement costs are you able to buy because I know a lot of folks in the private market are quoted discounts to replacement costs, but it's a really, really subjective figure and that you can pick any number to justify the price you're paying. So curious for what your team is seeing given your good detail or good kind of clarity on construction costs and where you could buy-in the same market.

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Yeah. It is something that we also look at pretty closely because those are both investment options that are available to us and we're both developing and buying in many of these markets today. So it depends on the submarket, it depends on the product-type. A lot of what we're looking to buy is, Call-IT, five to 10 years-old and it might be at a 10% to 20% discount to replacement cost. And that's not inappropriate. Brand-new product should sell at a higher price per door per-foot than, five to 10-year-old product, it will generate more NOI. There are markets where you can probably buy brand-new product in lease-up or coming right out of lease-up below where today's replacement costs are. Those are not the markets and the submarkets we're generally looking at. We're trying to stay away from those high supply submarkets. So yeah, what we've been looking at anyway, it kind of lines up in a way that makes a bit more sense.

John Pawlowski
Analyst at Green Street Advisors

Okay. And then last one for me. I briefly caught your portfolio trading commentary, the quote you had. Could you just expand on that? It sounds like you're more optimistic of getting portfolios done. Is that a function of wanting to accelerate your portfolio shift in the suburbs and the expansion markets or is it a function of you're seeing better pricing on portfolio acquisitions?

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Yeah. No, I think -- well, what I meant to say anyway was if a portfolio that aligned with our strategic objectives came to-market, we would definitely be interested in pursuing it and we're in a -- our balance sheet would support it. So we certainly could pull the trigger on something that was attractive. We're not necessarily at this moment seeing that. So I'd say the conditions -- our balance sheet supports the conditions are there. And more broadly, we think it's a better time to make the relative trade than maybe it has been in the last couple of years. So therefore, our hope is that we will be able to increase our portfolio trading activity further, but we haven't seen anything yet.

John Pawlowski
Analyst at Green Street Advisors

There we go. Thank you.

Operator

Our next question is from Adam Kramer with Morgan Stanley. Please proceed.

Adam Kramer
Analyst at Morgan Stanley

Great. Thanks for the time here. I just wanted to ask about the Los Angeles market. Obviously, really unfortunate wildfires and situation there. I was wondering if in your portfolio, you've seen anything on-the-ground, whether it's leads or activity that could suggest there could be some incremental benefit to the portfolio just from a need for more rental properties? And then on the other side of it, anything from a headwinds perspective, be it you moratorium or anything else that could impact operations on the other side.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yeah, Adam, this is Sean. First, as it relates to your initial question, if you think about the displacement and what happened there, which certainly is tragic. And as you might imagine, what we have heard on-the-ground from our teams is that most of those customers, as you might expect, are looking for single-family rentals, larger floor plans and preferably in the same school districts as they can get it, which is certainly challenging, obviously, given the level of destruction that occurred. We've seen a little bit of an uptick. I would say over the last three weeks, maybe 15% of our leases is around 60 leases or so have come from people who have been displaced. But it is very specific as to assets in submarkets, Pasadena, Glendale, Santa Monica, Burbank, some of those submarkets. It's a handful of leases here and there that add-up to about 60 leases. So it's hard to know where it's going to go-forward as the insurance process evolves and things of that sort. But that's what we've experienced thus far. And as it relates to the potential adoption of any eviction moratorium and/or rent freezes. We have not contemplated that as part of our guidance. There's been chatter about that. City Council looked at it a week ago. They sent it back to the housing committee, housing Committee is reviewing it, saying stuff back to the council. So there's a little bit of ping-pong going on right now. So we don't know exactly how that may come out. But we hope that they don't take action. It certainly has a negative impact on people who have been displaced. We need more housing for those folks, not less. So we'll see where it comes out, but we don't know anything definitive at this point.

Adam Kramer
Analyst at Morgan Stanley

Got it. That's helpful. And then we that Slide 12 with the kind of job growth and kind of employment forecast for this year. And I don't know that I have a specific question here other than just, I think being a little bit surprised maybe at kind of the acceleration in jobs for the rest of this year and I know these are from third-parties. So the level of granularity that you guys have may not be -- may not be super, super robust here, but just to the extent you can talk about kind of what their thinking is or what's embedded in that kind of acceleration over the course of this year from a jobs perspective, and again, it looks like it's taking jobs in 3Q and 4Q to a level we haven't seen in a couple of years. So just the kind of underlying assumptions or thought process there, I think would be helpful.

Benjamin W. Schall
Chief Executive Officer & President at AvalonBay Communities

Thank you. Yeah, Adam, it's Ben. We continue to look at NAVE, the National Association of Business Economists as the starting point for our job and wage assumptions going into the year. And as you call-out, moderating growth last year wind-up having roughly about 2 million jobs generated across the country. And Dave's consensus is that figure coming down into roughly the 1.5 million type of range, fairly consistent kind of growth throughout the year. Sean called out in his prepared remarks, we are hopeful that we'll benefit from a better mix of jobs this year given potentially more of the growth occurring in the core Avalon Bay types of industries. Yeah. One thing just to clarify and make sure you're interpreting the chart correctly is that chart on the right only reflects two job classifications within our established regions. It's not overall job growth. So keep that in mind that it's talking about an acceleration in those specific categories of employment as opposed to that being the cadence of overall job growth throughout the US.

Adam Kramer
Analyst at Morgan Stanley

Thank you, both. Really helpful.

Operator

Our next question is from Rich Heitower with Barclays. Please proceed.

Rich Hightower
Analyst at Barclays

Hey, good afternoon, guys. Good morning. John, I want to go -- I want to go back to your comments of the breakdown between new and renewal and blends for the year and to see if you could break it down just a little bit further and tell us how sort of the established markets relative to the expansion markets might look under the same framework? Thanks you.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yeah. So as I mentioned, we expect to see an improvement in effective rent change as we move through the year, which would be normal with the second-half being slightly stronger than the first-half, which is the opposite of what occurred in 2024. So that's kind of where we are as it relates to the sequencing by quarter. As it relates to the expansion regions versus the established regions. The first thing I would say is, you know, majority of our portfolio is obviously are established regions and we're expecting rent change to be healthier in those regions as compared to the expansion regions. The expansion regions, it's -- we're talking about a handful of regions here. So I wouldn't necessarily average them because you have a lot of different things happening across those regions that are very unique. Charlotte, particularly urban Charlotte is pretty beat-up. It's likely going to be flat to negative. Dallas will likely be positive this year because of a pretty rough 2024 in the 2% to 3% range positive. And then Florida and Denver, Florida is expected to be very modestly positive, I Call-IT roughly flat to plus 50 basis-points. And then as it relates to Denver, feel better about Denver than what is represented by the market overall, given the distributed nature of our assets across suburban submarkets. That being said, it's experienced a level of supply that has impacted the market more generally. So it would also be below the established region average. So I would be hesitant to draw sort of a broad conclusion across expansion regions, but give you those insights as it relates to each one.

Rich Hightower
Analyst at Barclays

Yeah. That's very helpful. Thank you, Sean. And then the second quick one is for Matt. You mentioned wanting over-time to grow the SIP book maybe around $400 million. I think we've heard comments on other calls that particular product in the marketplace is becoming increasingly competitive. I guess in terms of capital chasing yield and so forth. So maybe just tell us about the dynamic that you're seeing in the marketplace and you know-how you guys can sort of be uber selective and still hit your growth target there. Thanks.

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Sure. And Rich, I guess what I would say is, we do think that we bring -- in terms of the competitive environment, for us, the issue hasn't been losing deals to other providers of that slice of capital. It's been finding deals that underwrite to an appropriate level of safety and margin for us relative to where our proceeds are going to stop. So we're not going as high-up the capital stack as we used to go, whereas maybe earlier iterations went just given what's happened to interest rates and valuations. So what we saw last year is there were a lot of deals trying to get capitalized that really -- they were just the wrong core product market fit. They were high-rises in a market that will only support midrise or midrise in a market that should only support garden or very aggressive super luxury rents assumed or something like that. So through the course of '24, a lot of those deals got flushed out-of-the system and just didn't happen. And not only did they not happen, but eventually the sponsors just gave up and moved on. So what we've seen recently, I'd say in the last quarter or so is deals that start to make a lot more sense that on a much better basis, it's a better land deal, it's the right product. It's generally not as ambitious and aggressive in terms of the density and the rent levels. So we think those deals make sense and some of those deals people are not taking. Our program is strictly mezz to merchant builders. We're not doing to kind of bridge-to-bridge thing or the recaps. And the reason we're keeping it to that is because it leverages our unique capabilities in development, construction and operations. So on the deals that make sense to us, I would say we are a preferred capital provider and we have credit agreements with quite a few primary lenders, both banks and debt funds that take a lot of comfort in the fact that we are there with them in the lending, in the capital stack because we have a lot of internal data. We know-how to look at a deal and understand if it's getting built right and if it's going to be operated right. So I'd say we're very competitive on the deals that we want to win and it's just hoping that there'll be enough of them out there. For what's a pretty modest goal. I mean, these are $20 million, $25 million per deal. So we're talking three deals, three or four deals over the course of the year. We already have one that's in due-diligence right now that we hope to close here in the first-quarter and several others that are in the advanced stages. So I'd say it's a relatively modest goal and I'm feeling pretty good about it.

Rich Hightower
Analyst at Barclays

That's great. Great color. Thank you.

Operator

Our next question is from Alexandra Goldfarb with Piper Sandler. Please proceed.

Alexander Goldfarb
Analyst at Piper Sandler Companies

Thank you. Hey, good afternoon -- good afternoon down there. Two questions. First, fee income has been a popular topic as the industry rolls out various things like WiFi in addition to historic things, waste services, etc. As you guys look at the total all-in pricing of rent plus these other services, is it your sense that these services are additive or from a resident perspective, they look at the whole sort of the whole enchilada and say, this is the amount I can pay. And therefore, whether you're charging more in fees or rent, it doesn't really increase the overall sort of growth rate of the unit per se.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yeah, Alex, it's Sean. It's a good question. What I'd say is it depends a little bit on the composition of the various things that end-up in the bundle, I'll Call-IT. So for example, if we're talking about bulk Internet, to use one example, if we can replace the cost of that service for the resident at a comparable speed at a discount, net-net, they should look at that favorably, right? And when it comes to other fees that are out there, I think it's a good point where people start looking at, okay, there's a, let's Call-IT a move-in fee for amenities or there's a recurring maintenance fee or this, that or the other. If you're an outlier as it relates to that, then you may start to see some resistance. You know, everybody is passing-through utilities, everybody has pet fees, things like that, that are relatively standard. I think it's people maybe were out on the edge a little bit as it relates to either the amount they're charging for something or the unique nature of one that people may start to pause and wondering if that really makes sense or not. So it's an area that's evolving, I would say, and we're all pushing it, the publics, the privates, etc. And I think where we're providing good service and good value for residents, they should appreciate it. It may take a little education for them to understand it. Hey, what's this fee? Well, this is the bulk Internet fee. If you look at what you pay every month-to Verizon, what we're offering at the discount, et-cetera, etc. So it's a good question. I think people are working their way through it. Net-net, we think we provide good value to residents for what we charge, but it is sort of a owner-by-owner type of approach that you really have to look at.

Alexander Goldfarb
Analyst at Piper Sandler Companies

Okay. The second question is on harvesting assets, clearly, you guys are now out of Connecticut. As you look at Maryland, Montgomery County has become a flashpoint given rent control. Is it your view that that's another -- that Maryland is another market that you would look to significantly scale back, especially where it's been impacted by rent control laws. Just sort of curious given some of the headlines out of that market.

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Yeah, Alex, it's Matt. It is a factor-in our overall portfolio allocation goals longer-term. So Ben talked about our goal to get to 80% suburban. Some of that is about demand and supply. We like the demographics and there's more supply constraints in many of these suburban towns. And some of it is about regulatory risk and exposure and most of the jurisdictions that have a more aggressive regulatory regime or more regulatory risk are urban. You mentioned one that's not Montgomery County, which is suburban. We have a relatively modest presence in Montgomery County. I think we only have maybe four assets there. So we're not necessarily looking to lighten up specifically in Montgomery County at this moment, but it is a part of our overall strategy and you'll see us continue to sell assets out of jurisdictions where we view there being elevated regulatory risk over the next period of years. I mean, if you look at what we sold-in the past year, we sold an asset in the City of Seattle. We sold an asset in the City of Los Angeles, City of Boston. Those are all places -- I mean, that was one factor among others and you'll continue to see that.

Benjamin W. Schall
Chief Executive Officer & President at AvalonBay Communities

There's the disposition side, Alex. And obviously, then there's also the new investment side. And so in certain locations that have heightened regulatory risk or uncertainty as it relates to the regulatory future, for sure, the bar is higher there in terms of investing new capital dollars.

Alexander Goldfarb
Analyst at Piper Sandler Companies

Right. Okay. Thank you.

Operator

Our next question is from Rich Anderson with Wedbush Securities. Please proceed.

Rich Anderson
Analyst at Wedbush Securities

Hey, thanks. Good afternoon. So when you just look at what you have going on right now and let's say you get everything done in 2025 that you have on your plate, oh, how much closer do you get to your 25% target in expansion markets from the 10% that ended the year. I'm just wondering what -- how much the gap closes over the course of this coming year as you see it today?

Benjamin W. Schall
Chief Executive Officer & President at AvalonBay Communities

Yeah, Rich, we've been taking a fairly steadied and sort of measured approach there. As you saw this year, we moved it 2% to 3%. So we continue in that normal-course between trading activity and new investment activity is probably likely in that range. Now that is subject to the extent that we find opportunities, a small portfolio, opportunities potentially move that needle quicker that's out there, but normal-course is probably in that type of range. So it's a multiyear effort, which is sure has benefited us as we've sort of paced our capital allocation into these markets over-time.

Rich Anderson
Analyst at Wedbush Securities

Okay. And maybe correct me if I'm wrong here, but I think 45% of your starts this year will be in your expansion markets. Do you think as that area of the country steadily improves over the course of this year and perhaps you start to see some really big-time growth in '26 and '27 that acquiring in those markets becomes incrementally less appealing and developing is perhaps the way you top off getting to your full allocation of 25%. Is that a reasonable way to think about it like for now, maybe more in the way of acquisitions, but later on more in the way of development?

Benjamin W. Schall
Chief Executive Officer & President at AvalonBay Communities

I think about it as both. I mean, I wouldn't -- I don't think it's an either or choice for us. At a market level, at a sub-market level, obviously, we'll lean into acquisitions versus development going back to Matt's conversations as it relates to replacement costs. But I think we are in a window right now where we feel like we have a balance sheet. We can bring our strategic capabilities to bear where we can be growing both through acquisitions and development and then breaking down development further through our own development and through the funding of other developers. And that's a program that in times where we feel like we have the green light on development in terms of economics of development and cost-of-capital, that allows us to flex capital allocation into that sleeve.

Rich Anderson
Analyst at Wedbush Securities

Okay. Fair enough. Thanks very much thank you.

Operator

Our next question is from Michael Goldsmith with UBS. Please proceed.

Michael Goldsmith
Analyst at UBS Group

Good afternoon. Thanks a lot for taking my question. Can you talk about the gap in performance in suburban and urban markets in the 4th-quarter? And do you expect that gap to remain similar in 2025?

Kevin O'Shea
Chief Financial Officer at AvalonBay Communities

Yeah. When you said gap in performance, Michael, can you be a little more specific as to what you're looking for? Are you talking about like rent change as an example?

Michael Goldsmith
Analyst at UBS Group

Yeah. Rent change exactly.

Kevin O'Shea
Chief Financial Officer at AvalonBay Communities

Yeah. From a rent change standpoint, our suburban portfolio continues to outperform and outperformed in the 4th-quarter by about 40 basis-points. And given some of the dynamics we've been talking about and what I referred to as it relates to the very, very low levels of supply in our suburban submarkets. That expectation is that it will continue moving forward. There are some places with return to office that you might see a little bit of a lift more significantly on the urban side. We haven't seen that quite yet, but it's certainly a possibility as we move through the year.

Michael Goldsmith
Analyst at UBS Group

Thanks for that. That's helpful. And my second question, is that bad debt assumption for '25 imply that delinquencies remain elevated versus historical level. What factors are you keeping you from reaching that historical level of bad debt? Thanks.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yeah, Michael, Sean again. Yeah, in terms of reaching the historical level of bad debt, I think the couple of schools of thought there. I mean, people wonder is that achievable or not, the 50 to 70 basis-points that we have realized historically that is still a little bit of a TBD. The headwinds are certainly a tighter regulatory environment in terms of the processing of evictions, the timeline is taking, some of that's just backlog, some of it is additional regulatory actions that have been adopted that slow the process. And so that may be a little bit of a headwind to getting back to normal levels. At the same time, though, there's always been an element of fraud in the system. And I would say that the industry has much better tools available nowadays than we ever had pre-COVID to weed that element out, screen them out essentially. So there's some puts and takes there. So we still have a ways to go in terms of getting there. I suspect my intuition is we will certainly be closer to the 50 to 70 than where we expect in 2025, but it's going to continue to take time to get there in certain markets in particular, like in New York City, the District of Columbia, Montgomery County, but you see greater movement in those regions to support us getting there a little bit faster.

Michael Goldsmith
Analyst at UBS Group

Thank you very much.

Operator

Our next question is from Alex Kim with Zeldman Associates. Please proceed.

Alex Kim
Analyst at Zelman & Associates

Hey guys, thanks for taking my question. Just a clarifying one to begin. Is the development volume from the DFP included in the overall $1.6 billion number? And is there a number of or percentage even bookmark the TAM homes you're developing alongside your apartment units?

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Yeah. Hey, Alex, it's Matt. So yes, the development volume includes -- it's mostly our own development and a little bit of DFP. So I think as we sit here today, three of the 17 deals under-construction are DFPs. And then as we look to our 25 starts, time will tell, but my guess is maybe a similar proportion, probably two or three out of 10 or 12 starts would probably be DFP. Those come quicker, so they're a little -- not quite as easy to predict, but that's our expectation. As it relates to the townhome component, so we have the 100% townhome community under-construction today, which is a DFP deal that's Avalon Plano. And then we probably have two or three other communities currently under-construction that have a townhome component to them. I'm just looking at the list now, Lake Norman, Wayne, two deals in New Jersey, Pleasanton out in the East Bay, actually has some town homes. Tech Ridge in Austin has some townhomes. So anytime that we can mix it in, we will and we see that more-and-more with some of our garden communities where we might do very typical deal like look at an Avalon Wayne in Northern New Jersey, it's, I think 470 to 450 units, it's maybe 50 townhomes and 400 stack flats and that's been -- that's been a great formula for us.

Alex Kim
Analyst at Zelman & Associates

Got it. That's very helpful. And then just another one on the BTR business. As you expand your exposure to the product-type, are there any plans to ramp overhead this year or will you continue leveraging your existing capabilities?

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

So one of the nice things about the DFP is that it doesn't come with the same internal overhead. We do fund third-party developers their overhead through paying them developer fees, but it doesn't require incremental overhead on our platform. So we don't see that as a driver.

Alex Kim
Analyst at Zelman & Associates

Yeah. Got it. Okay. Yeah, thanks for the call thank you.

Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Ben Shall for closing remarks.

Benjamin W. Schall
Chief Executive Officer & President at AvalonBay Communities

Thank you. Thank you everyone for joining us today, and we look-forward to speaking with you soon.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

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