I live in Westchester County, New York, and for the past year or so, I've watched as a fairly large apartment complex has gone up in the nearby town of Harrison, where I once lived. It is impressive in a number of ways, but the really notable aspect of the new property is that it speaks to the construction acumen of owner AvalonBay (AVB 0.07%). And the real estate investment trust (REIT) has another $2.3 billion worth of projects in the works.
AvalonBay likes to build in difficult locations
The development in Harrison shocked me. AvalonBay essentially put up apartment complexes in what was once a series of parking lots located right along the Metro North train line (which delivers riders to New York City), serving as parking for the Harrison station. Getting approval for such a project must have been a long and difficult process in a wealthy town like Harrison since it materially increases population density in the town center. And AvalonBay had to provide parking for its residents and the Metro North station. There's also new storefront space on the lower level of the apartments, which will compete with existing stores across the street.
Image source: Getty Images.
This project isn't just an indication of AvalonBay's abilities as a developer but also demonstrates its negotiation strength. But this is hardly the first time the REIT has taken on a difficult project. It specializes in building in wealthy regions with high barriers to entry and difficult zoning requirements. Basically, it has built the skill of building where others can't. It's one of the reasons why AvalonBay is often afforded a premium versus its peers in the market.
The Harrison apartment complex has just been completed, so it is now time to get residents into the units. The company also just completed Avalon Brighton in Boston. As these apartments start to rent out, they will begin adding to revenue. And the rents, given the locations and new construction, are probably going to be quite high.
There's more on AvalonBay's construction docket
These two projects may be done, but there's another $2.3 billion in construction in the works. The list is fairly substantial, with 17 communities under development containing 5,761 apartments and 29,000 square feet of commercial space. In the second quarter, AvalonBay started construction on a 322-unit apartment complex in Hunt Valley, Maryland, worth roughly $109 million.
As each new development opens its doors to tenants, AvalonbBay's growth opportunity increases. But that's today's approach, and it's a good one. AvalonBay isn't always so aggressive with regard to building. It changes its tactic along with market dynamics. For example, if building new apartments is more expensive than buying existing ones, it shifts to buying already-built apartments. And if it can fetch hefty premiums for the assets it owns, it will sell apartments. That's particularly true if it can sell older assets that don't have the most modern amenities.
The end goal of all of these different approaches, however, is the same. AvalonBay is always looking to have a modern, young apartment portfolio for which it can charge premium rents in attractive markets. It has proven adept at achieving this over time despite the often volatile nature of the apartment space. Indeed, short lease terms mean that economic downturns can be particularly hard on apartment REITs.
Paying a premium for great leadership
AvalonBay's dividend yield is around 3.7%. The last time the yield was nearing 4% was during the coronavirus pandemic, suggesting the stock is perhaps attractively priced today. And while the dividend hasn't been increased every single year, it has trended steadily higher for decades. AvalonBay is one of those companies that you keep on your wishlist just in case Wall Street gets a case of the jitters over short-term headwinds. Today seems like one of those times. History suggests management will shift gears as needed and do what's necessary to succeed.
