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AvalonBay Communities Inc  (NYSE:AVB)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

(Operator Instructions) Your host for today's conference call is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley you may begin your conference.

Jason Reilley -- Investors Relations

Thank you, Brandon, and welcome to AvalonBay Communities Third Quarter 2018 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's 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. This attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance.

And with that I'll turn the call over to Tim Naughton Chairman and CEO of AvalonBay Communities for his remarks. Tim?

Timothy J. Naughton -- Chief Executive Officer

Great. Thanks, Jason, and welcome to the Q3 call. Joining me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum. Matt and I will provide management commentary on the slides that we posted last night and then all of us will be available for Q&A afterwards.

Our comments this morning will focus on providing a summary of the results for the quarter, an overview of economic and apartment fundamentals and their impact on current portfolio performance, a review of investment and portfolio management activity, where we were very active this past quarter and finally, we'll share some progress on our Columbus Circle mixed-use development.

Starting now on slide four, highlights for the quarter include core FFO growth of 4.1%, which was $0.03 per share above the mid-point of our Q3 outlook. You'll note that we've increased the mid-point of our full year 2018 outlook by $0.03 to $9 per share. Same-store revenue growth came in at 2. 3% and same-store NOI growth was 3.1% for the quarter. The mid-point of the range for same-store performance revenues, expenses, and NOI remain unchanged from our midyear updated outlook.

You'll note, however, we did provide additional ranges for revised same-store basket that excludes the New York JV assets assuming that deal closes prior to the end of the year as expected. We completed $315 million in new developments for the quarter, at an average initial projected yield of 6.2% and have now completed $740 million at a 6.4% projected yield for the year. We also started two new communities, totaling just over $200 million in Q3. And lastly, we raised $170 million of external capital through the sale of one community at an average cap rate of just under 4.5%.

Turning now to slide five and an overview of fundamentals, I'll just go through this quickly. As all of you know, the US economy is very healthy currently, with the GDP growth running around 3.5%, core profits surging by double digits, labor markets that are the tightest we've seen so far in this cycle and the household wealth recently reaching record highs before the recent pullback in the equity markets.

Turning to slide six, the economy is being driven by both the business sector and the consumer. A strong business and consumer sentiment is translating into increased levels of capital investment and household formation, both of which are good signs for the economy and the housing market over the next few quarters.

While these and most other leading indicators are still pointing up, there are some potential risks that are worth watching, including rising geopolitical tensions, the threat of trade wars and the normalization of interest rates through continued Fed tightening. But overall, it appears we'll have a solid macro environment in which to operate over the next few quarters.

Turning to slide seven, this favorable macro environment is in turn supporting apartment fundamentals, which are showing signs of renewed strength, with several drivers of rental demand turning up, including young adult job growth which is running above 2% again; wage growth reaching a cyclical high; and housing affordability actually hitting a cyclical low, all positive trends for apartment demand. These drivers are all further supported by demographics, as the young adult age cohort, or those under 34, is projected to experience decent growth for the next five years and not peak until 2024.

Turning now to slide eight, and the supply side of the equation, it appears, we're beginning to see some early signs of relief in supply as both permits and starts have been declining in our markets for most of the year. In fact, over the last two quarters, on a seasonally adjusted basis, starts and permits are down by 20 -- by over 20% from the prior two quarters. This is probably mostly due to construction cost inflation that we've been talking about and it's been averaging in the high single-digit range over the last year, with some regions like the Bay Area even reaching double-digit growth.

With rent growth generally averaging 2% to 3% over last year, projected yields on prospective deals have deteriorated by 25 basis points to 50 basis points over the last year or so, depending upon the market. It stands to reason then that this would begin to have an impact on new development investment and that seems to be occurring in our markets and to some extent nationally.

We've also seen a pullback in the public markets as the apartment REIT sector has cut back on development under way by roughly 35% since year-end 2016. Of course, this recent pullback in start activity in 2018 won't be felt really in terms of deliveries until 2020 or late 2019 at the earliest, as we expect new deliveries to remain elevated over the next four quarters or so as you can see in the box on the lower right on this chart.

Turning now to slide nine, as you might expect, improving demand fundamentals are starting to translate into stronger portfolio performance, and indeed this is happening. This chart depicts the four-quarter moving average in like-term rent change for our same-store portfolio. As you can see, rent changes started to turn up. Again, this is a four-quarter moving average, driven by improvement in Q2 and Q3, which posted stronger rent growth than the same quarters last year, with Q3 average rent growth of 3.2%, or 70 basis points greater than Q3 of last year. Similarly, gross potential for the same-store portfolio started to turn up and in Q3, it was at 2.3%, or 60 basis points higher than the Q3 of 2017 for the same-store portfolio.

And turning to slide 10, most of our regions saw solid improvement in the quarter. Northern California saw the biggest bounce, with rent growth of 4%, which was 250 basis points higher than Q3 of last year. All three East Coast regions saw good improvement in the 50 basis points to 100 basis points range. Southern California saw modest deceleration and Seattle a more significant deceleration from the prior year. Q3 rent growth in both those regions, however, was still at or above the portfolio average of 3.2%.

These trends have largely continued into Q4, with like-term rents up by about 3% in October. In addition, rent growth is broad-based, with every region currently in the 2. 5% to 4% range. And the East and West performing roughly in line with one another for the first time since 2011.

I'll now turn it over to Matt, who will discuss investment and portfolio management activity this past quarter. Matt?

Matthew H. Birenbaum -- Chief Investment Officer

All right. Thanks, Tim. Turning first to our current development activity, as you can see on slide 11, our completions this year have continued to meet our initial underwriting and delivered very healthy value creation, with yields of 6.4% compared to estimated cap rates for those same assets of roughly 4.5%. In addition, our development portfolio is generating lease-up NOI as expected contributing to earnings in 2018 right in line with our initial guidance.

This quarter we completed Avalon Dogpatch our largest development completion of the year. This woodframe community, which is uniquely positioned in an emerging neighborhood of San Francisco, that offers mainly high-rise product, was delivered at a very compelling basis, which in turn contributes to its 6.2% yield, a remarkable results for the Bay Area.

Turning to slide 12, we have an excellent long-term track record of delivering new communities in accordance with our initial budgets. This is in large part due to us acting as our own general contractor in most cases and having the majority of our trade costs locked in at the time we start a new project. This is particularly important given the increasing cost pressures we face in our industry. As Tim indicated, construction inflation is running well ahead of rent increases, a particularly acute issue in the tech markets on the West Coast.

This quarter we did recognize cost increases on two woodframe projects currently under construction in the East Bay, in Emeryville and Walnut Creek. These budget increases, which collectively total approximately $40 million, or 15% of our original estimate for those two projects, were the result of unexpected union pressures and subcontractor performance issues. These two projects are exceptions to the general trend, which continues to reflect excellent construction execution and across our current overall development portfolio, even including these two communities, our actual costs are tracking within 1.6% of the original budget as shown on the slide.

Turning to slide 13, our sector-leading development platform continues to provide excellent risk-adjusted returns, with approximately $3 billion in value creation so far this cycle and another $800 million expected from the development currently under way. While new starts may be less profitable than early cycle deals due to the cost pressures just mentioned, we are confident that long-term returns will still be highly accretive, consistent with our track record, as shown in the chart in the upper left. And we continue to manage capital markets risk by match-funding our development activity as shown in the lower right.

Turning to slide 14, our transactions team has had a productive year. As we execute on our strategy to rotate capital into our expansion markets of Denver and Southeast Florida, we are on track to complete the acquisition of four communities before year-end, including two suburban garden properties in the Denver area, a high-rise in downtown West Palm Beach, and a garden community in the Baltimore-Washington corridor just north of BWI Airport and the NSA headquarters at Fort Meade.

We have been opportunistically funding both our acquisition and development activity primarily through the transaction market as shown in the table on the left-hand side of the slide. We will have sold over $1. 2 billion in wholly owned assets by year-end, which after netting out $335 million in planned acquisitions, leaves us as net sellers of roughly $895 million during the course of the year providing cost-effective capital to fund our external investment activity.

To provide a little bit more detail on the Manhattan JV transaction, as we announced earlier this month and as shown on slide 15, we are selling an 80% interest in five stabilized properties valued at $760 million on a gross basis. As we've indicated for the past several years, our allocation to the Greater New York region is a bit higher than we would like and this imbalance would otherwise be trending even higher due to the development pipeline we have in the region.

We have sold about $1.1 billion in suburban New York assets over the last four years, but have not sold any wholly owned properties in New York City itself until now. This transaction further reduces our allocation to the Greater New York region while preserving our brand presence and rebalances our allocation within the region to roughly one-third each in the City, the New Jersey suburbs and suburban New York, including Long Island and Westchester.

It is important to note that, while these are among the most highly valued assets in our portfolio, there is a material difference between the short-term earnings yield or initial investment return and the transaction cap rate as that term is defined by various market participants. This is due to the presence of property tax abatements on all five assets and a ground-lease structure on two of the assets, which provide a short-term boost to cash flow until their expirations and/or resets. Consequently, the unlevered earnings yields on the assets is in the low 5% range, but this yield is roughly 150 basis points higher than what might be considered a normalized cap rate after adjusting for these factors. The impact of the JV transaction in our portfolio can be seen on slide 16. Metro New York share of our total NOI will drop from 24% to 22%, closer to our long-term target of 20%.

Moving to slide 17, I'd like to provide an update on our Columbus Circle development. This asset includes approximately 67,000 square feet of prime retail space on Broadway, and 172 residential units, and is on track for completion next year. Turning first to the retail component of the project, this slide shows our leasing progress today. We are pleased to report that we have executed a 35,000 square-foot lease for the two below-grade floors and a main entrance on Broadway to target.

In addition, we are in advanced negotiations to lease just under half of the second floor space as well. These two tenants will bring us to 65% leased by square footage and 45% leased by revenue, and both are at economics at or better than our initial underwriting. We expect to turn over both spaces for TI work to these tenants in early 2019.

As for the residential component, we are currently exploring a shift from rental apartments to for-sale condominiums. From the beginning, one of the most appealing aspects of this project, apart from its absolutely AAA location, has been the flexibility it provides with no tax abatements, zoning restrictions or affordable component that would impede a condominium strategy if it offered a better return profile.

While the Manhattan condo market has softened somewhat over the last year, as shown in the lower left corner of slide 18, our building offers some compelling advantages as indicated in the upper right-hand side of the slide. Our average unit size of roughly 1,100 square feet, while large for a Manhattan rental building, would actually be on the smaller side for a condominium offering, which in turn allows for lower whole dollar pricing than most other new product on the market. As a result, 85% of our homes would be priced below $5 million at our initial projected target pricing, with a wide variety of price points depending on unit size and location in the building, averaging roughly $3.2 million to $3.5 million per home.

And between the 8-foot deep (inaudible) facing Broadway and the balconies on the other frontages, more than 40% of the units have private outdoor space, an extreme rarity for such a prime Manhattan address. The outdoor space is not included in the average unit size, providing even greater value to potential buyers. We're still studying this option in greater detail, but our economic analysis suggest that at current market pricing there could be more than $150 million in additional pre-tax value through a condo execution.

To maximize our optionality, we are proceeding with some modest upgrades to the finishes in the building, which we believe will have value under either scenario and which will increase the expected total capital cost by less than 5%. If we decide to proceed with the condo execution, we would open for sales in March or April of next year, establish a threshold level of minimum sales contracts which we would require before finalizing the condo regime and proceeding to first settlement. Of course, we will continue to keep you apprised of our progress and our thinking on this as it evolves.

And with that I'll turn it back to Tim.

Timothy J. Naughton -- Chief Executive Officer

Thanks, Matt. So, in summary, a healthy US economy is supporting stronger apartment market fundamentals in most of our regions, with same-store rent change improving over the last two quarters and so far in Q4. Development activity is generally tracking expectations in terms of lease-up and yield performance, although we are experiencing some cost challenges in certain markets as Matt mentioned. We continue to make progress on our portfolio management objectives through activity in the transaction joint venture market.

And lastly, as Matt just mentioned, we're making really solid strides in retail leasing at our Columbus Circle mixed-use development, where we're also evaluating a condo execution on the residential component. And we'll certainly continue to share our thinking with that as we explore this opportunity further over the next couple of quarters.

So with that, Brandon, we'd be happy to open the call for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) The first question will come from Nick Joseph with Citi.

Nick Joseph -- Citi -- Analyst

On Columbus Circle when do we need to make a final decision on condo execution versus rental?

Timothy J. Naughton -- Chief Executive Officer

Yes. Matt, why don't you walk Nick through kind of the time line there?

Matthew H. Birenbaum -- Chief Investment Officer

Sure. Yeah. So Nick, what we're thinking is that, we would start some early pre-marketing shortly in the next month or two just to start building a prospect list. And then, if we're feeling comfortable with it, we would open a sales center on site probably in March. One of the things we have to offer that most other new condos don't is that, we would have the product actually show. So we think by March or April, we'll have a floor in the tower with four different unit types complete and kind of white glove ready as it were, which would provide -- so we're not thinking pre-sales before we actually have a product to show.

But if we open -- on that schedule, we'd open in kind of March-April. And then, if we were going to do that, we would just see how it goes. We would establish internally a minimum threshold percentage of units that we would want to have under contract before we're locked in and that might take anywhere from two months to four months, depending on how sales go. So -- but it wouldn't be until after we reach that threshold whatever it would be, 30%, 40%, 50%, whatever we want that we would then actually record(ph)condo and start settlement. So we would have optionality all the way up until that point.

Timothy J. Naughton -- Chief Executive Officer

Yes. Nick, and maybe just add to that, maybe it's probably obvious, but the opportunity cost would be potentially some loss lease-up revenue over the two to three or four months that Matt mentioned as we were -- as we are seeing the kind of traction that a condo execution would get.

Nick Joseph -- Citi -- Analyst

Makes sense. And if settlements do begin in the back half of next year, would you underwrite in terms of timing for a total sellout?

Matthew H. Birenbaum -- Chief Investment Officer

To some extent that's going to be a function of pricing and back it into some of our tactics and strategy. I don't think we're really at a point where we want to throw a target out there yet at this point for that.

Nick Joseph -- Citi -- Analyst

Thanks. And just finally, given the progress made on the retail leasing, what are the longer-term plans for the retail? And will you look to sell it once it's leased or are you comfortable owning and operating longer term?

Matthew H. Birenbaum -- Chief Investment Officer

Yeah. Hey, Nick. It's Matt again. I think we would probably expect to complete the lease-up of the retail space in the next year or two, and then, we'll look and we'll see. Hopefully, there will be a good NOI stream in place, but we may well turn around and decide to sell that in a couple of years because obviously it is a large retail asset and that's not our core business. But to get maximum execution on that we could go ahead and lease it up and then, we'll kind of see what it feels like at that time.

Nick Joseph -- Citi -- Analyst

Thanks.

Operator

Thank you for the question. The next question will come from Rich Hightower with Evercore ISI. Please go ahead with your question.

Rich Hightower -- Evercore ISI -- Analyst

Hey. Good morning, everybody. Maybe just to quickly follow up on the Columbus Circle retail question there. Can you give us a sense of just how competitive the leasing process was for the space that Target took down and also what is currently being offered to the market there?

Matthew H. Birenbaum -- Chief Investment Officer

Sure. Rich, it's Matt. I can speak to that a little bit again. There's been a lot of interest from a lot of different categories and for all different kinds of space. We have three very different price spaces. We have the sub-grade space. We have the Broadway frontage ground level space and then, we have the second floor space. So at this point, all the sub-grade space, a little bit of the ground floor just for the entry for Target and the entry for the second floor tenant, and about half of the second floor is spoken for. So what we're left with -- that's still available would be probably 85% of the ground floor and a little more than half of the second floor.

And we continue to see -- it's different categories of users. Obviously, those are very different rent levels, so they're different kind of tenants. So we've had pretty good interest from a wide variety of tenants for the space Target took. We've had a reasonable amount of interest on the second floor. The ground floor space is the most expensive space and probably the space that the thought was we needed to get the anchor tenant set first and that would generate more traction there. We are talking to folks, but we always expected that to probably be the last space to lease. So we're kind of not surprised with where that sits today.

Rich Hightower -- Evercore ISI -- Analyst

All right. Thanks for the color there. And then, my second question, I appreciate the detail in the earnings release surrounding the New York City JV portfolio impact on same-store results for '18. Can you help us understand and I guess in rough terms what the impact on '19 same-store would be from those assets being excluded from the portfolio?

Sean J. Breslin -- Chief Operating Officer

Yeah. Rich, this is Sean. I mean to the extent that we complete the execution of the JV, whether it's December or January, those assets would be removed from same-store. So there would not be an impact on same-store per se. It would be removed for both periods, for both '18 and '19 in terms of the calculation of the same-store metrics for the calendar year 2019, if that's your specific question.

The issues that led to the potential change in guidance as a result of the closing of the JV relates to two specific issues. One is the ground lease that we disclosed previously that we acquired a fee for Morningside Park last December, that's about $2.3 million. And then, there is another roughly $700,000 that relates to the write-off of a retail lease from third quarter of last year. So those are obviously a tailwind as it relates to the 2018 same-store results, particularly on operating expenses and there's an impact on NOI. So that's why it was necessary to basically indicate what the impact on the same-store performance would be by changing the composition of the bucket with and without the New York JV assets.

Timothy J. Naughton -- Chief Executive Officer

Aside from those two factors, the impact was negligible to the overall same-store.

Sean J. Breslin -- Chief Operating Officer

We're pretty much tracking where we thought we'd be in terms of all the same-store metrics, except for the impact of the New York transaction.

Rich Hightower -- Evercore ISI -- Analyst

Okay. Yeah. I guess to be clear, I mean, obviously, the pool will change in terms of the calculation next year, but I guess my question would be, let's assume they are in the pool for all of '19, and then, compare that number to what the pool without them in '19 would be just to get a sense of growth across the rest of the portfolio. That helps to frame it a little better.

Sean J. Breslin -- Chief Operating Officer

Yeah. I mean we're not ready to talk about '19 in detail just yet, but certainly New York is a market that we have been talking about, that there's a fair amount of supply this year. The supply starts to fall off somewhat next year. So you might see some marginal improvement there, but we haven't run through all the metrics in terms of the calculation of what we expect from New York and those assets in '19 yet to be able to give you enough insight into what the impact would have been if we didn't sell them and they remained in the same-store.

Rich Hightower -- Evercore ISI -- Analyst

Got it. Okay. Thank you.

Sean J. Breslin -- Chief Operating Officer

Yeah. Thank you.

Operator

Thank you for the question. The next question will come from Nick Yulico with Scotiabank. Please go ahead.

Nick Yulico -- Scotiabank -- Analyst

Thank you. So your forecast for supply in 2019 is a little bit higher than this year. Could you break that down the impact among some of your major markets where you see supply getting tougher or easier?

Sean J. Breslin -- Chief Operating Officer

Yeah. Nick, this is Sean. Happy to address that maybe at a sort of regional level and an insight on a few markets. But as it relates to 2019 in terms of what we expect relative to 2018, we do see supply drifting down a bit in New England, primarily in Boston, up a little bit around 30 basis points in the mid-Atlantic, and then, up about 80 basis points in Northern California. And if you look at the markets where there's some meaningful change to really talk about in terms of increases in supply in '19 relative to 2018 that's, D.C. is about 3,500 units and then, the East Bay and San Jose are each about 2 400 units in '19 and beyond, what they deliver or projected to deliver in 2018.

In terms of meaningful declines what we can see for sure, Boston about 1,100 units, Baltimore about 2,000, Orange County about 1,200, about 2,000 in San Diego. We do expect to see a decline in New York City, but given the nature of the construction and delivery cycle there, there's some question as to what's going to be delayed moving into next year. So we expect some modest reduction there, probably not what would have been anticipated mid-year when we saw it at that point, which is more meaningful, but we'll be scrubbing that pipeline later in the fourth quarter to provide good solid updates when we get into the January call.

Nick Yulico -- Scotiabank -- Analyst

Okay. That's helpful. And then, going back to the potential condo sales now in New York, I get that the overall NAV impact maybe higher, the NAV benefit maybe higher, but how do you weigh that versus taxes you'd have to pay on sales of units, economic risk for selling units rather than leasing them? And lastly, how this whole plays into FFO? And it feels like investors have kind of discredited condo sales income and FFO historically for REIT. So how do you weigh all that?

Timothy J. Naughton -- Chief Executive Officer

Yeah. Nick, Tim here. First of all, as an investment when we first got into this, we had a sense that maybe condo is maybe the highest and best use just given the fact there's no affordables here just the outstanding location. We programmed the community to give us some optionality. While the units are smaller than a typical condominium, they're larger than the typical rental. So we've always programmed this to provide some optionality.

As we got further into construction and we saw what the potential differential was between a rental value, capital highs and condominium, we just thought we owed it to ourselves as a good capital steward to explore further. And as Matt mentioned, we think the big differential maybe about $150 million on a pre-tax basis. So even if you calculate some tax in there, so it's probably still talking about a nine-figure differential and we think that we owe it to ourselves to explore that.

And just the fact that this building is almost -- is going to be ready for occupancy sometime next year, it is a unique advantage in that we have existing units that we can sell, whereas a lot of condos that are on the market today are on a pre-sale basis that are well beyond sort of the time -- that kind of time period in which they can deliver. So the cost here -- the opportunity cost is a little bit of an upgrade. So we think we can capture value on the rental side as well, but it's really sort of forgone lease-up NOI for a few months.

We can turn -- if we decided that demand just isn't there, the kind of values that we thought, we can always turn the lease-up on this thing in really a couple of weeks. So it's -- I think the risk profile of this is maybe a little different than somebody's thinking about this from ground-up perspective. Renting is our base business. And so, if that's the fallback, we don't really see where the extra risk is. And we probably ultimately will require a higher pre-sale requirement before making the condominium effective than maybe somebody is building a condominium purpose built from beginning.

So I hope that -- hopefully, that's responsive to the question. Something we've been thinking a lot in terms of how to just risk manage this opportunity, and as Matt laid out in his schedule, we think we've done that and as we said, we'll continue to keep both the analyst and investment community very well informed as to how we're seeing the market and how it's playing out.

Nick Yulico -- Scotiabank -- Analyst

Okay. I appreciate that. Thanks, Tim.

Operator

Thank you for the question. The next question will come from Juan Sanabria with Bank of America. Please go ahead.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Hi. Just a question on the strength or lack thereof of seasonality this year. Have you seen any benefits from an elongated seasonal lease-up period that may act as a headwind as we think about 2019 versus '18?

Sean J. Breslin -- Chief Operating Officer

Juan, this is Sean. Not really. I mean things are pretty much falling within a traditional cycle for us in terms of seasonality. So, I don't think there's any material impact if you look at it. I mean there was some discussion around that topic a couple years ago as it relates to some specific markets, of what was happening and the shortened duration to the leasing season, but nothing unusual in terms of what we're seeing this year that would bleed into '19.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

And just going back to Nick's question about developments and the earnings impact from an FFO perspective, I guess is there any development -- or should we think about any risk to FFO on developments coming online for '19 with and without going condo on the Upper West Side project?

Kevin P. O'Shea -- Chief Financial Officer

Juan, this is Kevin. The only development that really is relevant here would be Columbus Circle. And as Tim alluded to, there would be, as a consequence of pursuing a condo strategy if we go that route, a couple of impacts as we discussed. We wouldn't have the lease-up NOI, capitalized interest ceasing as it would for a rental, but it would be stopped when those units were made available. And then, probably be some marketing cost associated with the pursuing -- the pursuit of a condo strategy that would probably carved out of core FFO. So those are probably the two big things. Fact that there might be condo gains that will be carved out of core FFO, marketing costs will be carved out of core FFO, and then, I guess the third thing is, lease-up NOI that wouldn't be present on the residential piece. There may be one two other things but those are the major things.

Timothy J. Naughton -- Chief Executive Officer

And when we give our outlook in January, Juan, we'll be explicit as of to what our underlying assumptions are with respect to Columbus Circle and lease-up income as we have this year.

Sean J. Breslin -- Chief Operating Officer

Juan, just one other thing to add to that. I'm not sure if you're referring to this or not, but there was some discussion as we moved into '18 that our deliveries in 2018 would be down a fair bit relative to 2017. As we move into 2019, we do expect deliveries to come back up to levels that are more consistent with what we saw in 2017. Obviously, you have to set aside Columbus Circle which would have different use, but you start to see more deliveries coming through which would obviously look different to us in terms of earnings impact to '19 versus '18.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Okay. Great. And do you guys mind giving the portfoliowide renewals for the third quarter and what you're setting out the fourth quarter numbers at for renewals?

Sean J. Breslin -- Chief Operating Officer

Yeah. In terms of portfoliowide numbers as opposed to individual markets, and as Tim alluded to, in terms of October, we're running around 3% in terms of blended rent change for the entire portfolio. And then if you're looking at offers, offers are sort of in the mid-6% range for November and December.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you.

Sean J. Breslin -- Chief Operating Officer

Yeah.

Operator

Thank you for the question. The next question will come from Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Hi. Good morning. Thanks for taking the question. This is really the first quarter we've seen turnover increase in some time and I'm just curious if this was necessarily by design or just a function on the higher rents on renewals starting to force tenants out? And then did you see any notable increase I guess for -- in the reasons for move out?

Sean J. Breslin -- Chief Operating Officer

Yes. Austin, this is Sean. What you've seen is a little bit of an anomaly. We really -- we had more expirations in the third quarter of this year relative to the third quarter of last year. So if you look at turnover as a percentage of expirations, it was actually down about 220 basis points, pretty consistent with what we've seen through most of this year in terms of reduced turnover, but there is a change to the expiration profile that moves the numbers a little bit from quarter-to-quarter. So in general the trend has been down in terms of reduced turnover and that remains the case. So in terms of reasons for move out, no material changes whatsoever in terms of what we've seen this year relative to last year. It's been pretty consistent

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Thanks for the clarification. And the, as you evaluated the New York City joint venture, I mean, did you consider including any assets in the outer boroughs, I guess considering that's where it seems like a significant portion of the new supply is being delivered over the next several quarters?

Matthew H. Birenbaum -- Chief Investment Officer

Yes. Hey, Austin. It's Matt. We didn't. Actually, the portfolio that we brought to the market was all Manhattan assets and it was all stabilized assets and that was by design that for the types of capital we were looking to partner with and selling a partial interest sale, we wanted a portfolio that had a fair amount of consistency to it. And so, we were advised by the folks we were working with on it and I think appropriately that, the more consistent the portfolio, could be the better. And for many capital sources there's still obviously deep, deep institutional demand in the boroughs as well, but that would be kind of the thing that would get the most attention from the capital that we were targeting.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Great. Thanks for taking the questions.

Operator

Thank you for the question. The next question will come from Drew Babin with Baird. Please go ahead.

Drew Babin -- Baird -- Analyst

Hey. Good morning. A question on New Jersey. It looked like revenue growth year-over-year decelerated a bit in 3Q relative to 2Q and I was just wondering with a decent amount of supply looking to come to North Jersey next year, is that a market that you expect to maybe be a bit softer going forward? And I guess can you talk about Northern Jersey versus some of the properties you own in Central Jersey and what's going on there?

Sean J. Breslin -- Chief Operating Officer

Yes. Drew, this is Sean. Happy to chat about that. In terms of Northern New Jersey, we don't have a significant portfolio there. I'd say, what's probably most exposed in the supply, as it normally is, is our Jersey City asset. There's a fair amount on the Gulf Coast being done, but we don't have a big presence there other than potential impacts on Jersey City. So you will see some impact there. And the rest of the assets in Bergen County are generally at this point, in terms of the nature of how they perform, they tend to be not super-high beta assets is the way I describe them. So they're not right along the Gulf Coast in terms of their sensitivity to new supply. So they tend to just chug along and perform quite well.

The same thing with the Central Jersey assets for the most part. So they're not -- they don't present a lot of volatility, but they tend to be stable in environments like this where there's a lot of supply at the high end, whether it's in the City or on the Gulf Coast, and Northern New Jersey. So we'll provide better insight into it in terms of the supply as we get into next year, but it's pretty stable book of business. Overall, it kind of runs like Long Island in terms of performing pretty well without a lot of volatility.

Drew Babin -- Baird -- Analyst

And I guess a related question as you kind of rotate around New York City, the Fairfield-New Haven market, it's not in the New York Metro disclosures. Doesn't really grow like Boston, but also not a lot of new supply. I guess how should we think about that market long term? And is there potentially a point where that might make sense for harvesting some capital?

Sean J. Breslin -- Chief Operating Officer

Yes. I'm happy to comment on that and Matt can as well. We certainly have been a net seller in the Greater Fairfield market over the last few years. And based on what we're seeing overall in terms of demand drivers in that environment, independent of supply, we are probably likely be a net seller. But again that markets tends to perform just like the other ones that I mentioned, tends to run -- I mean, we're talking about 2% year-over-year numbers right now, tends to hold between, I'd say, 1.5 to 2.5 historically in terms of revenue growth if you look at it over a longer period of time. But to the extent that we find opportunities to sell some of those assets some of which are uniquely positioned potentially as for-sale assets or others or other uses as rental we'll certainly consider that.

Matthew H. Birenbaum -- Chief Investment Officer

Yes. Drew, this is Matt. I'll just add to that a little bit. We do think of Fairfield and New Haven, they are actually two separate MSAs. So we're pretty much out of New Haven at this point. We sold Milford last year which I think was our last asset in the New Haven MSA. But of what we have left in Fairfield, a lot of it is much further kind of down-county, closer to New York City, with better train connectivity. But there are still probably a few assets that are little more far-flung that we are likely to sell there in the next couple of years.

Drew Babin -- Baird -- Analyst

That helps. And then, lastly, a question for Kevin on the balance sheet. Seeing property yield on sales obviously down in the mid-4 range, 30-year debt sort of in the mid-4 range is there a certain point where if that cost begin to creep up more that you might consider even lower leveraged model if the economics between selling properties and secured bonds -- if the difference at least in the short term kind of equals out, is it something that might be explored? Or should we continue to think about roughly a 5 net debt-to-EBITDA as sort of the lower balance to the leverage target?

Kevin P. O'Shea -- Chief Financial Officer

Drew, this is Kevin. Yes. I think for now probably thinking about our leverage target in the low 5 net debt-to-EBITDA turn level seems to make sense. But certainly, we're tracking where capital costs are today and we have been able to sell some attractively priced assets to help support our investment activity, but I think we're pretty comfortable with where our leverage is right now.

Drew Babin -- Baird -- Analyst

Great. That's all helpful. Thank you.

Operator

Thank you for the question. The next question will come from Richard Hill from Morgan Stanley. Please go ahead with your question

Richard Hill -- Morgan Stanley -- Analyst

This is Ronald Kamdem on for Richard Hill. Just two quick ones from me. Just looking at the projected long-term goals in terms of New York and given that that's going to be one where you continue to sell, just curious, between New York City, New Jersey, New York suburban, do you guys have a sense of where some of the low-hanging fruits are? Are they going to be more sales in New York City, is it Jersey, or is it sort of all around?

Matthew H. Birenbaum -- Chief Investment Officer

Sure Ronald. This is Matt. As I mentioned in the prepared remarks, we had been selling more in the suburbs than the City, but this is really the first time we sold wholly owned asset in the City this cycle. And we -- I think the balance right now, which is roughly a third, a third, a third, feels pretty good. So we may lighten up a bit more in the New York Metro area, there maybe -- but I would look for those proportions to the extent we do. Central Jersey we might be a little heavy still because we have a lot of development actually coming in Central Jersey. So it might be a little bit more weighted in that direction, but we'll probably try and keep the same rough proportion.

Richard Hill -- Morgan Stanley -- Analyst

Got it. And the other one I was just -- it was interesting when you mentioned the two communities in Northern California, where those construction costs increased and so forth. One, is there any other markets where you're seeing that sort of pressure? And two, if you could just talk about maybe some of the long-term benefits in terms of reducing supplies to those areas?

Matthew H. Birenbaum -- Chief Investment Officer

Yes. It's interesting. The flip side of the pain, right?

Richard Hill -- Morgan Stanley -- Analyst

Right.

Matthew H. Birenbaum -- Chief Investment Officer

Certainly, in terms of hard cost pressure, Northern California would be the most extreme right now. Frankly, Denver is also seeing quite a lot of it. We're not building anything in Denver, but that is one thing that's informed our approach to partnering with others and frankly layoff some of that risk to partners through potential kind of capital JV-type structures that we've been looking at, similar to what we're doing in Southeast Florida with the TCR in Doral.

So, Seattle has seen quite a bit of pressure. I think it has for whatever reason a little bit of a deeper labor market and subcontractor base. So, while we've seen also a great ramp up in supply, it hasn't responded quite as aggressively as Northern Cal, but that would be the other region where we're seeing still very strong hard costs growth.

The impact on supply we'll see? I think, as Tim mentioned, we're starting to see it in the start numbers in our markets in general, perhaps more so in Northern Cal. I'll tell you, on the development side, we haven't signed up a new third-party development right in Northern Cal in years. What we are focused on is entitlements where we begin to sign in our own portfolio and we have a couple of great opportunities there and/or public-private partnerships like the deal we have with the city at Balboa Reservoir. So we've certainly seen in our behavior. And you would think at some point, it would start to impact starts there. Again, we're seeing it across our portfolio. I don't know that it's disproportionately in Northern Cal right now though.

Richard Hill -- Morgan Stanley -- Analyst

Helpful. Thank you. That's all I have.

Operator

Thank you for the question. The next question will come from Dennis McGill with Zelman & Associates. Please go ahead.

Dennis McGill -- Zelman & Associates -- Analyst

Hi. Thanks for taking my question. First one, just going back to Columbus Circle, I just want to make sure I understood the catalyst more near term. When you have the flexibility over time to think about condo versus rental, I think since the transaction was initially announced, the for-sale market probably has gotten softer. And then you build tax reform on top, so that kind of creates some additional risk on the ownership side. So just wondering, is there something that happened more recently or something as you think about the rental assumptions that would have tilted this toward condo?

Timothy J. Naughton -- Chief Executive Officer

Dennis, maybe I'll start and let Matt jump in if he'd like. I think one thing that maybe we underestimated was the value of selling a new condominium versus a conversion. So just from a pure value and execution standpoint, we probably underestimated that as we thought about kind of what our options were when we made the investment in the first place. So that's informed our view a bit in terms of exploring it now rather than saying, let's just lease it up and explore when the market is wide high. So that's probably been the biggest factor. From a rental standpoint and the -- the market's been pretty flat to slightly up, I think Sean mentioned. So that really hasn't changed in terms of our view of the rental economics at least on the revenue side.

Dennis McGill -- Zelman & Associates -- Analyst

Okay. And then, as you think about just the backdrop for the market, you noted a couple steps there on the slide there about contract activity being down and pricing incentives being up. What would you be assuming over the next 18 months, 24 months as far as the backdrop of the market? Are you just kind of holding that steady as far as the competitive nature?

Timothy J. Naughton -- Chief Executive Officer

Well, I guess the way we think about it is, we're going to go into this pre-marketing period and see how strong the market is. We'll let the market tell us. And so to the extend we get a great response there through the brokerage community, the brokerage network, we think we can start converting some of those prospects to contract. We then have sort of the second milestone to actually try to get -- try to start building contracts. And then again, we have sort of a second opportunity to decide whether we want to move forward or not based upon the strength of the market.

And again, we don't have to be committed to this route. If the weakness just is stronger than we think, then we always have the ability to lease these units up, so -- and essentially cancel any deals that we may have had in the market. So we think we've got a couple of milestones here that we can test the depth of the market. And if it's there, we'll go. If it's not, we'll go back to Plan A.

Dennis McGill -- Zelman & Associates -- Analyst

Okay. That's helpful. And then, just one last question on the supply outlook. Today, you're looking for relatively stable deliveries in your markets, '18 versus '17, and then, '19 to be up a little bit. If you go back earlier in the year, I think '18 was going to be up more, '19 would have been a fairly sizable drop. Can you just may be explain the shifting between the years? How much of this is a net-net increase if you look at '18 and '19 together versus just maybe delay from some of the competitive supply?

Sean J. Breslin -- Chief Operating Officer

Yeah. I think, Dennis, when we -- and this is Sean, we talked about it earlier in the year, I think what we said is that, we expected some mild reduction probably in 2019, but given what we've seen historically to the extent that we see more delays than what has been normal the last two or three years, those numbers could even out. And based on what we see today, that appears to be happening. So, the same assets are under construction, what's actually getting delivered in 2019 is increasing as a result of some movement from 2018.

So as I said earlier on one of the -- in response to one of the questions, we'll be scrubbing the pipeline hard here in Q4 before we finalize our guidance for 2019 and be able to provide a good update at that point. But to be honest, just based on where we are on the cycle for construction and the labor availability, you can say that 2019 number -- you expect that probably to come down some as you move through '19. It's just hard to get a visibility on exactly where it's going to be and how much.

Dennis McGill -- Zelman & Associates -- Analyst

But net-net, as you sit here today is that collective '18-'19 in your markets higher today than earlier in the year or just distributed differently?

Sean J. Breslin -- Chief Operating Officer

Distributed differently based on what we know.

Dennis McGill -- Zelman & Associates -- Analyst

Okay. That's helpful. Thank you, guys.

Sean J. Breslin -- Chief Operating Officer

Yeah.

Operator

Thank you for the question. The next question will come from John Kim with BMO Capital Markets. Please go ahead.

John Kim -- BMO Capital Markets -- Analyst

As the near-by resident, thanks for bringing Target to the neighborhood. On your developments, with the pullback in starts among your competitors, is your strategy now to increase your pipeline going forward, or are elevated costs keeping you at current level?

Matthew H. Birenbaum -- Chief Investment Officer

Yeah. John, it's Matt. It's really -- I mean our pipeline is driven by two things: bottom up where are the opportunities, where are we seeing the opportunities, and are we getting appropriate risk-adjusted returns based on our underwriting. And then a little bit top down, as we've talked about a couple quarters ago, what can our balance sheet support in a leveraged-neutral manner in terms of funding. So right now, I would say that the constraint -- the bottom-up constraint is probably at least has been good as has been(ph)the top-down constraints. We don't look at it and say, while the other public service developing less, we should be developing less or more. We really look at it in terms of what deals are there out there that are underwriting that are providing us reasonable returns and there are a few of those.

We've only signed up three new development rights all year this year. Interestingly, three in this past quarter, but those were the first three for the year. And one of those is a joint venture on a mall site with GGP/Brookfield. So that's a deal we've been working on for a long time. One of them was a densification of an existing asset that we already own. Kind of like what I mentioned earlier that in Seattle -- taking that strategy from Northern Cal to Seattle, we're looking at maybe an opportunity in Southern Cal now to do the same. So it's more of that kind of business. So I think it's more a reflection of the reality that where hard costs are it's harder to find deals that work. The ones that do tend to be more in the suburban and in the Northeast. You look at -- for example, we just started a deal this quarter in Old Bridge, New Jersey. That's a deal we've had under contract for four or five years, a market that doesn't see a lot of volatility, has seen less pressure on hard costs and still has a very strong yield. And then Tim you want to add?

Timothy J. Naughton -- Chief Executive Officer

Yes. John just to put some numbers. So I think we talked about this last quarter, if you looked at the '13 to '16 period, we probably averaged somewhere around $1.3 billion in starts, and it is our expectation, in '17, '18 and '19, that is probably going to be down, kind of commensurate with what I said the overall REIT sector is down by about 35% 40%, more in the $800 million may be $900 million range. And that's consistent with the market opportunity that we've seen, as well as Matt was mentioning in his remarks. So that's where we see it, at least for the foreseeable future, all subject to what the economics actually look like at the time which we have to actually make the capital allocation decision.

John Kim -- BMO Capital Markets -- Analyst

And is the 6.4 yield that you've had on completions year-to-date, is that representative of your overall pipeline ex-Columbus Circle or when you're underwriting for new project?

Matthew H. Birenbaum -- Chief Investment Officer

The new development rights -- I am sorry, the development rights that haven't yet started, the basket as a whole is probably in the low 6s, so it's probably just a little bit under that, but it varies a lot based on where you are in terms of geography and product type.

John Kim -- BMO Capital Markets -- Analyst

Okay. And just one quick one on Columbus Circle. The local press is referring to the building as 1865 Broadway, is the retail basically being rebranded or branded differently than the residential?

Matthew H. Birenbaum -- Chief Investment Officer

No. The residential address is actually 15 West 61st Street, whether rental or condo, that's where the front door to the residential is. It's obviously not on Broadway which is the prime (inaudible) of the retail space. So -- and the retail address is probably a Broadway address. There may be a second floor tenant who technically has a 61st Street address as well, but the retail engages with Broadway, the residential really engages with the side street.

John Kim -- BMO Capital Markets -- Analyst

Got it. Thank you.

Operator

Thank you for the question. The next question will come from John Guinee with Stifel. Please go ahead.

John Guinee -- Stifel -- Analyst

Great. Thank you. A bit of an oversimplification, but on the condo conversion, looks like let's say 110 million profit after tax, 172 units, about 650,000 in additional value created after tax. What happens to the retail? We're assuming that you get out of that. Can you make any money on the retail, or would the retail offset the value created on a condo?

Timothy J. Naughton -- Chief Executive Officer

We don't expect -- John, we don't expect to lose money per se on the retail. As Matt mentioned, it's not our core business. However so we are probably a little less confident in our projections and based upon our pro forma and the kind of rents that we're currently renting at, we think it's -- it probably contributes modestly to the profitability of this project.

John Guinee -- Stifel -- Analyst

Great. And then, a second question, what your crystal ball look like for hard costs over the next two or three years assuming the economy remains reasonably healthy, is it north of 5% annual increases or more inflation ask at 2 to 3?

Timothy J. Naughton -- Chief Executive Officer

Yes. No. It's a great question John. When you're in the middle of seeing these really healthy single digits, you ask yourself what's going to change to change that outcome. We are seeing a drop in starts in our market. So that's the first canary in the coal mine, where it might actually see some relief on pricing. You're starting to see the builders reporting order volumes being down. So that might help a little bit, but we're at full employment and we're losing -- we're not replacing some of the skilled labor we have in the construction trades.

And so, this is maybe a both a secular issue and a cyclical issue. So I don't think we're not betting that it's going to be 2% or 3%, or in line with rents, and it's one of the reasons why we're trying to maintain as much optionality on the development portfolio as we can. We have to wait it out until there's some kind of correction or ultimately if we need to write off some of these deals. We will if we just view them as uneconomic.

John Guinee -- Stifel -- Analyst

Last question. Any effect on land prices or land prices are remaining sticky?

Matthew H. Birenbaum -- Chief Investment Officer

Yes. I think it's still too early. John. This is Matt again. We do get that question seems like every quarter and we are waiting, but land prices are sticky. I would say for the most part, they've probably stopped going up and there are deals that aren't trading. There are land deals that aren't trading. So terms are maybe getting a little more favorable. People don't always expect to put it under contract today and close tomorrow, but we haven't seen any material decline in land prices that would make up for the increasing hard costs yet.

Timothy J. Naughton -- Chief Executive Officer

Yes. (inaudible) John is, land costs are generally 15% to 20% of total capital costs, whereas construction is probably 65%, maybe as high as 70% and soft costs maybe another 15%. So land costs will have to come down a lot to make up for the appreciation and escalation we're seeing on the construction side.

John Guinee -- Stifel -- Analyst

Great. Thank you.

Operator

Thank you for your question. (Operator Instructions) The next question will come from Alexander Goldfarb with Sandler O'Neill. Please go ahead.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Hey. Good morning down there. Two questions. First, as far as the condo and the retail at Columbus Circle, are those now both in like a TRS, or as far as the retail goes, is there some sort of holding period that you need to maintain to allow that to be good REIT income versus having it be taxable?

Matthew H. Birenbaum -- Chief Investment Officer

Yes. Alex, actually are both in TRSs.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. That's easy. And then the second question is just as far as New York State goes, with the whole rent control coming up for renewal next year and the possible change in the Senate and Albany composition, is there any concern that if they change the rent control laws that that would impact your affordable units that are part of your 421-a or those are separate from any legislation changes that they may consider?

Sean J. Breslin -- Chief Operating Officer

Yes. Alex, this is Sean. Good question with a whole lot of speculation around it, and whether the impacted be on affordable homes specifically or more on the market rate homes that are subject to rent stabilization because of the 421-a program. I suspect anything that would be related to the 421-a program given the fight that's already occurred over that, would probably be very difficult to get through, and that's what would impact potentially our portfolio. It wouldn't impact it in a meaningful way. There is only about 7% of the units in the portfolio that are basically at legal caps at this point in terms of for rents that are allowed. So the impact wouldn't be material, but I wouldn't suspect that that would happen given everything we've been through on the 421-a program over the last few years in New York.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. But if they change and do away with vacancy decontrol, you don't think that that would impact you or that could impact you?

Sean J. Breslin -- Chief Operating Officer

It depends on what they're talking about in terms of the population of units that would be impacted by any change, whether it's affordable units or just the stabilized units, because you are in one of these different programs in New York that you have to work through. So, I'd be surprised if it was on the market rate units that are subject to stabilization because of 421-a as opposed to a technically affordable units that are set aside(ph), different. So there's a lot of speculation around this, but there's nothing substantial that's actually being drafted and negotiated. So I think we would likely be OK, but even if something came through that affected the piece that we'd be worried about, it wouldn't be a material impact on the assets.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. Thank you, Sean.

Sean J. Breslin -- Chief Operating Officer

Yeah.

Operator

Thank you for your question. The question will come from John Pawlowski with Green Street Advisors. Please go ahead with your question.

John Pawlowski -- Green Street Advisors -- Analyst

Thanks. On Columbus Circle, if you had kept it or if you do keep it for rental, what was the unlevered IRR expectation over the long term for this site?

Timothy J. Naughton -- Chief Executive Officer

John, we typically don't provide disclosure on projected long-term IRRs, but I think we gave a sense that we thought the economics here were -- on the development basis were in the mid-4 range, including the retail. So you have to -- you can probably input your own assumptions there in terms of growth and reversion on cap rates as to what that would translate into an unlevered IRR.

John Pawlowski -- Green Street Advisors -- Analyst

Yes. Understood. Could you share the contracted retail rents per foot and what's under negotiation? How does that compare -- how will it compare to initial underwriting?

Matthew H. Birenbaum -- Chief Investment Officer

Yeah. Hey, John. It's Matt. We're not going to disclose what the actual rents were in the lease, but as I did mention, the two deals that we have either signed or very close to being signed are both better than -- at or better than the economics we had underwritten, both in terms of rent, and also in terms of TIs and free rents. So, so far we're tracking a little ahead of our performance, obviously, we still have lots of space left to lease.

John Pawlowski -- Green Street Advisors -- Analyst

Okay. That helps. Thanks a lot.

Operator

Thank you for the question. The final question will come from Wes Golladay with RBC Capital Markets. Please go ahead.

Wes Golladay -- RBC Capital Markets -- Analyst

Yeah. Hi, everyone. Just want to go back to those East Bay developments. I think you mentioned you had a $40 million cost overrun, but when I look at Avalon Public Market and Avalon Wallnut Creek, it looks like the cost went up $30 million. So the developer or the subcontractor eat the $10 million. And then if you have costs locked in ahead of time for the developments was this driven by increased labor costs or the whole thing just had to be reworked?

Matthew H. Birenbaum -- Chief Investment Officer

Yes. Hey, Wes. It's Matt. You're right. What we recognized this quarter across those two projects compared to last quarter was $30 million higher. To be fair, there was an additional $10 million in cost increases we had already recognized on Emeryville, if you go back to the very beginning when we first started the project. So, relative to what we thought what our initial budgets where that's where the $40 million came from. And you're right, in that, normally 90%-plus of the time when we start a project, we have most of the trade costs locked in with sub-contractors who perform.

And consequently, that's why if you look at that slide over a long, long period of time, we're generally bringing projects in within 1% of budget, plus or minus. This is the kind of environment in Northern California particularly right now, once the market -- one market once every cycle, where you see -- while you thought you had your costs locked in, the sub-contractors fail to perform, you can't -- you force them to build it if they're not making money doing it. They thought they could get labor at a certain price they couldn't. One of those deals in Walnut Creek we had a further complication which was, it's a public-private deal with Bard as the ground lessor and there's some minimum(ph)wage requirements which in turn created additional union requirements for the execution that we were not expecting there. So that was a piece of it as well but generally we are very successful in locking down our costs at the start. But there are extreme situations and this would be one of them where the subcontractor just won't perform and you basically have to switch, find new subs at whatever the prevailing market price at that time is.

Timothy J. Naughton -- Chief Executive Officer

Yes. Wes, maybe just add a couple of general comments. I think they do apply to what's happened in the East Bay. As you get late in the cycle like this where we have a lot of production going on, sub -- I mentioned earlier, just lack of skilled labor. They are adding skilled labor but it's oftentimes not as productive, not as good. And just the market is so stretched that the margin for errors is just very low. So there if one sub fails, it tends to have a cascading effect on all the subs behind him. So it's -- in a normal market, sometimes if one sub fails, you can oftentimes replace him quickly without an impact to schedule or to the -- or cost to the other subs. That's not this kind of market right now, particularly in Northern California, just a very low margin of error and something that we're trying to be mindful of from a risk standpoint at this point in the cycle.

Wes Golladay -- RBC Capital Markets -- Analyst

Okay. And then last one from me. We obviously just had Sears file bankruptcy and we're hearing from a lot of the retail landlords that this could unlock some densification opportunities. So have you noticed an uptick in inbound calls to Avalon looking at potential multifamily on retail side?

Matthew H. Birenbaum -- Chief Investment Officer

John, we've actually -- I am sorry. Wes, that's what we've been working on for a while. And in fact the deal I mentioned, the new dev right this quarter, which is at the Alderwood Mall outside of Seattle, that is actually a former Sears box. So it's -- we're working with GGP on it but actually (inaudible) in the deal as well. So -- and we assigned a fairly senior development person to kind of work on those opportunities really about a year or two ago. So we continue to talk to mall owners, to retail owners, and we do view that as a great opportunity for us. I don't think there's anything -- we're not seeing any more specifically because of the Sears bankruptcy yet and frankly, a lot of those locations are not locations that we're going to be all that interested in, but as a general macro trend, absolutely.

Wes Golladay -- RBC Capital Markets -- Analyst

Okay. Thanks a lot guys.

Operator

Thank you. This concludes the Q&A portion for today. I'd like to turn the conference back over to Tim Naughton for closing remarks.

Timothy J. Naughton -- Chief Executive Officer

Thank you, Brandon. And thanks for all of you being on today and look forward to seeing you in the near future. Take care.

Operator

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect your lines.

Duration: 66 minutes

Call participants:

Jason Reilley -- Investors Relations

Timothy J. Naughton -- Chief Executive Officer

Matthew H. Birenbaum -- Chief Investment Officer

Nick Joseph -- Citi -- Analyst

Rich Hightower -- Evercore ISI -- Analyst

Sean J. Breslin -- Chief Operating Officer

Nick Yulico -- Scotiabank -- Analyst

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Kevin P. O'Shea -- Chief Financial Officer

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Drew Babin -- Baird -- Analyst

Richard Hill -- Morgan Stanley -- Analyst

Dennis McGill -- Zelman & Associates -- Analyst

John Kim -- BMO Capital Markets -- Analyst

John Guinee -- Stifel -- Analyst

Alexander Goldfarb -- Sandler O'Neill -- Analyst

John Pawlowski -- Green Street Advisors -- Analyst

Wes Golladay -- RBC Capital Markets -- Analyst

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