Housing prices in some of the United States' larger metropolitan areas have relegated many aspiring buyers to renting -- which may provide Fools an opportunity to cash in. The shift has boded particularly well for AvalonBay Communities (NYSE:AVB). This real estate investment trust acquires, develops, and operates high-end rental communities in the nation's prime real estate markets, including Boston, New York, D.C., and Southern California.

The company has strategically targeted the premium markets, and its shareholders have benefited immensely. For instance, the D.C. metropolitan area currently has an apartment vacancy rate of around 1.7% according to Delta Associates, a Virginia-based real estate information company. This rate is well below the national average of 5.7%, offering the company a tremendous amount of pricing power as a result. "Steady job growth and low housing affordability are driving rental housing demand, while new supply continues to be delivered at a modest rate," said AvalonBay President Tim Naughton.

This REIT has seen its stock price run from around $80 a year ago to its present-day price of $116. Such a run-up could lead many Fools to question whether the company can maintain this momentum. While it would be tough to attain a similar return over the next 12 months, there are many signs that this stock has further potential.

Last month, AvalonBay reported second-quarter funds from operations (FFO) of $1.03 per share, compared to $0.97 per share for the prior year's second-quarter. When adjusted for non-routine transactions, the company actually realized a 10.8% year-over-year increase in its FFO per share for the quarter ended June 30, 2006. Avalon attributed this increase to improved community operating results and contributions from newly developed communities.

The company still has a great deal of ambition. In the aforementioned earnings release, it revised its outlook higher for the remainder of the year. Avalon is now projecting FFO of $4.28 to $4.38 per share for the full fiscal year, up from its original range of $3.95-$4.15 per share. Its current price-to-FFO ratio of 29 makes it pricier than competitor Archstone-Smith Trust (NYSE:ASN), which has a price-to-FFO of 22. Still, it's difficult to argue that the ratio isn't warranted, especially given Avalon's future growth potential.

In an interview, AvalonBay spokesman Allan Jordan emphasized: "If you look at the company's track record over any timeframe, the last 5 to 7 years for example, the company has had top returns for its shareholders. This is not a one-year story by any measure." As Mr. Jordan also noted, "AvalonBay currently has more development under way than at any point in its history."

The company has approximately 20 communities currently under construction, with about 10 of them planned to open in the upcoming months, including Avalon Wilshire in Los Angeles and Avalon Bowery Place in Manhattan. It has an additional 30 or so communities in the planning stages for future development.

While waiting for these communities to open, Fools can profit from the stock's 2.7% dividend yield and the effects of a tightening rental market. Avalon itself only has a 3.5% vacancy rate on the properties that it rents out, and the company will certainly benefit from this trend in the upcoming quarters.

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Fool contributor Billy Fisher does not own shares of any of the companies mentioned.