Ladies and gentlemen, good morning, and welcome to AvalonBay Communities Third Quarter 2020 Earnings Conference Call. [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.

Thank you, Abby, and welcome to AvalonBay Communities Third Quarter 2020 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. The 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?

Yes. Thanks, Jason. With me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum. Sean, Matt and I will provide comments on the slides that we posted last night, and all of us will be available for Q&A afterward. Our comments will focus on providing a summary of Q3 results, an update on operations and some perspective on the transaction market and our financial position. Maybe just a few comments before turning to the deck. Several of the trends unique to this downturn and pandemic that we discussed last quarter played out in our performance in Q3. The appeal of urban living is, for the time being, diminished due to health concerns of living in dense environments; the shutdowns effect on retail, entertainment and cultural venues that have long been the draw for urban centers; and a civil unrest that occurred in many of our cities over the summer and early fall. Work from home flexibility has been extended through year-end by many, if not most employers, particularly those heavily weighted to knowledge-based jobs like many businesses in our coastal markets. We've experienced a significant reduction in student and corporate demand as remote learning modalities are being deployed at many urban universities and business travel has dropped off substantially. And finally, historically low interest rates are stimulating demand for existing and new home purchases, particularly for young age cohorts where homeownership rates have begun to climb. All these factors have resulted in an unprecedented reduction in apartment demand, particularly in urban centers, beyond what we typically experience in an economic downturn. And while we believe the reduction in demand is mostly temporary in nature, we also believe that it won't be restored until we substantially resolve the public health crisis from the pandemic. A meaningful recovery in our business will…

All right. Thanks, Tim. Turning to Slide 6. We experienced a year-over-year increase in prospect visits to our communities each month of the quarter. In total, visit volume was up about 20% year-over-year during Q3, which led to a roughly 10% increase in net lease volume. As you can see from Chart 2 on Slide 6, the most significant increase in net lease volume occurred in September, which is up about 35% year-over-year. And as of yesterday, traffic and leasing volume for October was up roughly 25% and 20%, respectively. Moving to Slide 7. For the first time in more than 4 years, resident notices to vacate our communities increased by a meaningful amount on a year-over-year basis. During Q3, notices increased by roughly 17%, primarily as a result of the spike in lease terminations in urban submarkets, which is depicted by the hash bars on Chart 1 on Slide 7 and a topic I'll touch on in a minute. Our leasing volume exceeded the pace of notices, however, starting in August and has continued through October. As a result, if you turn to Slide 8, you can see that beginning in September, move-ins exceeded move-outs and physical occupancy has increased from the low point at 93.1% in September to 93.5% for October and stands at 93.9% today. Moving to Slide 9. Our suburban portfolio continues to perform substantially better than our urban assets. Charts 1 and 2 at the top of Slide 9 reflect notices to vacate our communities and lease terminations by submarket type. Notices to vacate our urban communities increased by roughly 40% during the quarter, driven by an approximately 70% increase in lease terminations, and led to a 340 basis point decline in physical occupancy from Q2 to 90.2% and double-digit decline in rent change. For…

All right. Great. Thanks, Sean. Turning to Slide 12. We are starting to see a remarkable recovery in the transaction market. Ultra-low interest rates have started to bring buyers back into the investment sales market for properties that can support reasonable levels of debt service, primarily suburban assets where operating results have been less impacted by the pandemic. To take advantage of this shift in buyer sentiment, we increased our disposition plan over the summer and brought several communities to market in the past 2 months. As of today, 6 of these communities are currently under contract or letter of intent at very attractive pricing with cap rates averaging 4.4%. This compares to 4 communities that we sold earlier in the year at an average cap rate of 4.7%, putting us on track to complete nearly $700 million in dispositions for the year. Turning to our development portfolio. Slide 13 shows the rents we are achieving at the 9 communities currently in lease-up. For the past several years, we have shifted our development focus to more suburban locations, and we're starting to see some of the benefits of this strategy now as our lease-up rents are only about $45 per month below our initial underwriting, allowing for continued value creation on these assets as they are completed and stabilized. We have highlighted 3 of our lower-density northeastern communities on the slide, which feature rental townhomes and which are showing a nice increase in rents compared to pro forma. This product, which features larger floor plans, private garages and direct entry with no common corridors, is particularly appealing in the current environment and serves as a good substitute for single-family rentals, which are enjoying very strong fundamentals. On Slide 14, we show the future earnings potential of our development [ portfolio ]. At current projected rents and yields, we expect to generate nearly $140 million in annual stabilized NOI with only $14 million of that reflected in our Q3 results. And with more than 90% of the capital needed to complete those assets already funded, these developments should contribute significant incremental cash flow over the next several years. And with that, I'll turn it back to Tim for some closing remarks.

Well, thanks, Matt. Turning to the last slide, Slide 15. It was another challenging quarter, driven by the suddenness and continued strength of the pandemic. Weak same-store performance is being driven mostly by our urban portfolio as Sean mentioned. Particularly in the high cost markets of San Francisco and New York Suburban communities with larger units have performed much better. While pricing pressure continues to impact rental rates, occupancy has begun to modestly improve and stabilize in the 93% to 94% range. The transaction market, as Matt mentioned, has picked up dramatically after having been frozen earlier in the year. For those assets being taken to market, values are generally holding up at levels close to pre-COVID valuations. We continue to be cautious in deploying new capital, particularly for new development where economics are challenging and construction costs have not abated in any material way. And lastly, the balance sheet is very well positioned and is much stronger than prior downturns, which should give us plenty of financial flexibility to address the challenges posed by the current downturn. And so with that, Abby, we'd be -- we'd like to open the call for questions.

[Operator Instructions] We will take our first question from Nick Joseph with Citi.

Maybe just on the transaction market. You mentioned kind of the difference of urban versus suburban, but that kind of blended transaction just values are pretty similar to pre-COVID. Can you bifurcate that between the 2, both in terms of buyer interest as well as values for urban versus suburban of what you're seeing today?

Nick, this is Matt. I wish that I could, but the reality of it is that there's very, very little kind of urban high-rise assets that are in the market right now. And kind of that makes sense when you think about where the occupancies are, where the rent changes on those assets, as Sean laid out in his remarks. So the assets that are trading, both that we're trading and that we're seeing others trade in the market, tend to be more assets that can support strong debt service coverage wherever the buyers can take advantage of the rates -- incredibly low rates. And those tend to be more of the suburban assets, more maybe $100 million or less in general asset size, although not universally. As you mentioned, on those assets, what we're seeing is the values are pretty consistent with where they were pre-COVID. In some cases, the cap rates are down, the NOIs are down a little, but the value is pretty much, some are a little higher, some are a little lower. And the bid on those has been incredibly strong. There's a lot of capital that was raised. If you went to NMHC in January this year, there were a lot more people saying they were going to be buyers than sellers. So there was a lot of money on the sidelines, and that money was frustrated in the first half of the year with very little transactions to shoot at. So you're seeing a little bit of a pent-up demand there. But again, that's all focused really on the assets that are being brought to market. And I'm not aware of hardly any kind of downtown urban core markets -- assets being brought to market in this environment. So the value on those assets is really anybody's guess.

And then just in terms of your own appetite for sales, beyond the $440 million that you cite here, kind of what's behind that? And then if you can tie that to the share repurchase program and expectations going forward.

Well, yes, Nick, this is Kevin. Maybe I'll begin with the share repurchase. There's obviously a lot of number of uses that we fund with asset sale proceeds as we always do, including development spend under way. But in terms of the share buyback, as you saw, we were active in that program in the second quarter. Really, the fundamental thesis behind the share repurchase program hasn't changed. We expect to be active on it in the third quarter. We believe there's an attractive opportunity to take advantage of the disconnect between private and public market values for investors like ourselves who can see things through to the other side of the pandemic. We have the balance sheet strength and liquidity to pursue a modest share buyback that's executed in a measured way, which we believe we did in the second quarter and we intend to do so going forward, and one that's funded with primarily with asset sales and sized and managed in a manner that preserves our strong credit profile. So all those things were true last quarter. They remain true this quarter. And so looking ahead, we would continue to plan on a measured buyback, funded primarily with asset sales with an eye on preserving our financial strength and flexibility. So we have plenty of capacity to sell assets over time and don't feel -- we don't believe that's going to be a constraint for us. I don't know, Tim, if you want to add anything.

No.

We will take our next question from Rich Hightower with Evercore.

In terms of the move-outs that took place during the third quarter and predominantly within the urban portfolio, can you give us a sense if you track this sort of thing, where they're moving to in terms of forwarding addresses? Because we've heard commentary on intracity moves, let's say, where it's more bargain hunting than anything. But are you seeing a structural shift outside the city from your urban -- previously urban inhabitants going elsewhere?

Yes. Rich, this is Sean. A very good question. And we do track that just based on forwarding addresses. I'd say there's probably 2 or 3 things I'd highlight as it relates to -- when you look at the data, what sort of stands out, and really, I'd say 3 points. First is we classify the big move for a resident is that they're moving more than 150 miles somewhere. And in that category, New York City, this percentage of move-outs, Q3 of '19, that was about 17% of the population, that increased to about 30% of the population in Q3. In San Francisco, Q3 last year was about 23%. It moved up to about 27% this year. And then the 2 other categories I'd highlight, a regional move, which we define as between 50 and 150 miles away from your departing location. In New York City, that moved from 6% of move-outs up to about 20% and in San Francisco from 7% to 10%. And then probably the last one I'd highlight is what we consider a market move, which is between -- greater than 10 but less than 50 miles. And the one that really stood out as a meaningful increase was Boston, primarily urban Boston, where it increased from basically 10% to 20%, so about double. One thing you have to keep in mind in some of these things where a local move is obviously less than 10 miles that didn't go through it, but 10 miles can be -- when you think about some of these urban environments, 10 miles does feel like a long way. So someone leaving San Francisco, 10 miles could be going down into the peninsula or places like that. But in terms of sort of the larger move, that's the data that stood out in Q3.

Okay. Those are helpful stats. And then just maybe a quick housekeeping question. But for the -- on the asset sales side, the properties that are in the market or under contract, do you expect those to close by year-end? Or what's the timing there?

This is Matt. I think most of them will close by year-end. It's possible 1 or 2 might slip into January, but we would expect most of those proceeds to come in by the end of the year.

We will take our next question from Alua Askarbek with Bank of America.

Just going back to move-outs and focusing specifically on the Bay Area, which are the highest in Northern California. But kind of where do things stand today? And are you starting to see the move-outs moderating as we head into the winter months? And do you work with residents offers to like suburban market options to keep them within network?

Yes. Alua, your questions broke up a little bit in terms of residents departing San Francisco, I think you said, and whether we're seeing that accelerate or decelerate? Was that the first part of your question?

Yes. I was just wondering if like move-outs are starting to moderate as we head into the winter months?

Yes. I mean as you can see on the chart regarding the move-in/move-outs that we posted up there, we're starting to see volume ease as we move into the fourth quarter in October specifically. That is relatively typical in terms of seasonal patterns. But in terms of whether that's sustainable or not, it will depend on a lot of different factors and many of which Tim mentioned in his prepared remarks, so it's probably too early to conclude that it's a definitive downtrend, other than seasonally, that would normally be the case. And then I think the second part of your question was around transfers and whether we help facilitate that for residents, and we do. And as it relates to transfer activity, transfers were up about roughly 1/3 year-over-year. So we are seeing increased activity both within the same community and to another community that might within -- be within a reasonable distance of the community they're departing. So definitely an increase in activity there, but it's not a meaningful percentage of total move-outs, if you want to think about it that way.

Got it. And then just one other question. So some peers have started to get creative in the urban markets by transforming empty apartments into work-from-home spaces or building in desks into various mix in the apartments themselves to attract renters. Have you guys done anything different to attract renters in your urban markets? Have renters been asking for different amenities like this?

Yes. And a good question. We're exploring a lot of different things that we've done a fair bit as it relates to some people who are looking for, in this environment, a short-term stay in a different geography. It may not just be in the urban environment. It could be a suburban environment where they have left the urban environment, but they are not sure when they may have to return to work in that urban environment. And therefore, they'd like to rent a furnished apartment in a suburban location that's not their sort of normal home location. So we're doing a little bit of that. And then certainly, as it relates to amenities, we're trying to facilitate food delivery and things of that sort as best we can, given the -- obviously, the constraints to the building from a physical standpoint, trying to facilitate as best we can. So for that, our customers that are home in urban environment, trying to make sure that they have access to the amenities that they would normally enjoy just in a different way.

We will take our next question from Rich Hill with Morgan Stanley.

I wanted to come back to some of the October updates that you had put in your presentation and you discussed in your prepared remarks. It looked like there was some pretty healthy improvement in occupancy. So the question I'm trying to maybe understand a little bit better is, do you think rents have come down enough in your markets whereby demand is starting to come back up, and you're going to start to see less bad, call it, leasing spreads going forward? So it's really a question of velocity here going forward. And do you think that you're starting to see some stabilization in that demand?

Yes. Rich, good question. A few thoughts, and then others can join in. I mean I'd say, obviously, recent trends, particularly September and October, were favorable in terms of demand absorbing some of the inventory we had. Obviously, we had more available inventory given the turnover and the lease breaks that I mentioned, particularly in the urban environments, which did put some additional pressure on pricing. But it really is sort of a macro question as it relates to, particularly in the urban environment, people coming back into this environment because they feel comfortable about it. They need to go to school. They have to be back in the office. All those macro factors really drive that ultimate decision as to whether to return to that environment, and price is more just what am I going to choose within that environment. And as long as you're competitive, you should get your fair share of the market overall. But I think the macro factors are really the things that will tilt it to either kind of stabilize and be more positive going forward or deteriorate. Those are really the key drivers here, and I think that's yet to be told that full story until we move into it a little bit further here towards year-end.

Yes. Sean, maybe I'd just add to that a little bit. I think what we're seeing a little bit is what we would normally see in a downturn, which is sort of the housing market is dynamic and kind of resetting its level, if you will. So we've lost about 300 basis points stock. We'd say we've had to reach down a little bit, if you will, into the rental pool. And as part of that, you got to adjust pricing in order to sort of attract your sort of fair share, if you will, of the pool of renters. I think, ultimately, in terms of whether it stabilizes, it's just -- it's going to be a question, I think, of the macro environment, as Sean mentioned, but also just what's happening on the public health front. I mean as we said, it's really impacting urban centers, in particular, in a very unique way. To the extent we get a vaccine or a therapeutic that starts to give employers confidence enough to bring employees back into the workplace, they're going to start coming back into the -- into these urban centers in terms of their living arrangement, and that's going to create some net new demand for us and help stabilize it. To the extent this thinking needs to get protracted, the vaccines just don't get approved or don't appear to be as effective as we hope or don't have the penetration, then this will obviously continue to be a bit more protracted. But I think that could really help sort of stabilize, if not improve, the outlook for -- particularly for the urban centers.

Yes. And so just so I understand, are you -- is -- are you suggesting that the improvement in October that was noted is more seasonal? Or would you -- or are there other factors that are driving that?

I think a lot of it is price driven, honestly. Rents have continued to come down sequentially, and we've gotten to the point at which we've been able to attract sort of our fair share of the market in the 93% to 94% range in terms of occupancy. So I think that's what's driving it initially. As to whether it stabilizes, I think it's a function of some of the things that Sean mentioned and I mentioned.

We will take our next question from Rick Skidmore with Goldman Sachs.

Just thinking about the development pipeline -- the future development pipeline, both of new starts, how are you thinking about that as -- I know you talked about not doing any new starts yet other than the one JV. But how are you thinking about it as you look forward and then also as you think about mix, both from a geographic mix and, I guess, urban/suburban?

Yes, this is Matt. I guess I can take that. I don't know, Tim, you may want to add some as well. Yes. It's really a combination of, I'd say, both bottom up in terms of did the deals still pencil in terms of the value creation and are we seeing an attractive cost basis as well as top down, just what are our other options for our capital availability, as Kevin was talking about. So we might start a deal or 2 this quarter. The deals that are more likely to start sooner are going to be the -- some of these suburban northeastern deals where even from my prepared remarks, you saw some of those lease-ups are actually beating their pro formas pretty significantly. So some of those locations are benefiting from some of the outmigration from some of the urban submarkets. And those are markets that just tend to be much lower beta in the first place. They tend to be less volatile in terms of rents. They haven't seen the same run-up in hard costs over the last 10 years or 5 years, certainly. So maybe there's a little bit less giveback on hard costs in some of those markets. So that's probably where we're more likely in the short term to start. We are still looking to grow in our expansion market, so that's another place that we don't have anything. We're going to start there in the next quarter. But at some point next year, we may have some deals to start there. And then the other piece of it is just what's going to happen with hard costs. And we have not seen hard costs come down. They've maybe flattened out in some of our markets. Lumber is still sky high, although it's starting to come down some. And whether the reaction to this downturn, if you go back 2 cycles ago, the recession there after the great financial crisis, hard costs did come down quite a bit. But prior cycles, it was more that they kind of flatlined for a while and inflation surpassed them. So they kind of fell on a real basis but not a nominal basis. And I don't know that -- we're still waiting to see how that plays out in each of our regional markets.

Yes, Matt, I agree with all that. Maybe just to kind of step back a little bit in terms of volume. We were probably running at about $1.4 billion kind of mid-cycle last year. We'd already sort of downsized it to the $800 million, $900 million over the last 3 years or so, call it, '17 to '19. We could start anywhere between 0 and probably $1.5 billion next year, depending upon the factors that Matt mentioned, just the visibility around the rental market and construction markets and then certainly as it relates to the capital markets as well and other options that we might have with our capital, including repurchase of shares. So it's a mix of all those factors, and it's ultimately -- our views on those are going to kind of form ultimately how we -- how much capital we decide to deploy, somewhere between 0 and $1.5 billion. And so it's probably over the next 12 to 15 months.

We will take our next question from John Pawlowski with Green Street.

Sean, just one question for me. Could you share economic occupancy in October for Northern California and Washington Metro? Just curious those 2 markets, how pricing power is trending and how it could trend into the winter.

Yes. John, you broke out a little bit. You said occupancy in Northern California in October?

Economics.

Yes. I think it's physical occupancy. Yes, physical occupancy, I can tell you. Sorry, say it again.

Yes. Physical occupancy is fine if that's all you have in Northern California and Washington, DC.

Yes. So in Northern California overall, I believe we're running today -- I believe, today, running around 92%, which is pulled down by the -- really the lower occupancy that we're experiencing in the 90%, 91% range in San Francisco and pockets of San Jose. How we define San Jose, which is primarily Mountain View and Central San Jose pulling down those numbers. So those are the 2 areas where physical occupancy is weakest, I would say. And then as it relates to Washington, DC, the district itself, occupancy, I believe, is around 91% today, physical again.

Okay. And based on current trends today, do you expect stabilization or improvement in those markets or continued slide?

I'd say based on recent trends, I would say they stabilized a little bit in terms of occupancy and have started to trend up, consistent with the same-store portfolio pattern that I described earlier in my prepared remarks. How quickly they come back is just a function of the velocity that we see in terms of notices, which is primarily a function of lease breaks recently, and then on the demand side in terms of the velocity of leasing that comes through. But as I look forward over the next 6 weeks or so based on availability and such, I would expect both of those to drift up some.

We will take our next question from Nick Yulico with Scotiabank.

This is Sumit Sharma here in for Nick. Maybe if you could give us a quick update.

We can't hear you, if you could try to speak up a little bit. Juan, is that you? I can't -- we can't hear you -- or Nick.

So sorry. This is Sumit in for Nick, speakerphone problem. So maybe if you could give us a quick update on the sales pipeline at Park Loggia. I think you guys sold about 59 out of the 172 condos on -- understanding -- interested in understanding if you're seeing any uptick in the NYC sales market or the rental market weakness is sort of filtering in there as well?

Sure. This is Matt. I can give you an update. So as of today, we have 65 units that have closed. Again, there's 172 units total in the building. We closed 65, that's $207 million in sales price or about $3.2 million per unit. We also have 9 units under contract today, and we have another 7 contracts out for signature. So we have another 16 -- 15, 16 deals that are pending, many of which would close in the fourth quarter. I guess I would say the last couple of months, traffic has been pretty good. Interest has been pretty steady. We're running about 3 new deals a month, which would put us at probably the top or among the top 2 or 3 performing condo buildings in all of Manhattan. So there is a lot more supply than there was kind of when we opened the building for sales, but we're still continuing to get well more than our fair share. So I'd say the sales activity has been pretty steady since kind of the initial lockdowns were lifted in midsummer, and we're continuing to get pretty good traction.

Great. And just a more longer-term question, I guess. With the pandemic and everything, how has it sort of changed your development plans? In terms of -- outside of the pipeline today, what should we be thinking of when we think about your development plans? When you shift towards suburban to urban or even the unit mix, does that shift towards 2 or 3 bedrooms or more in line with your classical kind of the unit mix?

Yes. I'll try to speak to that. Again, you're breaking up a little bit. But in terms of -- long term, in terms of development, it's an important capability, and it's a distinguishing competitive advantage that we've had in the public markets. As markets stabilize and start to strengthen, we think the development will be economic again. And I think we've said many times in the past that we're relatively agnostic between urban and suburban. We're trying to go where we think fundamentals are the best at any point in time and where there's greater value. And having said that, for all the reasons we've been discussing, we pivoted -- we had already started pivoting maybe 3 or 4 years ago to suburban in part because there was just better value, and we've started to see the suburbs start to grow as the leading edge of millennials were approaching sort of the time of their lives where they're maybe buying homes or starting to move -- double back to the suburbs. So we're just seeing more economic activity. That's only been obviously exacerbated by the pandemic. So I suspect suburban demand would continue to outpace urban for a little bit. We did talk about sort of product mix on the last call. I do think there's -- particularly with the work-from-home flexibility that it is going to translate into some unit mix and program changes, an extra bedroom that can double as an office, providing dedicated workspaces within the units. Our survey data suggests that a majority of the residents still would prefer to work within their unit, but they're also -- about 20%, 25% are very interested in a co-working space as well. Pretty much everything we've touched, either redevelopment or new development over the last 2 or 3 years, has a significant co-working space. So the types of spaces are likely to continue to change, more sort of dedicated versus just kind of open table format but giving people an opportunity to either meet or have more sort of safer spaces or confined spaces. I think we expect we'll see that. So those are some of the changes we think are likely to come as a result of either the work-from-home flexibility that we think it's a real -- it was already a trend. It's only going to be greater kind of going forward. Our portfolio really needs to respond to that.

We will take our next question from Juan Sanabria with BMO Capital Markets.

I'm here with John Kim. Just had a couple of questions. First, just on the pricing that you noted in October, was there a change strategically, either dropping the rent or increasing concessions in October versus the previous months in the third quarter just to stimulate that improvement in the occupancy?

Yes. Juan, this is Sean. Yes, fair point. As I noted in my prepared remarks, obviously, we had additional inventory become available as a result of the increase in turnover that occurred during this quarter, particularly in July and August, in those urban environments, as I mentioned. And you can see that, I think it was on the second slide where we showed notice to vacate and lease breaks. And obviously, that put additional pressure on pricing. So that -- for example in -- kind of on all leases signed in the third quarter. If you look at July and August, as an example, in urban environments across all leases, the average concession was between half a month to 3/4 of a month. As we moved into September and then in October, getting beyond Q3, that increased to about a month on all leases signed. So certainly, price response, as it relates to the additional availability that came through. Could we have leased some of that faster? Probably, yes, if we had been even substantially more aggressive as it relates to price. But when you have that kind of inventory delivered to you quickly because there are lease breaks as opposed to having 30 to 60 days advance notice, you would have had to discount that price pretty heavily to try and absorb the incremental inventory that we receive much more quickly. So our strategy was to absorb the inventory at a reasonable pace but not put out a fire sale, so to speak, to absorb it very, very fast, if that makes sense.

Yes, good. And then I was just curious on the relative pricing between some of your urban core and sort of transit -- close to suburban assets. And kind of are we getting closer to parity to maybe where you could see a flip-flop between some of the people in the suburban market switching back to the urban given the relative pricing and the proximity to work and significant time commuting for whenever we do return to the offices?

Yes. I mean, good question. I'm happy to comment on that and others can jump in. But if you think about the markets we're talking about, New York City, as an example, think about the rent levels in New York City as opposed to kind of moving into the Westchester, Long Island or Northern and Central Jersey, it's a pretty big trade. Even though rents have come down quite a bit in New York City, it's still a big trade. So I think it's really more a function of the macro factors that we were talking about earlier in terms of people's either desire or need to be in those urban environments as it relates to either being in the office because they're required to be in the office, they need to be in the office, returning to school at some of these urban universities or just feeling comfortable in those environments that we've moved into a place where they feel better about retail establishments, restaurants, et cetera, and part of that will be driven by the health care situation and whether that crisis is resolved in a meaningful way. So I think those are the bigger issues as opposed to just purely price.

I just said -- I mean -- and today, they're just -- they're not having to commute. So obviously, they've tried to take advantage of lowering their rent. I guess I would say we do expect them to come back when they're forced to come back to market. I mean you sort of have to just ask yourself the question, was your life sort of better before COVID or after COVID, and all the things that make urban living great sort of pre-COVID. Once we get on the other side of this, they're still going to be there. These are great mixed-use environments. Particularly the markets that we're in. They are dynamic environments. It's certainly more proximate to jobs. There's been a lot invested in infrastructure in these. It's environmentally more sustainable to people that care about that, I guess. But I think I'd say the one caveat is this work-from-home flexibility, I think, at the margin will cause some people to maybe stay in the suburbs. If they only have to commute, call it, 2 or 3 days a week versus 5 days a week. They may be able to tolerate that where they wouldn't 4 or 5. So I'd say kind of at the margin, you may not expect to see urban demand as robust as it was pre-COVID. But I think when you layer on the pricing changes that we've seen, there's going to be plenty of people coming back to the urban centers.

[ That you ] noted in the New York MSA?

I'm sorry. Did you say including the New York MSA?

No. I'm just thinking, is Northern California different from New York in terms of the relative rent differential in Downtown San Francisco versus Oakland or the South Bay?

Pretty big deltas.

Yes. Those rent spreads are pretty big between the pockets of the East Bay or even moving down into the peninsula or lower peninsula as compared to being in the city of San Francisco. It's a pretty big spread. I mean I think it really is more around the quality of the lifestyle and the reasons you want to be in the urban environment, I mentioned, just not necessarily being able to stay and you don't have to be in the office.

We will take our next question from Rich Anderson with SMBC.

So when I was thinking initially about the environment, I thought AvalonBay would be in a better spot than it's turned out to be because of the lion's share of your portfolio is in the suburbs. I didn't think people would move from New York to Nebraska maybe as much as they had and more New York to Edgewater, New Jersey or something. But I understand transfers are up a little bit, but I also understand that's a relatively small piece of the turnover puzzle. How would you respond to the idea that when people -- when we do get some sort of resolution here that people want to step back into these urban worlds and not maybe go all the way into Manhattan but someplace around it and thereby putting AvalonBay in an interesting spot to sort of tease people back into these urban centers without having to go full in. Do you have a sense about how permanent these moves away from you have happened and how much flexibility people have to come back as soon as they feel comfortable to do so?

Yes. Rich, I think it's a really interesting question. I would say even going back before sort of pre-COVID, there was already -- I mean we were already a believer sort of in the infill kind of urban-light, sort of mixed-use lifestyle environments. We think sort of post-COVID, that's still a great opportunity. Maybe it's even a stronger opportunity when you sort of add affordability in the mix, when you can maybe be in an infill suburb for a couple of bucks less a foot than being downtown and then you couple that with maybe decent transit and only have to hop in the train 2 or 3 days a week versus 5 days a week. So I think kind of that infill suburb is really extremely well positioned. I think it had been anyway. But like many things, as we've talked about COVID, it just seems to be accelerating kind of these trends that were already occurring before. But even as I mentioned on the last question, it doesn't make -- urban living is still very attractive. But when you layer into demographics, affordability and work-from-home flexibility, that does make -- that does change the calculus a little bit for that marginal renter.

Okay. And second, unrelated to the first, but you talked a little bit about how your future development activity might be informed by this environment and how it may change. How does that apply to your fledgling businesses in Denver and South Florida? Do you think those markets are performing perhaps better or feeling more resilient and maybe they become a bigger piece of the pie chart now in the aftermath because of all of this? Or does that not change relatively speaking?

Rich, it's Matt. So those markets right now are doing better than most of our legacy markets. I think some of that's a function of their lower-cost markets, their markets where initially, anyway, there was less of a shutdown. So that's probably part of it. And the assets we have in those markets seem to be more suburban as well, at least that's definitely true of our Denver portfolio. So when we went into those markets, we said our goal was to get them to be about 5% each of our portfolio, which would be about $1.5 to $2 billion each. We're only -- not even quite halfway there yet. So we are looking to be aggressive there. We'll continue to look to be aggressive there. Over time, could that migrate up to more than 5%? I mean it could. But I think, again, like Tim was saying, to the extent what we're seeing is that the kind of COVID response is accelerating a lot of the trends that we saw pre-COVID, and those were the same trends that have led us to those markets in the first place.

Yes. Rich, maybe just to add to that. I agree with Matt's -- what Matt was saying. I think we've said on prior calls, too. It might lead us to go into new markets as well that are likely to have some of the spillover benefit from -- whether it's New York or the California markets but also are kind of heavily indexed to knowledge-based jobs as big tech and knowledge-based industries continue to kind of diversify their workforces across the map. We want to be kind of where their workers are. And if there are going to be places like Denver and Southeast Florida, we think strategically, those are the places we need to be and our allocation is going to need to respond to that.

We will take our next question from Austin Wurschmidt with KeyBanc.

I was wondering if you guys can walk through your effective rent growth month-to-month in the third quarter as well as provide October? And do you think now that you're through the peak leasing season, you could see rates improve due to fewer expirations? Are you more apt to keep rents closer to maybe September and October levels and continue to try and grow occupancy?

Yes. Austin, this is Sean. Good question. In terms of walking you through the rent change in the quarter, basically, we move from sort of mid-3s up to mid-8s in terms of the reduction in rent change as you move through each month of the quarter. And then October, right now on a blended basis, is down about 10%. And in terms of the broader question as it relates to stabilization, I mean the only thing I'd say is that, particularly in the suburban environment, concessions have kind of leveled off in the past couple of months here. We've had good volume. So we haven't necessarily had to kind of dig deeper into the concession bag to generate that velocity. And I'd say we're reasonably comfortable with the velocity we're seeing today, which is what I expressed in my prepared remarks that you saw on the slide. So to the extent that we continue to see good velocity in pricing, we wouldn't have to dig deeper into that concession bag to the extent things fell off then we'd have to reevaluate. But based on where we think we're priced today, we feel like we're in pretty good shape. And again, I'd say on the suburban side, [ I think it ] is a little bit better than urban. So I'd say it will take a little while longer here to see how it plays out in these urban environments, if that's going to be the right kind of pricing level to continue to attract demand at the pace that we need it.

Got it. No, that's very helpful. And then earlier to your comments going on where fundamentals are best as it relates to new investment activity, does any of the trends you've seen since you decided to enter into the expansion markets change your target allocation of those markets, either higher or lower, as you kind of look forward over the next several years?

Yes, this is Matt. No, I mean I think as we were talking on one of the prior questions, we like those markets. We're looking to grow in those markets. Like I said, our objective is to get to about 5% in each. Some of that is driven by just the size of those markets relative to the size of ours. And as Tim mentioned, there may be additional markets that we add into the mix here at some point that would get that kind of total allocation to other markets like that above that 10% over time.

We will take our next question from Alexander Goldfarb with Piper Sandler.

So 2 questions. Tim, just going back to development. We had talked about this on the last call and you had said that you guys were adamant with your current development program and the team that you have in place, no changes. But in some of your answers earlier on the call, you talked about starts, obviously, this year being much down. Next year could have a wide range, 0 to $1 billion, I think you said. So as you think about where you would be on that front with development, what do you think the impact would be on the P&L? Like would we start to see some of these capitalized costs end up as expenses on the P&L as you try to keep your team in place? or do you think that there would be further changes afoot, especially if you can't do the level of development in the suburban markets that would necessitate -- that would keep sort of the level constant where it is today?

Yes. Alex, I think sort of simple answer is too early to know, to be honest. I think as I mentioned on the prior call, we have actually cut back our development capacity over the last 2 or 3 years as we've gone from about $1.4 billion to about $800 million. I'd say the group is scaled to do around $1 billion -- $800 million to $1 billion a year. It can probably flex up or down a little bit from that, depending upon the needs. When you talk about expensing versus capitalizing, it starts to get into a lot of other things that are probably worth maybe another call. But if you look at the past downturn, we suspended development for 4 or 5 quarters typically. So again, if this is a downturn in length and it looks somewhat like those, I don't think we're talking about what -- I don't think there's a concern about the things you're talking about. To the extent we're looking at a downturn where it just doesn't make sense to start a new development for 3 years, we're going to have to rightsize the group or expense some of those costs. So -- but I think it's premature to kind of know kind of where that's likely to fall out.

Okay. The 4- to 5-quarter pause actually is a helpful reference. So thank you on that, Tim. The next would be -- so if you -- maybe for Kevin, just thinking about the operational, whether it's at the property level, G&A or on the balance sheet, where do you think are some cost saves or efficiencies that you guys could peak out that would help mitigate the revenue drops for -- as we look forward into next year?

Well, I mean maybe just to put some context, Alex, this is Kevin, I think we experienced year-over-year NOI decline $38 million, $39 million this past quarter. If you add the quarterly property management costs, overhead costs and G&A, they're about that number. So proportionately, our overhead costs represent a small part of the puzzle. And in terms of how we -- relative to the overall business and the revenue structure and so forth. So it's not a particularly acute issue, I would submit. In terms of how we can manage it, we manage it throughout the cycles. There are potentially some opportunities -- one of the biggest opportunities simply is just a fair bit of overhead costs or incentive costs, and those are going to naturally correct here this year. So there's a little bit of a self-correcting piece. And then in terms of kind of property management overhead, Sean, did you want to add something?

Yes. Alex, it's Sean. One thing, I think, that's fair to address is we were already on a path to create more operating efficiencies throughout the portfolio based on some of the things we talked about. I think it was one of the calls last year as it relates to automation, digitalization, various things like that, the great use of data, centralizing different things, whether it's leasing, renewals and such. And we're still on that path. And if anything, I would say it's accelerated certainly as a result of what happened through the pandemic as it relates to the operating model. And we were talking about somewhere in the order of magnitude of approaching $20 million to $30 million of operational savings through those various initiatives. And we're still plowing forward on that. And probably, we'll be investing more in some of those technology initiatives over the next couple of years to help offset what we're seeing at least at the property level P&L.

Yes. Alex, just to add, finally -- this is Tim, Alex. Maybe just to add, finally, in terms of G&A, as Kevin was mentioning, it's a pretty efficient business model. I mean you're talking about G&A costs are maybe 15 to 20 basis points of total asset value. If you compare that -- I mean, so as a business, it's pretty G&A efficient. I think compared to other business models, particularly on the private side, it's efficient again. So this is -- there aren't a lot of opportunities on the G&A side. Some of it is self-correcting through the incentive system, as Kevin mentioned. As performance weakens, incentives pay is less. But it's -- there's not a lot of extra bodies to look to. And G&A is -- it's 85%, 90% bodies, when you get down to it.

Yes. Tim, that's exactly the point I was after. And I was thinking at the property level, the bulk of the expenses are insurance, real estate taxes and payroll, and those categories would seem like they'd only go up. So it seems like the expense savings are sort of on the margin. It doesn't sound like there's anything big picture. It sounds like it's on the margin, but a lot of the expenses seem -- like are sort of set. Is that a fair takeaway?

Yes. I would say on the payroll side at the -- on the property level, that's where the opportunity is. Those are some of the activities that we think we can automate or centralize, get the benefit of some scale and the benefit of some automation as well where there could be real savings in terms of number of bodies. Not as clear on the overhead side, G&A side, when you may have a group of 2 people within a particular function that's working across a 300-unit -- a 300-community portfolio. So...

[Operator Instructions] And we will take our next question from Zach Silverberg with Mizuho.

Just a couple of quick ones. Can you talk about the profile of the residents entering the portfolio today in some of your more challenged submarkets like New York and Boston, where concessions appear more prevalent. I'm wondering if the income and credit profiles are any different and if there's any concern over future rent payments maybe a year from now.

Yes. Zach, good question. We haven't really changed our credit standards other than to be probably even more diligent as it relates to detecting fraud. Particularly in certain markets, I would say, like L.A. tends to be one that comes to mind. But we've not relaxed our credit standards as it relates to it, and we are still qualifying people in diligent manner so that as we look to the other side of this, lease rents aren't changing materially, that we can really have customers that can afford renewal rent increases as you move into -- pick a time frame that you're comfortable with, late 2021 or whatever it may be. So is there risk? There's always risk. But we definitely have not relaxed the standards. If anything, they are a little more stringent as it relates to the fraud detection.

Got you. And I guess piggybacking on an earlier question about coworking and communities and with flu season around the quarter, are you guys taking any preventative sanitary measures to combat the spread within the communities, given the potential uptick with flu season around the corner?

Yes. We've done a lot as it relates to kind of promoting a healthy environment. If you look at our operating expense table, we've noted that we've spent a couple of million bucks already this year as it relates to PPE and then beyond that for cleaning and disinfectants and various other things. We have a reservation system where people have to reserve amenity time within a gym or a chill space, whatever it may be. And so we're doing a fair bit to promote healthy environment. And for the most part, I think we're getting very good feedback through our Net Promoter Score comments around people appreciating our efforts. There's certainly some frustration that they can't just walk into the gym whenever they want. But it's very understanding as it relates to the need for a professional protocol to limit any impact at the community. And so far, knock on wood, we've been relatively lucky in terms of what we've seen at the community. So we feel good about what we're doing and continue to look for ways to promote that healthy environment.

We will take our next question from Dennis McGill with Zelman.

A question is on Slide 9. As we look at that split between suburban and urban, I think it's easy to understand the pressure on the urban environment and the change in living conditions and so forth. When you analyze your suburban portfolio, though, it looks like rents there are down maybe 3%, 4% based on the chart. You are seeing move-outs up and vacate notices up as well. Where are those tenants going? If you were to sort of quantify or speculate the weakness in the suburban market, what do you think the leading factors are there? And what are the causes of turnover that you're seeing and the weakness in pricing?

Yes. Good question. I mean on the suburban side, you did peg it right, rents are down, call it, roughly 3% or so. I would say it's a variety of factors, really depending on the market. I'll give you a couple of examples. So we would consider various pockets of San Jose, as an example, including Mountain View, Central San Jose to some degree [indiscernible] Northeast San Jose at suburban. But I can tell you just based on the current protocol for companies like Apple and Google and others, there is not a need for those residents to be in that location. As a result, we've seen pressure from turnover in some of those pockets where the demand has just fallen off, obviously, not as much as what we've experienced in San Francisco. But because of those policies, there's pressure on demand there. And some of those pockets, particularly Central San Jose, Mountain View and a little bit in Northeast San Jose, there is supply. So we're seeing a compression there in terms of what's [indiscernible] at the higher end of the price pyramid coming down to compete with other assets in the existing inventory of sort of A minus to B-type assets, which are representative of what we have in those markets. So that's the kind of pressure you see in that type of environment. That's similar to what you might see in certain pockets in Seattle, like in Redmond. And then there's other pockets in the Northeast, say, Boston is holding up relatively well. Long Island is holding up relatively well, but you still do have -- we are in the midst of a recession, and people are making different choices to some degree as it relates to a living environment. Some people are moving into those environments from densely populated urban environments, but others are making different decisions as it relates to staying there or moving elsewhere. So demand overall, we're seeing just household contraction. So that will impact suburban environment, just not nearly as much as what we've seen in urban environments. So that's kind of the macro view. And Tim, do you want...

And part of that is you're seeing, particularly younger age cohorts moving back home. So the number -- percentage of under 35 moving back home, particularly under 25 [ continues to hit ] sort of historical highs. So you get sort of normal consolidation you get with any downturn. Probably what we haven't seen yet is it doubling up. If anything, people are trying to get away from their roommates if they're both trying to work from home in the same space. So -- but we're definitely seeing people move back home and camping out in the basement or just where they have more room to [ fill out work ]. We mentioned earlier sort of the parents' homes are more fully occupied, self-storage is more fully occupied, and apartments are a little less occupied. So that seems to be part of some of the trends that we're seeing.

That's helpful perspective. Actually, that was going to be a second question, Tim, if maybe continuing on that. If you think about the demographics of those early terminations or vacates, is that skewing more to the younger cohort that can be more mobile versus the families? Or are you seeing it fairly distributed across your tenant base?

Yes. No, that's a fair point. I mean if you look at sort of occupancy and related lease breaks, there's definitely more pressure in the studio floor plans. Urban environment studios during Q3, I think, the average occupancy was 87%, 88%, as an example. So people less -- more flexible moving home to mom and dad, for sure.

And with no additional questions, I would like to turn the call back to Tim Naughton for any additional or closing remarks.

Thank you, Abby. I know everyone's busy, a lot of calls today. But thanks, again, for joining, and we'll see you in the virtual world, I suppose, maybe at NAREIT in November. Take care.

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.