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Weak demand joins excess supply as a worry for AvalonBay, execs say


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Weak demand joins excess supply as a worry for AvalonBay, execs say

Lowerdemand for apartments stemming from weak job growth hurt AvalonBay Communities Inc.'s ability to raise rents in thesecond quarter, company executives said in an earnings conference call.

In releasingits second-quarter earningsJuly 25, the company cut its full-year guidance for same-store revenue and NOI,though it said its full-year core FFO expectations are unchanged. In the call, Chairman,President and CEO Timothy Naughton said the company did not receive the seasonalbump in effective rent growth in the second quarter that it is accustomed to seeing.

Besidesweaker-than-expected economic and job growth, Naughton cited declining businessconfidence and investment amid global uncertainty. Rent growth moderated most notablyin Northern California and the Northeast, he said.

Apartmentcompanies, including AvalonBay,have in recent months citedexcessive new construction in key markets such as New York and San Francisco, andcompany executives said during the call that owners of new buildings in both ofthose markets are making rent concessions in order to fill their buildings, a trendthat is hurting owners of existing buildings.

The companyexecutives' remarks in the call, though, represented a new emphasis on demand fromrenters, rather than supply of apartments. Naughton said apartment deliveries areexpected to peak nationally in 2016 and 2017, while permitting for new projectshas slowed in recent quarters as credit for multifamily construction has tightened.

Naughton'scomments on the broader apartment market were generally upbeat: He predicted thatapartment supply and demand will remain in balance, and added, "We don't seeany real tangible signs that the apartment or housing cycle is nearing its end."

The companyexpects "very healthy" rent growth in the 3% to 4% range for the remainderof the year, he said.

Still,COO Sean Breslin said that, with the exception of acceleration in the Pacific Northwest,most other markets are slightly below job-growth expectations for the year. Thatweakness, combined with the still-high levels of new supply, led to the revenuegrowth reduction, Breslin said.