AvalonBay Communities Inc. fell the most since January after the apartment landlord lowered its full-year earnings forecast and reported a decrease in rental revenue from its Washington-area properties.
Rental revenue from more than 4,400 apartments in the metropolitan area fell 0.1 percent in the third quarter from a year earlier, the only market with a decline, the Arlington, Virgina-based real estate investment trust said in a statement yesterday after U.S. markets closed.
The Washington area, which is facing a glut of newly built units amid slowing job growth, accounts for about 16 percent of AvalonBay’s net operating income. About 30,211 apartments are under construction in the region, more than half of which will open this year, according to Delta Associates.
“This is really not surprising,” Alexander Goldfarb, a REIT analyst with Sandler O’Neill & Partners, said of AvalonBay’s results in an interview today. “But obviously, the first time you see a market go negative, everyone’s like ‘Ooh, call up the paramedics, get CPR.”
A bigger surprise is the company’s increased turnover across all of its communities, Goldfarb said. AvalonBay, the biggest publicly traded U.S. apartment owner after Equity Residential, reported a turnover rate of 70 percent for the quarter, compared with 65 percent a year earlier.
The shares fell 4.3 percent to $128.50. They have dropped 5.2 percent this year, compared with a 3.2 percent decrease in the Bloomberg REIT Apartment Index of 18 multifamily landlords.
Washington is poised to be one of the only major U.S. cities with a decline in apartment rents this year after a surge in construction outpaced job growth, leaving the nation’s capital with a glut of properties.
Rents in the metropolitan area, including the suburbs of Maryland and Virginia, will fall as much as 2 percent on average, making it the only market in the top 20 U.S. cities other than Detroit to have a decline, Delta Associates said in April. Rents will drop further in 2014, data from the Alexandria, Virginia-based property-research firm show.
AvalonBay lowered its outlook for 2013, saying funds from operations, a measure of cash flow used by REITs, probably will be $5.09 to $5.15 a share. The company in July forecast FFO for the year of $5.05 to $5.25 a share.
Federal government spending cuts limited employment, creating “headwinds” for Washington-area apartment demand in the first half of the year, Sean Breslin, AvalonBay’s executive vice president of investment and asset management, said on a conference call with analysts today.
“So the threat of a government shutdown and debt-ceiling debate didn’t help our third-quarter results,” he said. “We expect the D.C. market to continue to be challenged for the next few quarters, given the uncertainty in the mind of both direct and indirect government workers and the continued impact of new supply.”