AvalonBay Communities (AVB) Timothy J. Naughton on Q2 2016 Results - Earnings Call Transcript

| About: AvalonBay Communities, (AVB)

AvalonBay Communities, Inc. (NYSE:AVB)

Q2 2016 Earnings Call

July 26, 2016 11:00 am ET

Executives

Jason Reilley - Senior Director of Investor Relations

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Sean J. Breslin - Chief Operating Officer

Matthew H. Birenbaum - Chief Investment Officer

Kevin P. O'Shea - Chief Financial Officer

Analysts

Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)

Richard Allen Hightower - Evercore Group LLC

Dennis Patrick McGill - Zelman Partners LLC

Austin Wurschmidt - KeyBanc Capital Markets, Inc.

Kris R. Trafton - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Jeffrey A. Spector - Bank of America Merrill Lynch

Nick Yulico - UBS Securities LLC

Drew T. Babin - Robert W. Baird & Co., Inc. (Broker)

Vincent Chao - Deutsche Bank Securities, Inc.

Conor Wagner - Green Street Advisors, LLC

Alexander D. Goldfarb - Sandler O'Neill & Partners LP

John P. Kim - BMO Capital Markets (United States)

Richard Hill - Morgan Stanley & Co. LLC

Omotayo Tejumade Okusanya - Jefferies LLC

Wes Golladay - RBC Capital Markets LLC

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

Operator

Please, stand by. Good morning, ladies and gentlemen. Welcome to the AvalonBay Communities Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following remarks by the company, we will conduct a question-and-answer session.

Your host for today's conference call is Mr. Jason Reilley, Senior Director of Investor Relations. Mr. Reilley, you may begin your conference.

Jason Reilley - Senior Director of Investor Relations

Thank you, Augusta, and welcome to AvalonBay Communities second quarter 2016 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 is 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?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Yes, thanks, Jason, and welcome to our second quarter call. With me today is Kevin O'Shea, Sean Breslin, and Matt Birenbaum. I will provide commentary on the slides that we posted last night, and then all of us will be available for Q&A afterwards.

My comments will focus on providing a summary of Q2 and year-to-date results, our revised midyear outlook for 2016, our view regarding the trajectory and durability of the current apartment cycle, and lastly, a look at how current development activity is contributing to our earnings growth.

So, starting on slide four, it was a solid quarter where we achieved core FFO growth greater than 8.5% from a combination of healthy same-store revenue and NOI growth of 5% and contributions from new lease-ups as we completed almost $200 million at a projected yield of just under 7%. Year-to-date, core FFO was up over 10%, again, driven by a combination of internal growth from the stabilized portfolio and external growth from stabilizing development. For the first half of the year, our same-store portfolio performed in line with budget, although a bit ahead of budget in Q1 and a little behind in Q2. I'll discuss this trend a little more in a couple of minutes.

Turning to slide five and our updated outlook for the year, in short, overall expectations for core FFO are in line with our original outlook which called for core FFO growth of 9%. Our projection for same-store NOI growth has been trimmed by about 40 basis points or approximately $0.03 per share for the full year but is offset by contributions from other categories. That said, our full year outlook for core FFO remains unchanged. Projected investment and funding activity for the year remains more or less in line with our original expectation with some minor variances.

Turning now to slide six, we thought we'd provide a little more color regarding our outlook for the same-store portfolio in the second half of the year. As I mentioned earlier, we performed in line with expectations for the first half of the year, although in Q2, we did not experience the seasonal strength and effective rent growth that we're accustomed to seeing.

This trend appears to be largely demand-driven as economic and job growth fell short of expectations for the first half of the year, and declining business confidence and investment no doubt was a contributing factor as recent uncertainty and global events have left businesses hesitant to make new commitments.

Turning to slide seven, slower economic growth impacts corporate and transient demand, which helps fuel seasonal strength in the second and third quarters for our business. A weaker corporate and transient demand affects us in two ways; first, a reduction in premium income, which typically runs 50% to 60% higher per lease; and secondly, an effective increase in market vacancy as, in effect, inventories essentially added back to the market.

Turning to slide eight. As economic conditions have moderated over the last two quarters to three quarters, effective rent growth in our same-store portfolio expressed as like-term rent change has remained in the 4% range over the last six months to seven months. And while like-term rent change did improve modestly in Q2, we did not see the same seasonal lift we've seen in prior years so far this cycle.

And turning to slide nine, of course, performance does vary across our regions. The fact that rent growth has moderated, most notably in Northern California and the Northeast, while Seattle and the Mid-Atlantic have been trending up, rent growth in Southern California remains healthy in the 6% range.

Turning to slide 10, as you might expect, these trends are impacting our outlook for portfolio performance for the year. Again, the Northeast and Northern California has fallen short of projected budget, while Seattle and D.C. are expected to outperform. Overall, the net impact is resulting in a reduction of same-store revenue of almost 40 basis points for the full year with all of that expected shortfall to occur in the second half of the year.

Turning now to slide 11, just given trends in the operating environment, we thought we'd just revisit where we think we are in the cycle. We still believe that fundamentals point mostly in favor of an extended cycle, much like we saw in the 1990s. As you can see on this chart, consumer confidence remains on solid footing at cyclically high levels, and young adults are feeling the best and leading the way.

Turning to slide 12, consumer confidence is being shaped in large part by an improved employment picture, with jobless claims continuing their fall since the cycle began and job openings now outpacing hiring activities.

And as you could see on slide 13, the growing strength in the labor market seems to finally be putting pressure on wages as evidenced by recent ADP reports. And combined with reduced debt burden and stronger balance sheet you can see on chart two, the consumer is in good shape and getting stronger, which bodes well for continued economic growth given their contribution to the GDP.

Turning to slide 14, in addition, renter demand should continue to be supported by favorable demographics, with the largest segment of Millennials in their early to mid-20s still moving into their prime household formation and renting years. Obviously, demographics have been a major driver of renter demand this past cycle and they continue to support healthy renter demand over the next five-plus years even if homeownership rates begin to stabilize as a leading edge of Millennials begin to consider buying a home.

Turning to slide 15, the supply side of the equation is encouraging as well. Apartment deliveries are expected to peak nationally in 2016 and 2017 as permitting for new projects has slowed down over the last two quarters to three quarters from the cyclical highs in 2015. This is due in part to tightening credit from multi-family construction which has become much more pronounced over the last couple of quarters.

Turning to slide 16, in addition to the apartment sector remaining in balance, the picture for the overall housing market looks positive as well. Our projections for new housing production are in line with household formation over the next four years. But it's important to note that, first, these figures, the supply figures ignore obsolescence or destruction of roughly 400,000 units per year. And they also assume that housing production over the next four years increases by 30% from its current level and roughly doubles what we've seen so far on average this cycle.

So overall, while we may be seeing economic growth moderate a bit, we don't see any real tangible side that the apartment or housing cycle was nearing its end. Rather, we are still seeing solid demand growth matched by what we believe is reasonable levels of new supply to meet that demand.

Turning to slide 17, within this operating environment, one where demand and supply are expected to remain in balance, we believe that we are well-positioned to continue to deliver outsized growth from our development platform. So far this cycle, we've completed over $4 billion of new development at initial stabilized yields on average of around 7% are well in excess of our marginal cost of capital during this time which has contributed to strong core FFO growth over the last few years.

And finally, turning to slide 18, development should continue to drive solid external growth going forward as development underway along with non-stabilized recent completions to generate another $200 million of NOI with less than $400 million of capital required to complete this basket of $3.3 billion of assets.

With these assets projected to yield well above our marginal cost of capital, most of which has already been raised, we are positioned to deliver industry-leading external growth over the next two years to three years.

So, in summary, 2016 is shaping up to be another strong year for AvalonBay, and we believe that the company is very well-positioned from an investment and funding perspective to outperform going forward.

And with that, Augusta, we'd like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. This question-and-answer session will be conducted electronically. We'll go first to Nick Joseph with Citi.

Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)

Given the more muted near-term 2016 operating outlook, does it give you any pause in terms of development starts in the back half of the year?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Nick, this is Tim. No, not really. I mean, I would kind of point to the last few charts and talking about where we think we are in the cycle. We think the cycle still has room to run, the economic cycle and more broadly the housing cycle and the apartment cycle.

So what would give us pause if we thought the cycle was maybe nearing its end and the cost of capital was – that we need in order to fund those commitments change dramatically. But in terms of the expected yields on that basket of communities relative to what we think we can fund them at, we think it still provides an attractive accretive growth. So at this point, I'd say no.

Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)

Thanks. And then just in terms of the markets, maybe one that surprised on the negative and one on the positive. Can you talk about what you're seeing in New England and then in the Pacific Northwest?

Sean J. Breslin - Chief Operating Officer

Yes, sure, Nick, it's Sean. Happy to talk about that. In terms of New England, first, it's typically more seasonal than most of our markets. And if you look at what's happened throughout the year, rent change started the year in the mid-2% range and has trended up to about 3.5%. But it's running well below both last year's rate of about 5% and our initial expectations.

And I think it's largely a result of two things. One is job growth in the first five months or six months of the year has been somewhat disappointing at an annualized rate of about 1.5% relative to expectations, closer to about 2% for the full year. And then also the transient demand that Tim referred to has been pretty weak in Boston this year, which put downward pressure on rental rates in the late spring and the early summer. So in terms of New England, that's kind of what's happening there.

And as it relates to Seattle, Seattle, for the most part, is all about demand. And in the first half of the year, job growth is running in the mid-4% range. I think most forecasters that we rely on had projected a slowdown in hiring in the Seattle market and it has not slowed down. There's still plenty of supply, about 3.5% of inventory, but the surprise has been on the demand side in terms of job growth.

There's still softness in the sort of urban core of Seattle. We don't have many assets there. We really have two operating assets in those submarkets. But if you move out to the north end, and you move to Redmond, you move to Bellevue, revenue growth is still relatively robust.

And I think the difference between Seattle and Northern California in terms of what you're seeing in performance is you really have some well-established, large, well-capitalized companies driving the hiring in the tech sector in Seattle as compared to a lot of the smaller businesses that make up a greater share of employment in Northern California that are more susceptible to changes in funding tied to the D.C. market and what's happening with IPO valuations, et cetera. So that's really what's been helping Seattle. It's really the job growth.

Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)

Thanks. And then just finally, looks like bad debt increased. Could you talk about what drove that increase and if it was in any specific markets?

Sean J. Breslin - Chief Operating Officer

Yes. Did you say bad debt, Nick, just so I get you clearly?

Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)

Yes.

Sean J. Breslin - Chief Operating Officer

Yes. No, bad debt was up about 15 basis points year-over-year. We are seeing elevated levels of bad debt across four of the six regions. About 60% of it, though, is coming from a combination of factors in the New York region, really three things that I could point to. One, is the core process is slow considerably in 2016 relative to 2015, so it's taking a lot longer to get sort of judgment if you want to call it that. And our policy is to write things off after a certain period of time, if we collect it later, it will be an offset, but we're running things off more rapidly. And then secondly is we're just not getting the same level of judgments that we were seeing based on some new judges in certain courts.

And then thirdly is we did have one corporate housing provider kind of go belly up on us. It was only 15 homes but it represented a couple of months of rent. The underlying client was actually still paying so it's sort of an anomaly in the system I guess I would say. But New York is about 60% of the total increase, so that (16:45).

Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)

Thanks.

Sean J. Breslin - Chief Operating Officer

Yes.

Operator

Our next question comes from Rich Hightower with Evercore ISI.

Richard Allen Hightower - Evercore Group LLC

Hey. Good morning, everyone. So a quick question here on the New York/New Jersey region. It does seem that the revised projection is not meaningfully below the original projection, but somewhat below. So could you break down what you're seeing in the different submarkets, whether it's Manhattan or Brooklyn or even the outlying suburbs and just where you're seeing pockets of strength or weakness on either the supply or demand side there?

Sean J. Breslin - Chief Operating Officer

Sure, Rich, this is Sean again. Happy to do so. First, overall for New York/New Jersey, just to give you a sense of how it's trended throughout the year across that portfolio, rent change increased from about 1.5% in Q1 to roughly 3% for Q2. And while we've had a good progress on renewal rent change, which is in the low 4% range, move-in rent change remains pretty stubbornly low at around 1.5%. It hasn't really improved much through the second quarter or into July. And I think what you're seeing there, particularly in New York City, which I'm including Northern New Jersey in kind of this general description of the geography at this point, is while there's been steady job growth, there's just not enough high-paying jobs being created to absorb all the new supply that's all being delivered at the high end of the market.

And if you look at the performance, particularly recent performance, the suburban markets in and around New York are performing better than the city. We're seeing rent growth in New York City that's sort of in the mid-2% range. But as you move into Long Island and Northern and Central New Jersey, we get up to the 3% to 4% and even 5% in Central Jersey over the last quarter. So, in general, I'd say the supply is weighing most heavily on the New York City market, so including the boroughs in Northern New Jersey, and we're seeing better performance out of the suburban submarkets.

Richard Allen Hightower - Evercore Group LLC

All right, Sean, that's helpful. And then one also final question on property tax increases. I know that they were up 9% for the quarter. I guess if you could pinpoint this, when can we expect that trend to sort of taper off a little bit, or do you think we're sort of just in for consistent mid-single-digit to high single-digit growth for a little while here?

Sean J. Breslin - Chief Operating Officer

Yes. Really it's the taxes. The second quarter and the first half are really a reflection of prior year activity, for the most part. About 2/3 of the increase in taxes relates to supplemental assessments that were reversed last year in the second quarter. Our expectation is that by the time we get to year-end, taxes will probably be growing on a year-over-year basis in the 4% range, 3.5% to 4% range.

So there's a lot of noise in there in terms of the appeal to whether we achieve something this quarter what we received in the same quarter last year, et cetera sort of muddies the comps a little bit, but call it 3.5% to 4% is the expected growth rate in Texas for the calendar year 2016.

Richard Allen Hightower - Evercore Group LLC

Okay, great. Thank you.

Sean J. Breslin - Chief Operating Officer

Yes.

Operator

We'll go next to Dennis McGill with Zelman & Associates.

Dennis Patrick McGill - Zelman Partners LLC

Hi. Good morning. Thank you. First question, it looked like turnover for the whole portfolio was up a little bit, hoping you could put a little color behind the markets if you're seeing any markets vary materially from that trend?

Sean J. Breslin - Chief Operating Officer

Sure. I mean, if you look at it, it's a little bit of (20:21) I would say. It's basically 61% this year and last year in the same quarter. And if you look at turnover as a percentage of expirations, because expirations do move around a little bit, turnover was actually down about 100 basis points. So, the only market where there's anything to note is that Pacific Northwest was up about 300 basis points year-over-year. It's sort of to be expected given the nature of the rent increases that we're achieving in that market that turnover's up. So other than that, for the most part, relatively benign change in turnover on a year-over-year basis.

Dennis Patrick McGill - Zelman Partners LLC

Okay. And then, how about concessions? Are you seeing any shift in concessions and particularly, I guess, in Northern California and in the New York City or any increased prevalence of concessions?

Sean J. Breslin - Chief Operating Officer

Yes. There definitely is, I'd say, a trend of increased concessions primarily in the New York City market and in San Francisco. Those are probably the two places that you're seeing at. And for the most part, I think it's a direct reflection of just the lease-up activity that we're seeing in those markets. So, in both San Francisco and particularly in Manhattan, there's a fair amount of concessions at the lease-up communities. And then the stabilized assets do tend to compete based on those price points, so in many cases or market-to-market rents, but in some cases where you think it might be an aberration for a short period of time, we might use the concession as opposed to reducing the rent, particularly in New York when you're faced with communities that have legal rent caps and things like that you're trying to manage with.

Dennis Patrick McGill - Zelman Partners LLC

Okay. And then just lastly, as you look at your second half outlook, and I believe there's 3% to 4% revenue growth outlook, what would the pace look like through the years? Do you see the third quarter and fourth quarter relatively similar? Or do you see a shift in momentum as you exit the year?

Sean J. Breslin - Chief Operating Officer

Yes. I mean, what's implied by the revised outlook is high-3% range in terms of revenue growth in the second half. Expect it to be slightly above that in the third quarter and slightly below that in the fourth quarter.

Dennis Patrick McGill - Zelman Partners LLC

Okay. Perfect. Okay. Thank you, guys.

Sean J. Breslin - Chief Operating Officer

Sure.

Operator

We'll go next to Jordan Sadler with KeyBanc Capital Markets.

Austin Wurschmidt - KeyBanc Capital Markets, Inc.

Hi. Good morning. It's Austin Wurschmidt here with Jordan. Just up until this point really, the weakness that we've talked about has really been supply-driven and this is one of the first references I recall of being more on the demand side. So I guess I'm just curious aside from – you mentioned New England being one of the markets where job growth has come in below expectations. What other markets are you seeing demand sort of weaker than you initially expected? And then what gives you the confidence with, I guess, greater uncertainty in the world and the election upcoming that things could reaccelerate or level out?

Sean J. Breslin - Chief Operating Officer

Yes. I could speak to maybe some of the near-term things, and then Tim might want to speak to sort of the broader cycle, which I think is what he referenced in his prepared remarks in terms of acceleration or deceleration, but in terms of current trends, as Tim mentioned, job growth overall is running below expectations across the country. I'd say with the exception of what we're seeing in terms of acceleration in the Mid-Atlantic and the Pacific Northwest, most of the other markets are slightly below expectations in terms of job growth for this year. So given the level of supply which was anticipated and reduced job growth, that's where you see us falling short a little bit in terms of our expectations for revenue growth in the second half of the year.

But in terms of the broader outlook, Tim could probably reference some thoughts on that.

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Yes. Just to be clear, I wasn't calling for an acceleration of fundamentals. What I was saying is we believe that the cycle is not done and we're not actually going to see a continued deceleration. I think the one charge, we've seen like-term rent change be right in the 4% range now for the last six months or seven months. That's a period of time when we have seen weaker economic activity than we have anticipated. And I think job growth has been off about 50 basis points from what we had projected and I just think when there's just less economic activity and job growth, you're going to have a little less household formation.

But having said that, as we said in our management letter, we do expect rent change to be in the 3% to 4% range for the balance of the year. That is at or above trend, long-term trend. That is still very healthy rent growth for our business. So we're not necessarily calling for reacceleration to cyclical highs, but we don't think it's over yet. And, again, it's one of the reasons why we compare it to the 1990s.

If you go back to the 1990s and you just sort of chart what rent growth and revenue growth look like, it moved around from year-to-year based upon what was happening in that particular year from an economic activity standpoint. It does ebb and flow a bit, and that's just the way economies work.

But we don't see the kind of distortions that you might expect to see. You see some weakness, but you don't see the kind of distortions that you might expect to see that results in a lot of dislocation and ultimately leads to negative economic growth of recession.

Austin Wurschmidt - KeyBanc Capital Markets, Inc.

I appreciate the detail there. And then you kind of touched a little bit on Southern California and I was just curious, that was a market that was sort of trending ahead of expectations early in the year. And now you're calling for things to soften into the second half of next year and didn't really highlight it as an outperformer versus your initial projections. Can you just give a little detail as to what's driving some of that softness into the second half of the year and then maybe a little detail by submarket would be helpful.

Sean J. Breslin - Chief Operating Officer

Sure. This is Sean. On that topic, basically Southern California as you pointed out slightly ahead in the first half, it's basically slightly behind in the second half as a function of the macroeconomic things that we spoke about in terms of job growth, et cetera. The supply is pretty much as expected.

And so I don't know that there's a great story in Southern California in terms of whether it's a deceleration other than the job environment. I mean if you look at it, we had a little bit of a boost in the Los Angeles region particularly San Fernando Valley in the first half of the year as a result of just a one-off issue which was a gas leak in that area that drove some initial demand in the first quarter boosted occupancy but we've given that back in the second quarter.

So there was a little bit of a lift in the first quarter and first half as a result of that. So that's partly reflected in a deceleration I guess if you want to call it as you look to second half relative to the first half. But it's basically performing on plan. Los Angeles is healthy. Orange County has been slightly choppy but still relatively healthy. You've got some supply coming into Anaheim, Irvine and Huntington Beach creates a little bit of choppiness, but for the most part that product is being absorbed. And then San Diego just continues to perform quite well.

So, I don't know that there's any unusual story coming out of Southern California other than slightly lower job growth and then the sort of one-time boost that we received in the first half of the year from the gas leak that occurred.

Austin Wurschmidt - KeyBanc Capital Markets, Inc.

Great. Thank you for taking the questions.

Sean J. Breslin - Chief Operating Officer

Yes.

Operator

We'll go next to Kris Trafton with Credit Suisse.

Kris R. Trafton - Credit Suisse Securities (USA) LLC (Broker)

I'm just following up on Jordan's (sic) [Austin's] (28:03) question. Given that we're expecting deliveries to peak this year in markets outside New York and job growth continues around 150,000 pace a month, not looking for 2017 guidance, but is your thought that revenue growth could potentially bottom at the end of this year?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Well, I'll just go back to my earlier comments. I think revenue growth can move around for the balance of the cycle. It's very different than what we saw in the 2000s where rents went up, and then when they stopped going up, they went down. So far this cycle, I think you even saw in those two charts that we put up, one that showed the entire portfolio and one that showed the six regions.

Even after you sort of neutralize for seasonality, rents have moved around a bit even this cycle, and we're saying we think that we're going to continue to see that a bit. Having said all that, we do see demand and supply becoming more in balance, which means we think we're going to get – we're moderating towards trend right now or a little bit above trend.

Kris R. Trafton - Credit Suisse Securities (USA) LLC (Broker)

Okay. Perfect. And then just going back to one of your slides on the job openings versus job hire slide, I mean, given like the protection of sentiment kind of in the United States and less likely to import foreign labor and the skills gap that we have here in the United States, do you think that that gap between openings and hires may kind of stick around for a while? And then do you give it any thought in terms of how that may affect demand in kind of your major markets?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Yes. I think it's a fair question. I mean, particularly as you get into college grads and highly skilled positions as you mentioned that there could be a shortage and what that does is it creates more income growth for a big part of our resident population which one of the things that we said we really need to have as the cycle gets longer to help continue to kind of support kind of rent growth that we've been seeing. So I think potentially it's a favorable trend for our business maybe not more probably for the economy but for the apartment business and the kind of markets that we're in.

Kris R. Trafton - Credit Suisse Securities (USA) LLC (Broker)

Perfect. Thanks a lot.

Operator

We'll go next to Jeff Spector with Bank of America.

Jeffrey A. Spector - Bank of America Merrill Lynch

Great. Can you hear me?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Yes.

Jeffrey A. Spector - Bank of America Merrill Lynch

Oh, great. Sorry about that. Good morning. I don't think this question was addressed, but if it was, please let me know. On the supply point, you mentioned in your management letter, you talk about supply averaging approximately 2% of your markets in 2016 and 2017. When we look at different sources of supply, and I know it's still hard to figure out for 2017, it seemed like there is some differentiation between, let's say, San Fran and New York City. But based on your comment, I wasn't sure if you feel like San Fran is going to stay elevated into 2017, because I think we were looking at stats that were showing a drop loss in, let's say, the Northern California area in 2017 versus New York is going to persist at least through 2017.

Sean J. Breslin - Chief Operating Officer

Yes, Jeff, this is Sean. A fair comment. I think if you look at it based on the way we look at our markets, which is different from the U.S. overall, we're not as heavily involved in scrutinizing supply in those markets. But in our footprint, we're expecting the Northern California region to decelerate slightly from 2016 to 2017 from about 2.5% to 2.2%. But if you look at San Francisco specifically, we're expecting it to increase again in 2017 from 3.1% of inventory in 2016 to 3.4% in 2017. So you do need to look at the composition of the different markets within that region to determine what's happening.

And then as it relates to New York, we are expecting that to continue to be an issue through 2017. As you may know, in New York, 15 deliveries were about 1.5% of inventory. It's up to about 3% now. And when you get to 2017, it's expected to peak closer to about 3.5% of inventory in the New York market.

Jeffrey A. Spector - Bank of America Merrill Lynch

Okay, great. So in San Fran, you are expecting, in 2017, an increase. What's the disconnect, let's say, between what you're projecting versus, let's say – I believe you guys look at the – I think Axiometrics is projecting a decrease. Is it just more of the submarket?

Sean J. Breslin - Chief Operating Officer

Yes. I think all I can speak to is our process for the most part, and the way we do the process is a little bit top-down and bottoms-up to sort of meet in the middle with our forecast. The top-down sort of comes from other sources, whether it be REITs, Axiometrics or certain local market providers like Delta Associates, as an example here in D.C., or others in other markets. So we take that.

But then we also do sort of a ground-up assessment. We have a market research team here in Arlington that scrubs all the local websites (33:15) municipalities in our market to understand where certain deals are in their processing for entitlement and what the expected delivery dates are. In addition to that, our local development team, where we have three to four people per office around the country, is tracking all the developments in their markets as they're competing for sites and expected opportunities in their markets.

And then in addition to the development teams, the last scrub in our process is through the operations team where they know what's beginning to prelease to better predict when deliveries are expected to arrive in certain submarkets and if we needed to alter our revenue management strategy ahead of deliveries coming.

So, it's a pretty thorough process from a top-down and a bottoms-up perspective as compared to just looking at the REITs' data and saying, that's what we expect. So I think our process is probably more robust on average, but given our capability and development and how important that is to our business, we just give a lot of scrutiny.

Jeffrey A. Spector - Bank of America Merrill Lynch

Okay. Thank you. That's very helpful. And then I just had one question on development yields. In 2Q, yield was higher than I think 1Q year-to-date. Can you talk a little bit about those yields? And I assume that they came in above underwriting expectations.

Matthew H. Birenbaum - Chief Investment Officer

Sure. This is Matt. I can speak to that. You're talking about the 2Q completion?

Jeffrey A. Spector - Bank of America Merrill Lynch

Correct. In your presentation, you talk about the development yields for 2Q. I think it's...

Matthew H. Birenbaum - Chief Investment Officer

Yes.

Jeffrey A. Spector - Bank of America Merrill Lynch

Yes.

Matthew H. Birenbaum - Chief Investment Officer

Yes. We completed three communities in the quarter, and the number is going to move around based on the specific communities, the geography each quarter, and the three we completed this past quarter all beat pro forma pretty handily. One of them was on Capitol Hill in Seattle which is our first asset in that submarket, which had just exceeded expectations obviously with the big run-up in rent since we started that deal two-plus years ago.

Another one was a deal in Northern New Jersey, in Union, which hadn't seen any new supply in many years, and frequently we find a positive surprise on rents when we lease up in communities like that. And the third one was in Irvine. So, the basket moves around from quarter to quarter, but I think year-to-date it's in the kind of 6.3%-ish (35:48) range. So, obviously as we completed the prior quarter with all the lower yielding, some of those were in – one of those was a large deal in Southern Cal which tends to have lower yields. So, it's going to generally move around. But we're continuing to see yields, obviously, beat the initial underwriting on the strength of good rent.

Jeffrey A. Spector - Bank of America Merrill Lynch

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Andrew Rosivach with Goldman Sachs.

Unknown Speaker

Hi. Good morning. This is Jeff (36:20) on with Andrew. Just to turn to slide eight of the presentation, it looks like much of the setup is like 2013 where your same-store slowed but bottomed at 3.5%. But I'm just curious, if you take this chart, what would it look like in 2001 or 2008 when things were about to fall off a cliff?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Yes. I think, I referenced it, they looked – I don't know if we had this exact data series – time series certainly for 2001, but if you recall we had a big run-up in 2000 in the apartment world. So we really had a rent spike that was driving pretty phenomenal performance in 2000. And then, with the tech rack (37:17) and the elimination of – you had two things going. You had the elimination obviously of a lot of technology jobs and you had a pretty – a much more dramatic expansion of monetary policy in terms of the impact on interest rates. So you had a lot more homeownership rates went up in the face of recession which was unusual. So you had a lot more demand destruction in the case of rental housing than you did actually in the 2000s where you had job losses that were actually three times what we had in the early 2000s.

But we saw sort of the typical pattern where ownership rates actually went up during recession. So, as I mentioned earlier, in the 2000s, it's a little bit more of a kind of a straight-up and then straight-down curve to rent growth. But it kind of kept going up and then (38:15). And then after about 2006 into 2007, rent started to decelerate until 2008 hit us.

Unknown Speaker

Great. Thanks. That's helpful. And then also, if you looked at cap rates by region, where do you believe the lowest and highest cap rates are in your portfolio?

Matthew H. Birenbaum - Chief Investment Officer

This is Matt. I guess I'll speak to that one. Lowest cap rates are still probably Manhattan. Kind of core best locations in Manhattan are probably still free caps. But outside of that, I would say generally speaking, the lowest cap rates are across the Southern California right now. I don't think a lot has been trading in Northern California recently just be it the changes on the ground there.

So we've been trying to buy in Southern California, and it's been a little bit frustrating. Good, newer products in Southern Cal in infill submarkets is definitely trading sub-4% cap rate. And then the rest of the markets are kind of low 4%s to mid-4%s up to mid-5%s depending on where you are.

Unknown Speaker

Great. That's helpful. Thanks for taking my questions.

Operator

Our next question comes from Nick Yulico of UBS.

Nick Yulico - UBS Securities LLC

Thanks. If I look at page nine of your slides where you give the rent change by market, while your market seem like they're just sort of fluctuating over a five-year average, but the chart that looks scarier there is Northern California which looks like it's in sort of freefall since last year, but maybe even reaching a bottom line on your five-year history. So what was the first half of this year like-term rent change in San Francisco and what are you assuming for the second half of the year? And maybe you can break down the performance of the markets a bit between San Francisco versus the East Bay and San Jose.

Sean J. Breslin - Chief Operating Officer

Yes, Nick. This is Sean. Why don't I try to address some of those comments and we can always follow up with greater detail if you're interested. Why don't I give you a sense that in Northern California, first, to give you some perspective from an overall standpoint, rent change started the year around 6%, but it continued to decelerate and is currently running around 4%, and that's made up of about 2.5% in San Francisco, 6% in the East Bay and a low 4% range in San Jose. So that's kind of where we are now.

If you want to kind of decompose that even more into the new move-ins and like-term rent change by market, why don't I get that to you separately so we don't consume a lot of time on that. But I think it's fair to say that San Francisco is probably the softest at this point so just to address that one. Rent change at this point on move-ins is essentially just barely positive, 50 basis points to 100 basis points kind of range. We continue to hold renewals sort of in the low 4% to mid-4% range. So you're talking about anywhere from 2.5% to 3.5% sort of numbers on a blended basis in San Francisco. This number is certainly better in East Bay and San Jose, as I mentioned currently.

But in terms of it, reaching a bottom and flattening out, as I mentioned in response to a prior question, we still expect continued deliveries at a pretty heavy level in San Francisco throughout this year and then even increasing into next year.

So performance, really rent change is going to depend on the level of demand and job growth has been decelerating there. So to the extent that we see job growth level off, that would certainly help. But I think really your forecast for job growth is going to dictate performance in 2017 and whether that levels off or not certainly as you get beyond 2017. Given the nature of the product that's constructed in San Francisco, supply should start to fall off, but we do expect it to be somewhat challenging through 2017 in San Francisco specifically. So...

Nick Yulico - UBS Securities LLC

Okay. That's helpful. I guess just specifically the second half of 2016, is it going to be – your guidance is assuming it's worse than the 4% you've done in the first half of the year?

Sean J. Breslin - Chief Operating Officer

That's correct.

Nick Yulico - UBS Securities LLC

Okay. But no specific number?

Sean J. Breslin - Chief Operating Officer

In terms of that specific market, I can give you some general ranges in terms of what we're expecting in the third quarter and fourth quarter. I mean, Northern California, we're probably talking about more in the 3%, 3.5% range, somewhere in that ballpark for all three markets combined.

Nick Yulico - UBS Securities LLC

Okay. That's great.

Sean J. Breslin - Chief Operating Officer

Yes. The weakest is going to be in San Francisco. But keep in mind, I said Northern California is more like 6% in the first quarter and then 5% in the second quarter, so, it continues to trend down. The 4% I mentioned was more of kind of where we are currently.

Nick Yulico - UBS Securities LLC

Okay. So, going back to the East Coast, the Brooklyn development project that's underway, how is the lease-up doing particularly I'm interested in the Avalon component which I know just started leasing as the higher rent piece of the project. Any changes to how you're thinking about concessions there and the ultimate yield on the entire project? Thanks.

Sean J. Breslin - Chief Operating Officer

Sure. This is Sean again. Yes, Willoughby and – Avalon Willoughby and AVA DoBro have been performing quite well as you indicated. We're just starting to lease up on the Willoughby component. But if you look at performance through the second quarter, which represents mainly AVA DoBro, we lease and occupy 65, 60 a month which is quite strong and up from the first quarter which was around 39. So, leasing velocity has been healthy.

Yes, as I indicated, it's a little too early probably to give you correct guidance about the Willoughby component. We did mark the rents up this quarter, but our expectation is that hopefully there'll be some additional lift as we move through the second half of the year. The views are pretty spectacular at the top of that building. So I'm not sure that we have seen exactly where the rents are going to settle out.

But I think it's fair to say the overall project has performed quite well. In terms of the impact on yield, the only negative I can speak to is that we have had a little bit of a surprise on the property tax side that may offset some of the rent lift. But our expectation is that the yield would be essentially on par with original expectations hopefully slightly above.

Nick Yulico - UBS Securities LLC

Thanks.

Operator

We'll go next to Drew Babin with Robert W. Baird.

Drew T. Babin - Robert W. Baird & Co., Inc. (Broker)

Good morning. I was hoping to talk about LA. My understanding of your portfolio is that you have very little exposure to Downtown LA where there's quite a bit of supply coming over the next couple of years. I was hoping you could speak to whether or at least tangentially if there was any impact from Downtown LA supply in some of your submarkets in the second quarter.

Sean J. Breslin - Chief Operating Officer

Yes, Drew, this is Sean. You're correct. We have one operating asset in Downtown LA. It's in Little Tokyo, a community we constructed at the earlier part of the cycle, actually have great bases there. But, yes, there's a significant amount of supply being delivered into LA. I think it's upwards of 15% of inventory. You have to put that number in context with the fact that they're trying to create a whole new environment in downtown and it's spread across multiple submarkets within Downtown LA.

But in terms of any indirect effect on the rest of the portfolio from that supply, we have not seen that. Most of the product that we own in that market is a mix of some newer communities, but also a fair amount of older communities in terrific suburban locations that are performing quite well.

Drew T. Babin - Robert W. Baird & Co., Inc. (Broker)

Okay. You also mentioned markets like Huntington Beach and Irvine, for instance, that are seeing a decent amount of supply just in Southern California. What does that supply growth trajectory look like going into next year? Is there a fairly sizable deceleration in supply, or do you expect some continued pressure there?

Sean J. Breslin - Chief Operating Officer

In those specific submarkets you're referring to or just in the market overall?

Drew T. Babin - Robert W. Baird & Co., Inc. (Broker)

Yes, LA and Orange County, generally.

Sean J. Breslin - Chief Operating Officer

Yes. I mean LA and Orange County, if you look at the supply that's coming on line, for the most part, we do expect continued elevated deliveries in Downtown LA. It's like 14%, 15% this year and it stays at that level through 2017. The other couple of pockets that you're seeing supply in LA is really Marina del Rey. In particular, there's one large development there at Playa Vista that's delivering right now and then a couple of other submarkets. As you move down in Orange County, you do see supply fall off a little bit in Anaheim from 2016 to 2017.

And as it relates to Irvine, Irvine is actually projected to increase some as you move into 2017 as a result of some deliveries by a handful of developers, but in particular a couple of large projects that will be delivered by the Irvine Company. So increase there.

And then a modest reduction in Huntington Beach, and in Huntington Beach, there's kind of two anchors to the supply. There's a fair amount of product being delivered right at the mall at Beach Boulevard and the 405, but there's other communities, a couple of large communities under development down at Pacific City, which is down along Pacific Coast Highway there in Huntington Beach. So, there's not much sort of in between there, but those are the two sort of anchors of supply in that market.

So if you look at it, though, overall, one thing to keep in mind for Southern California is we're still talking about deliveries that are low 1% range of inventory overall. So you do have to be careful about which submarkets you're in, but if you look at it, the region is pretty supply-constrained.

Drew T. Babin - Robert W. Baird & Co., Inc. (Broker)

Okay, great. Thank you.

Sean J. Breslin - Chief Operating Officer

Thank you.

Operator

Vincent Chao with Deutsche Bank has our next question.

Vincent Chao - Deutsche Bank Securities, Inc.

Hey, everyone. I jumped on a little late, so I apologize if I missed this. But just in thinking about the underperformance of job growth year-to-date versus your original expectations, did you guys mention what the outlook for job growth is in the second half for your portfolio?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

We did not, we did not. We really just spoke to the shortfall so far this year which is about 50 basis points less than we had anticipated. That's nationally. And then, if you look at our markets, I think it's probably roughly in line with that in terms of the overall shortfall so far this year.

Sean J. Breslin - Chief Operating Officer

And just one other point to comment on, Vin, I think our projection for the full year now at this point is about 2.5 million jobs, and originally we're well north of that for the full calendar year.

Vincent Chao - Deutsche Bank Securities, Inc.

Yes. Okay. I'm just trying to get a sense if you're expecting things to sort of stabilize here at current levels or maybe decelerate a little bit further. I guess any color you could provide there.

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Yes, Vin, so let me just speak. What happened in the first half here is what's really going to impact the portfolio performance in the second half of the year. So that's all. We're not really all that – we're not as focused in terms of the – what happened in the second half of the year in terms of job growth will really play more into our 2017 outlook than the back half of 2016. You should see about a two-quarter lag impact in terms of what's happening in terms of the direction of job growth relative to the portfolio.

Vincent Chao - Deutsche Bank Securities, Inc.

Okay. Thanks for that clarity. And then, just another question, just in terms of looking at the like-term effective rent change's around 4% so far this year. Expect it to maybe moderate a little bit in the back half. But if we look at the first half same-store revenue growth, it's been a bit higher, maybe 100 basis points higher than that. And it looks like the July data, there's a narrowing of that gap, and I'm just curious if there's anything specific that's driving that. Is it folks trading down or just different lease term lengths than you've seen typically and just any color you have on that?

Sean J. Breslin - Chief Operating Officer

Yes. I mean, what comes to mind is really comps. I mean in the second half of the year, certainly, we have more challenging comps, and it's really played out in terms of – if you look at granular level, it really comes down to the monthly sequential change in GP. And what we've seen in both like-term rent change, as well as the transient and corporate component, it's just not compounding as great a rate as it was at this time last year.

So, to give you some perspective, as an example, if you look at the change in GP on a monthly basis, last year, we're talking about through the second quarter, on a monthly basis, moving up at 60 basis points in April, 100 basis points in May, and about 110 basis points in June. Versus this year, those numbers were 30 basis points, 60 basis points, and 90 basis points.

Some of that is a reflection of the transient demand that we mentioned earlier, Tim alluded to in his prepared remarks, which does sort of turbo-charge GP growth in the late second quarter and early third quarter that we're not seeing this year. So that's certainly part of it.

Vincent Chao - Deutsche Bank Securities, Inc.

Okay. Thank you.

Operator

We'll go next to Conor Wagner with Green Street Advisors.

Conor Wagner - Green Street Advisors, LLC

...lease growth, and how does that compare to the prior year?

Sean J. Breslin - Chief Operating Officer

I'm sorry, Conor. I think we got the tail end of your question. Would you mind restating?

Conor Wagner - Green Street Advisors, LLC

Yes. Yes. 2Q in July, new lease growth and how those compared to last year.

Sean J. Breslin - Chief Operating Officer

Sure. 2Q move-in rent change is 2.6%, and last year at this time, we were doing – hang on one second, I'll tell you the exact number for 2Q, it was running in the mid-4%s. And then you said July? You're looking at July as well? Is that the question (53:11)?

Conor Wagner - Green Street Advisors, LLC

Yes. Yes, sir.

Sean J. Breslin - Chief Operating Officer

So, July move-in rent change is running to 8%. And last year, actually, I don't have last year right off the top of my head here, Conor. I'll get back to you on that detail.

Conor Wagner - Green Street Advisors, LLC

Okay. Thank you. And then what was the initial year cap rate on the Tustin sale?

Matthew H. Birenbaum - Chief Investment Officer

Tustin sale, this is Matt. Let me just look that one up for you, Conor. I think it was in the low – if I can find that.

Conor Wagner - Green Street Advisors, LLC

And maybe while you're looking for that, Tim, what was the new development site you added in Southern California? The new right.

Timothy J. Naughton - Chairman, President & Chief Executive Officer

It's in the Arts District.

Conor Wagner - Green Street Advisors, LLC

Okay. In LA, correct?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Correct. Yes. I'm sorry.

Conor Wagner - Green Street Advisors, LLC

Okay. So then you have Hollywood – you have the West Hollywood deal and now the Arts District deal there. Those are your two Southern California rights, correct?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Well, yes. There's a West Hollywood that's under construction. There's Hollywood which has a development right, which is three quarters a mile down Santa Monica, so it's Hollywood and Arts District. Correct.

Conor Wagner - Green Street Advisors, LLC

Okay. Thank you.

Matthew H. Birenbaum - Chief Investment Officer

Yes. This is Matt. It looks like East Tustin was 4.9% cap rate, call it.

Conor Wagner - Green Street Advisors, LLC

4.9%, and is that on – that's on about $400 a door of CapEx, correct?

Matthew H. Birenbaum - Chief Investment Officer

There might have been a little more deferred CapEx that's not included in that number.

Conor Wagner - Green Street Advisors, LLC

Okay.

Matthew H. Birenbaum - Chief Investment Officer

Frankly, if you put in some of the CapEx (54:48) the cap rate would be lower.

Conor Wagner - Green Street Advisors, LLC

Okay, great. Thank you very much.

Operator

Alexander Goldfarb with Sandler O'Neill has the next question.

Alexander D. Goldfarb - Sandler O'Neill & Partners LP

Good morning down there. Just two quick ones from me. First, on the outperformance that obviously helped this year's guidance number and has sort of been of a hallmark for you guys, the 30 basis points. As fundamentals moderate, how should we be thinking about that outperformance? Is that something that you expect to continue, or eventually, maybe if not in the next six months, maybe in the next 12 months where trend is going, you'll just be delivering at your underwriting rather than exceeding?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Well, Alex, I mean, as you know, I mean, we do underwrite based upon current rents in place. As long as rents continue to rise at some level, we would expect yields to continue to go up, all other things being constant which, for the most part, they are. We generally have been able to bring development in close to budget. So, yes, you would expect that lift to moderate as rents might moderate.

Now, the 30 basis points is a little misleading. If you took out the impact of Willoughby, well Willoughby's rents went up pretty significantly, so did the taxes, as Sean had mentioned. So that's actually due to the impact in terms of the yield impact. If you neutralize for Willoughby, the other deals, on average, have gone up by 70 basis points. So about a 10% lift in terms of the projected yield. So you got to look at the actual basket and some different things that may be happening with individual assets.

Alexander D. Goldfarb - Sandler O'Neill & Partners LP

That's helpful, Tim. And then the second is maybe, Kevin, can you just provide a little bit color, I don't think you addressed it earlier, but in the guidance revision, you're getting a lift from capital markets and transaction activity, a $0.02 positive variance versus your original outlook. Can you just provide a little bit more color on what's going in there, what's changed in your thinking of those two items to give you that positive benefit?

Kevin P. O'Shea - Chief Financial Officer

Yes, Alex, this is Kevin. The $0.02 lift in expected core FFO per share coming from capital markets and transaction activity is as you'd expect. It's a mix of things going on there. It's the impact of net acquisition and disposition activity both in terms of the amount and the timing, as well as some changes to JV income – I'm sorry, some changes to the debt assumptions that we've got. We did pay off a piece of debt in the second quarter and have some benefit from lower interest rate being woven into the mix here.

Alexander D. Goldfarb - Sandler O'Neill & Partners LP

Okay. But it's not as if – because you guys haven't historically drawn your line, I can't remember actually the last time you had drawn in your line. But it is not as though you intend to use more of your line of credit; it is just timing of other activities, correct?

Kevin P. O'Shea - Chief Financial Officer

It's timing of other activity, primarily acquisition and disposition activity, both amount and the timing of it. So yes, we don't expect to be a significant user of our line of credit and we haven't been throughout the year.

Alexander D. Goldfarb - Sandler O'Neill & Partners LP

Okay, great. Thank you very much.

Operator

We'll go next to John Kim with BMO Capital Markets.

John P. Kim - BMO Capital Markets (United States)

Thank you. I just wanted to follow up on commentary of concessions on stabilized assets. Can you just quantify what percentage of your stabilized portfolio you're offering free month's rent and maybe compare that to last year?

Sean J. Breslin - Chief Operating Officer

Percentage of the portfolio offering free rent, I'm not sure I have that. I think we can certainly get that back to you. But to give you some sense in terms of absolute dollars on a year-over-year basis in the second quarter, cash concessions in the second quarter of 2015 were about $75,000 versus the second quarter of this year were about $300,000 and the greatest increases were in New England, New York, and Northern California markets.

John P. Kim - BMO Capital Markets (United States)

And when you discussed 3% to 4% like-term rental growth in the second half of this year, is that on an effective or nominal basis?

Sean J. Breslin - Chief Operating Officer

That's effective. That's a net effective number.

John P. Kim - BMO Capital Markets (United States)

Okay. With your cost of debt declining, have you changed your underwriting hurdles at all on your development pipeline as far as yields or IRR?

Matthew H. Birenbaum - Chief Investment Officer

Yes, hey, John. This is Matt. We do index our target investment returns to our weighted average cost of capital, assuming a 30% to 70% debt to equity mix. So, as the cost of debt goes down, it does at the margin reduce our WACC a little bit, but frankly, it's a lot more impacted by the equity. And we don't adjust it on a day-to-day basis. We'll adjust it maybe twice a year. What we've seen is that it's actually been pretty darn sticky over the last four years or five years really through this entire cycle.

So, I would say, no, in general, our target returns on development have not moved in any material way over the last, really, couple of years. We're still looking at it. And when you look at where the underwriting returns on the development rights are, they've been very consistent in that kind of mid-6% range.

Kevin P. O'Shea - Chief Financial Officer

And, John, this is Kevin. Just to add to that, while Treasury rates have certainly gone down, if you sort of look at our cost of debt for 10-year unsecured debt, last year, we averaged around 3.4%, 3.5%. As you know, in our May offering, we executed just under 3%. If we were to raise, do a 10-year unsecured bond offering today, we'd probably be around 3% because while treasuries have fallen, spreads have widened, essentially neutralizing the Treasury change.

So, even over the last year, there's only been maybe a 40-basis point, 50-basis point decrease in our overall cost of debt. So, when you weave that through on a blended basis at 30% leverage for what Matt alluded to in the underwriting, it's a pretty modest potential impact.

John P. Kim - BMO Capital Markets (United States)

It seems like it would be higher levered return though on your development? Is that a fair assessment?

Kevin P. O'Shea - Chief Financial Officer

I'm not sure if I follow. We underwrite yields on an unlevered basis. And so what we do is in our yield matrix the component that Matt was alluding to that tied to our short-term cost of capital looks at our unlevered initial short-term cost of capital which ascribes 30% weighting to debt, 70% weighting to equity. And so you end up with having essentially an unlevered or neutralized number there from a leverage point of view. So we don't look at yields on a levered basis.

John P. Kim - BMO Capital Markets (United States)

Got it. Okay. Thank you.

Operator

We'll go next to Richard Hill with Morgan Stanley.

Richard Hill - Morgan Stanley & Co. LLC

Hey, guys. Quick question from me on the development side of the equation, I'm curious how much of the job occupancies or job openings that you're seeing are driven by construction and if that's having any pressures on construction costs and then it would ultimately impact development yields. And I know you mentioned development yields were probably going to be stable. But I'm curious if you're seeing rising construction costs driven primarily by wage growth on that side.

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Well, it has been driven mostly by labor, not by materials for sure. And that's been a mix I would imagine of both profitability and labor cost. If you look at the different sort of wage indices out there, construction labor is towards the top, if not at the very top in terms of year-over-year wage growth. So it's an industry that has seen a lot of skilled labor leave over the last cycle or two. And it's a challenge, it's a challenge to get skilled labor at a lot of these sites compared – and when you think about the production level, not just of apartments, but just of housing and kind of all real estate categories, the level of construction is still not that high and, yes, it's a real challenge for the industry right now. And I think a lot of that just has to do with the shortage of skilled labor.

Richard Hill - Morgan Stanley & Co. LLC

Got it. And you're pretty comfortable that development yields will remain stable despite that?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Well, we continue to – whenever we look at new opportunities as well as existing opportunities, we continue to sort of re-underwrite them as we continue to best pursue cost of capital and make sure it's something we want to continue to invest where we think is sort of the highest risk capitals of any deal, which is that entitlement and design that pursue cost of capital, if you will. So the kind of yields that you see on the schedule in the release, they're consistent with the kind of yields we see in the development rights pipeline.

Richard Hill - Morgan Stanley & Co. LLC

Great. And then, just one more quick question on the financing side, are you actually seeing guys pull back or developers pull back because they haven't been able to get the construction financing that they see or that they used to see?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

There's clearly – I mean part of why we've been able to replenish our development rights pipeline, I think, is connected to that. We are seeing more deal flow. I think there – if a developer has three or four deals, they may be looking to lay off one of them in terms of land and it's probably a function somewhat of the kind of reception that they're getting with some of their key lending partners.

But across the board, you're definitely hearing from both banks, the suppliers of capital as well as the consumers of capital developers that construction financing is less plentiful.

Richard Hill - Morgan Stanley & Co. LLC

Great. Thank you.

Operator

We'll go next to Tayo Okusanya with Jefferies.

Omotayo Tejumade Okusanya - Jefferies LLC

Hi. Yes. Good morning, everyone. Just a quick question, could you talk about rent-to-income ratios in many of your key markets and if you think that's a contributing factor to – or rent fatigue is a contributing factor to some of the slowdown in rent growth we're seeing? Just want to get a sense of how much of this stuff really is supply-related versus how much is demand-related.

Sean J. Breslin - Chief Operating Officer

Sure, Tayo. It's Sean. Yes, rent-to-income ratios are running around 23% right now, so, certainly at the higher end of long-term averages, if you want to think of it that way. We are seeing income growth. Income growth from the portfolio in households that moved in, in the second quarter was up a couple of hundred basis points year-over-year.

In terms of rent fatigue, if you look at the portfolio in terms of reasons for move out, it's actually come down. If you look at rent increases as a percentage of move outs, it was running close to the 20% last year; it's running about 17% right now. And as you might imagine, it's come down a fair bit in markets like New York and Northern California.

So, we're starting to see pretty good signs of wage growth across the economy and in our portfolio and, as you've seen, some deceleration in rental rate growth in some of these markets. There's just not as much pressure there as there was during 2015, as an example.

Omotayo Tejumade Okusanya - Jefferies LLC

Got it. Helpful. Thank you.

Sean J. Breslin - Chief Operating Officer

Yes.

Operator

We'll go next to Wes Golladay with RBC Capital Markets.

Wes Golladay - RBC Capital Markets LLC

Hey. Good afternoon, guys. Looking at the reasons to move out, have you noticed any changes that are material?

Sean J. Breslin - Chief Operating Officer

No. Not really. Other than what I've mentioned as it relates to rent increases being down year-over-year, for the most part, it's been pretty stable at the portfolio level. And I wouldn't say there's any significant highlight even at the regional level at this point.

So what you'd expect, for the most part, relocations (67:10) of about 23% to 25% of move-outs, rent increases, as I mentioned, running around 17%, and then home purchases are running at (67:19). It's actually down about 50 basis points year-over-year and still well below long-term averages. So a little bit of movement upward in a couple of markets, but it's not really moving much in terms of the home purchases.

Wes Golladay - RBC Capital Markets LLC

Okay. And looking at Exhibit 7, how much did that impact – or the lower corporate and transient demand impact the overall same-store number for the year when you factor in 2Q and 3Q?

Sean J. Breslin - Chief Operating Officer

Yes. Wes, it's a little hard to quantify, and I'll tell you why. It's easy to quantify some of the direct effect on the short-term component in particular. So to give you an example, if the percentage of leases that are short-term is down, say, 50 basis points specifically, get a 50% premium on that, a loss of about 25 incremental basis points of GP growth during that period of time.

What's hard to quantify is the indirect effect of having that inventory back into the market. So it's hard to say exactly what the impact is for the full year because of the various assumptions you'd have to make. So it's fairly easily to quantify the three months or four months which we could certainly talk to you about offline, but the broader impact is hard to quantify.

Wes Golladay - RBC Capital Markets LLC

Okay. And was that pretty broad-based by the regions, both the corporate and transient or was it just isolated to the East Coast where leasing was a little bit softer?

Sean J. Breslin - Chief Operating Officer

No. The corporate component was pretty widespread, probably slightly more pronounced in New York, as an example. And then on the transient piece, also relatively widespread, a bit more acute in New England.

Wes Golladay - RBC Capital Markets LLC

Okay. Thanks a lot.

Sean J. Breslin - Chief Operating Officer

Yes.

Operator

We'll go next to Nick Joseph with Citi.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

Hey. It's Michael Bilerman with Nick. I'm curious, just sticking with slide seven, as you think about I don't know whether you track this or not, but was there any change in sort of Airbnb type rentals? Were renters in your apartments accelerating the listing of their apartments or scaling that back as a way to maybe generate income to offset some of the rent expense? Is there anything there that you've been able to discern on the Airbnb front within your portfolio?

Sean J. Breslin - Chief Operating Officer

Not necessarily, Michael. We do stay connected with Airbnb and they provide us information on leasing activity in our apartment homes. Based on the last report that I saw, there was not a material shift. Some of the stuff that we see is really you have to dissect it at a very granular level to understand it. So for example, in New England, Boston specifically, there were some pretty good winter storms in the last couple of years. When we underwrite things, we sort of look at an average year.

This year was a better than average year, so there were less transient demand from insurance claims for people that had damage in their homes during the winter, I guess to that level of granularity in terms of understanding that demand. So I have not seen anything regarding Airbnb at this point, though.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

And then when you think about the – so this captures about 6% of the lease volume of your rent roll between the corporate leasing and the short-term. So the balance, call it about 94%. Is there other categories that we should be mindful of that are either accelerating or deceleration? I don't know how granular you get between students, singles, couples, couples with children and how you dissect all of the data. I'm just curious whether you can share any light on the 94% relative to the 6% you showed here.

Sean J. Breslin - Chief Operating Officer

Yes. We do dissect the data in terms of the percentage that are single, single with children, married, married with kids, roommates, et cetera. There's not been a significant movement in those numbers. It's a large population, so you'd really have to see in absolute sense quite a bit of movement to move the needle here.

The reason we brought this up is the premiums are so significant on the short-term leases that it can have an impact. Again, when you're talking about a 50% premium even if it's 1% of your leases or 50 basis points or 0.5% of your leases, then it can have a significant impact on GP in any given month. So, that's why we highlighted this one in particular and the same thing in the corporate.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

And is there any change in terms of the number of people occupying a home over time that may indicate any shift in terms of affordability that would be noticeable?

Sean J. Breslin - Chief Operating Officer

We have not seen that to date, no.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

Okay, great. Thanks for the time.

Sean J. Breslin - Chief Operating Officer

Sure.

Operator

We have no other questions at this time. I'd like to turn the conference back to Tim Naughton for any additional or closing remarks.

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Well, thank you, I guess, and thank you, everybody, for being on the call today. And enjoy the rest of your summer, and we'll see you in the fall.

Operator

That does conclude today's conference. Thank you all for your participation. You may now disconnect.

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