Creating Products to Fit Specific Customer Needs

AvalonBay’s Matthew Birenbaum explains how the company is positioned for targeted growth with two new apartment brands.

AvalonBay Communities Inc., a REIT that owns or has an interest in over 58,000 apartment homes in high-barrier-to-entry markets across the United States, recently launched two new brands—“AVA” and “eaves.” These new community brands give the company a broader platform to meet the distinct needs of a wider range of customers, including the Gen Y renter looking for an urban experience and the value-oriented customer looking for functional amenities. Matthew Birenbaum, executive vice president of Corporate Strategy, updates MHN Associate Editor Michael Ratliff on the grand design behind both new offerings, including the targeted customer base and the undertaking of new development and acquisition activities.

Looking back at 2011, is there a particular achievement at Avalon Bay that you’re most proud of?

Well I just returned to the company in late 2011 after working in the industry elsewhere for the past eight-and-a-half years—so it has nothing to do with my efforts—but I can say that 2011 was a strong year for AvalonBay. We posted strong growth across the company. Net operating income grew by over 8 percent and per share funds from operations (FFO) by over 14 percent—our best performance in over 10 years.

AvalonBay recently launched two new brands, “AVA” and “eaves.” What kinds of markets, properties and residents will these brands target?

AVA is designed to attract the increasing number of people, particularly the Gen Y segment, who want to live in energized, urban neighborhoods—often times-transitioning areas. AVA communities will typically have smaller apartments—many designed for roommate living—and will frequently be found in transit-oriented locations. AVA will grow primarily through new development and redevelopment, and construction is currently underway on our first new AVA communities in Washington D.C.’s H Street District, Manhattan’s Chelsea neighborhood and the Ballard section of Seattle. We’ve also recently redeveloped several communities in San Francisco and Seattle to the AVA brand.

Eaves by Avalon addresses the value-oriented segment—renters seeking good quality apartment living with practical and functional amenities and services. These communities will tend to be in suburban areas and offer more moderately priced apartments. We’ll be growing this brand through acquisition and redevelopment.

Our Avalon brand remains our core offering and our main focus for new development. Avalon communities offer an upscale apartment living experience with  high-end amenities and services in the leading urban and suburban markets.

How have renter demographics changed to warrant the launch of these new brands?

The brand strategy was not really driven by demographic changes, although certainly the echo-boomer/millennial cohort is enjoying strong growth right now, and AVA is well positioned to respond to that growth. Fundamentally, it’s more of a recognition that different customer segments have different needs. We as an industry have not always done a great job of recognizing that. Through our brand strategy, we are developing distinct offerings as opposed to trying to be too many things at once. The brands provide us a better way of positioning a particular community in a given submarket that distinguishes us from the competition.

What strategies are you using to attract the Gen Y segment into “AVA” properties?

Within the product itself, we are featuring more modern interior design with an eye toward embracing the local neighborhood, unique indoor and outdoor community spaces to allow for more socialization among the residents, and a general vibe which is more in tune with the style this demographic embraces. You really have to go see one of the AVA communities to appreciate how different they are from our typical Avalon brand.

In our new construction AVA communities, the apartments are engineered to maximize the “live-ability” of a smaller space so residents can better afford to live in an urban location. And we have a higher mix of small, but well-designed, two bedrooms for roommate living. From a marketing perspective, most of our marketing is online, and we use Facebook and other social media to connect with residents. We also have a focus on connecting with the neighborhood and have had “AVA Live” concerts at our communities featuring local bands, in addition to local restaurants and bars hosting free tastings and social events.

Can you describe the ideal property in which to invest for 2012?

We’re investing across multiple platforms in 2012, including development, redevelopment and acquisitions. We don’t necessarily have any specific ideal investment prototype in mind. We look at each investment on its own, and analyze it based on its unique risk/return characteristics. I would say that at this point in the cycle, we view development as being particularly accretive and believe there will be a lot of value creation in our current development communities as they are completed and stabilized. We probably see the best returns on our high-density wood-frame product, and we’re seeing a trend toward more transit-served locations as well.

What about on the disposition side? How does AvalonBay work to ensure a strong ROI?

Our dispositions are driven partly by our own internal portfolio allocation objectives and partly by a review of our projected return from continuing to hold the asset as compared to what someone else would be willing to pay us for that asset in today’s market. We also have our first investment fund which is reaching the final years of its established investment period and will be a primary driver of dispositions for us in the next few years.

What are the challenges the multifamily industry faces today? How is AvalonBay working to overcome these issues?

We’re bullish on the industry and see a lot of positives in the current environment for the multifamily sector in general and for AVB in particular.
As for challenges, we’re keeping a watchful eye on supply in some of our markets. We have developed our own internal models to project rent growth going forward which incorporate updated supply projections and which guide us in setting target returns to keep us from getting too caught up in the euphoria. I try to remind myself of the old quote about how the Federal Reserve’s job is to take the punch bowl away just when the party starts getting good—we’re determined to continue our track record of being good stewards of our investors’ capital.