Q3 2023 Avalonbay Communities Inc Earnings Call
Participants
Benjamin W. Schall; President, CEO & Director; AvalonBay Communities, Inc.
Jason Reilley; VP of IR; AvalonBay Communities, Inc.
Kevin P. O'Shea; CFO; AvalonBay Communities, Inc.
Matthew H. Birenbaum; CIO; AvalonBay Communities, Inc.
Sean J. Breslin; COO; AvalonBay Communities, Inc.
Adam Kramer; Research Associate; Morgan Stanley, Research Division
Anthony Franklin Powell; Research Analyst; Barclays Bank PLC, Research Division
Austin Todd Wurschmidt; VP; KeyBanc Capital Markets Inc., Research Division
Bradley Barrett Heffern; Analyst; RBC Capital Markets, Research Division
Connor Mitchell; Research Analyst; Piper Sandler & Co., Research Division
Eric Wolfe
Haendel Emmanuel St. Juste; MD of Americas Research & Senior Equity Research Analyst; Mizuho Securities USA LLC, Research Division
James Colin Feldman; Equity Analyst; Wells Fargo Securities, LLC, Research Division
John Joseph Pawlowski; MD of Residential and Health Care; Green Street Advisors, LLC, Research Division
John P. Kim; MD & Senior U.S. Real Estate Analyst; BMO Capital Markets Equity Research
Joshua Dennerlein; VP; BofA Securities, Research Division
Michael Goldsmith; Associate Director and Associate Analyst; UBS Investment Bank, Research Division
Richard Charles Anderson; Analyst; Wedbush Securities Inc., Research Division
Stephen Thomas Sakwa; Senior MD & Senior Equity Research Analyst; Evercore ISI Institutional Equities, Research Division
Presentation
Operator
Welcome, ladies and gentlemen, and welcome to AvalonBay Communities Third Quarter 2023 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.
Jason Reilley
Thank you, Rob, and welcome to AvalonBay Communities Third Quarter 2023 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. This 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 Ben Schall, CEO and President of AvalonBay Communities, for his remarks. Ben?
Benjamin W. Schall
Thank you, Jason, and thank you, everyone, for joining us.
In keeping with our custom, we posted a presentation last night to accompany our earnings release. In addition to my opening comments, you will hear from Sean on our operating performance and revenue building blocks for 2024; from Matt, on the significant earnings being generated by our development projects and lease-up; and from Kevin, on the strength of our balance sheet.
I want to start with my thanks to the AvalonBay team and our 3,000-plus associates for delivering another strong quarter of financial performance and operating results. Particularly in the current environment of higher interest rates and uncertain cap rates, we are laser-focused on driving cash flow growth from our portfolio. The bottom line results from our operating model transformation, led by our on-site and centralized teams and powered by our technology, revenue management and data science teams and proprietary systems, continue to outpace expectations.
Our strong operating performance also speaks to our portfolio positioning, which is 70% suburban and primarily in suburban coastal markets, which continue to benefit from a combination of steady demand and limited new supply.
Turning to Slide 4 in the presentation. We grew core FFO by 6.4% in Q3, which was $0.06 ahead of our expectations. This outperformance was primarily driven by better-than-expected revenue growth, which positions us well as we enter the traditional slower leasing season.
As shown on the bottom of Slide 4, we have raised $855 million of capital this year at a 4.3% initial cost, which includes the drawdown of our $500 million equity forward, which we priced at $250 per share, and with the remainder coming from asset sales that we've sold at an average cap rate of 4.7%.
We completed three development projects in Q3, two in suburban submarkets in the Northeast and one in Miami, at a 7.2% stabilized yield. As Matt will emphasize later, our lease-up communities continue to outperform our original expectations by a wide margin. These projects are funded with yesterday's capital, at yesterday's capital cost and are slated to generate outsized value creation and earnings for investors.
We also started two projects this quarter, one in Princeton, New Jersey and one in South Miami, with projected yields in the mid-6% range. I will come back to our positioning on new development and capital allocation at the end of our prepared remarks.
In Q3, we made $50 million of commitments under our structured investment program, or SIP, and feel fortunate to be building this book of business in today's environment, with these new commitments generating an attractive 13% return.
Slide 5 provides the breakdown of our Q3 revenue outperformance relative to guidance from the end of July, with a 30 basis point uplift from higher-than-expected occupancy, 20 basis points from higher rates and 10 basis points from improving bad debt.
Turning to Slide 6. We've exceeded and raised guidance 3x this year. We now expect core FFO to grow 8.6% in 2023, which is 330 basis points above our initial expectations for the year. Same-store revenue growth expectations are up 130 basis points. Expenses are down slightly, leading to NOI growth of 6.3%.
And with that, I'll turn it to Sean to comment on the favorable demand and supply drivers in our markets and provide a fuller operating update.
Sean J. Breslin
Thanks, Ben. As we start to look forward to 2024, I thought I'd provide some initial thoughts on two topics. First, I'd like to highlight a few macro factors that will support the performance of our portfolio in the coming year. And then second, share a few building blocks as it relates to the outlook for 2024 revenue growth specifically.
Starting on Slide 7, we believe our portfolio is well positioned as it relates to rental affordability, particularly as compared to other regions of the country and single-family for sale product. In Chart 1, you can see that rental affordability in our established regions is actually better than pre-pandemic levels, given the strong wage growth that's been experienced over the last few years.
And in Chart 2, the difference between the cost of owning a median-priced home and median rent in our established regions has increased by roughly 10x if you look at the first 3 quarters of 2023, relative to the average during 2020, which certainly makes apartment living the more attractive option in these regions.
We've already seen the impact of this trend in multiple data points. For example, the volume of existing home sales in our established regions has declined by roughly 25% over the past year. And in our own portfolio, the percentage of move-outs to purchase a home has dipped below 10% this year, well below the mid-teens long-term average.
Moving to Slide 8. Our portfolio is also relatively insulated from new supply, particularly as compared to the Sunbelt. In our established regions, we expect new multifamily deliveries of approximately 1.5% of existing stock. And in the specific submarkets where we own assets, new supply is projected to be roughly 1% of stock. This bodes well for revenue growth in all market cycles, but is a particularly valuable attribute of our portfolio if we experience a weaker economic environment during 2024.
Transitioning to Slide 9. I'd like to highlight four specific building blocks for 2024 revenue growth. First, the embedded growth in the rent roll from leases we've executed during 2023 stands at approximately 1.5%, which is above our long-term average at this point of the year.
Second, our current loss-to-lease is roughly 2%, led by the East Coast at about 2.5%, while the West Coast and expansion regions trailed behind at approximately 1.5% and 70 basis points, respectively. Third, we continue to drive incremental revenue from our operating model initiatives.
For example, the September revenue from our AvalonConnect offering was about 40% greater than the average monthly revenue for the first 9 months of the year, and that monthly revenue run rate will continue to grow during the last 2 months of 2023 and throughout 2024.
Lastly, we're expecting a continued tailwind from the normalization of bad debt. During the first half of the year, underlying bad debt averaged approximately 2.7% as compared to the Q3 average of roughly 2%, and we expect continued improvement as we move through 2024. The benefit from an improvement in underlying bad debt will be partially offset by the loss of rent relief we've recognized in 2023, but still be a net meaningful benefit for 2024. Taken together, these building blocks should support healthy revenue growth during the upcoming year.
So with that, I'll turn it over to Matt to address our lease-up activity and structured investment platform. Matt?
Matthew H. Birenbaum
All right. Thanks, Sean. Turning to Slide 10. Our lease-ups continue to deliver outstanding results, laying the foundation for strong future growth in both earnings and NAV. We have five development communities that had active leasing in Q3, and those five deals are leasing up at rents that are $485 per month, or 17% above our initial underwriting. This, in turn, is driving a 90 basis point increase in the yield on these investments to 7.4%, far above any estimate of current cap rates and even further above the cost of capital we sourced to fund these deals back when they broke ground several years ago.
After a relatively light year of deliveries in 2023, we do expect to see a significant increase in our apartment completions in '24, which will provide incremental NOI and FFO as these communities reach stabilization.
Slide 11 provides an update on our structured investment program, where we initiated two new investments last quarter to lend $52 million at an all-in average interest rate of 13%. As we've discussed on prior calls, these are 3- to 5-year investments where we provide capital to merchant builders that sits above the construction loan, but below common equity in the capital structure.
We're still early in the buildup of this new line of business and expect it to continue to grow to roughly $400 million over the next few years, providing a nice tailwind to earnings growth as these dollars get invested and start earning a return. We're also fortunate that we're able to underwrite most of this business in today's more restrictive environment, providing a strong risk-adjusted return, particularly for the latest additions to the program.
And with that, I'll turn it over to Kevin.
Kevin P. O'Shea
Thanks, Matt. Turning to the next two slides. We continue to enjoy tremendous financial strength and flexibility, both from a balance sheet and a liquidity perspective. Specifically, from a balance sheet perspective, as you can see on Slide 12, we enjoy low leverage with net debt to EBITDA of 4.1x, which is below our target range of 5x to 6x. Our interest coverage ratio and our unencumbered NOI percentage are at near record levels of 7.5x and 95%, respectively.
Our debt maturities are well laddered, with a weighted average years to maturity of 7.5 years. And our development underway is nearly 100% match-funded essentially with yesterday's lower cost of capital, which, in turn, helps ensure that these projects provide earnings and NAV growth when they are completed and stabilized.
In addition, from a liquidity perspective, as shown on Slide 13, we continue to maintain a high level of excess liquidity relative to our open commitments for development and structured investment products as of quarter end. Specifically, we enjoy $1.5 billion of excess liquidity. And so as a result, we continue to enjoy tremendous financial strength and stability and the flexibility to pursue attractive growth opportunities that may emerge across our investment platforms in the coming months.
And with that, I'll turn it back to Ben.
Benjamin W. Schall
All right. Thanks, Kevin. We have consistently maintained a strong balance sheet throughout cycles. And as a result, we are well prepared for the current environment. As we have shown over the past couple of years, we proactively adjust our capital sourcing and capital allocation activities based on changes in the environment, as emphasized on Slide 14.
We locked in our equity forward in early 2022 to prefund future development activity. We shifted in the second half of 2022 and in 2023 to be a net seller of assets, with a portion of the proceeds being utilized to fund acquisitions as we reshape the portfolio and the balance to fund accretive development. And we have continued to be responsive in adjusting our development start activity, reducing starts last year and this year as our cost of capital changed.
As we've emphasized, we are 95% match-funded on our development underway, which means all of that capital has already been raised at an attractive initial cost and allows us to deliver projects in 2024 and 2025 that will generate significant earnings and value.
On a go-forward basis, we have raised our return requirements on new development. For a standard development deal, our target return was in the low to mid-6s in the middle of the year and is in the mid-to-high 6s today. These target returns are up over 100 basis points since last year, with the goal of underwriting 100 to 150 basis points of spread between development yields and market cap rates.
We expect to be in the lower development -- we expect to be in a lower development start environment in the coming quarters and with spreads at the tighter end of this range after a number of years of outsized development profit margins. And while in the current environment we're focused on maintaining our balance sheet strength, we do believe that we are well positioned, given our low leverage, ample liquidity and unique strategic capabilities, to capitalize on opportunities that might result from market dislocations. In the near term, while volumes are modest, we're able to deploy capital at double-digit returns through our SIP program.
Slide 15 concludes our prepared remarks with our key takeaways. We continue to deliver strong operating results with tailwinds specific to our suburban coastal markets, incremental NOI to come from our developments and lease-up and all supported by a fantastic balance sheet.
And with that, operator, please open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from Eric Wolfe with Citi.
Eric Wolfe
I think you said that you raised your development yields that's underwritten to be mid-to-high 6s. Just curious why you think that's the appropriate level? And what percentage of your future development pipeline with that criteria? So if you just take your rights pipeline and everything else, what percentage would be started under that criteria?
Matthew H. Birenbaum
Eric, it's Matt. I guess I can speak to that one a little bit. As Ben mentioned, we're really trying to preserve that spread of 100 to 150 basis points between cap rates and development yields. And so mid-to-high 6 is a reflection of where we think. It's very hard to know where spot cap rates would be today. I think that we had a pretty good sense of where they were over the summer when transaction activity has started to pick up. With the most current rise in rates, it's a little bit of a guess.
But if you think cap rates are maybe in the mid-5s, then that would translate into development yields in the mid-to-high 6s to preserve that spread. It does vary by product type and by region, of course. But -- so that's really kind of the thinking behind that.
And as it relates to what percentage of the current book meets that threshold, it's actually hard to say because things are moving around so much. And what we found is that until we have CDs, permits in hand, hard drawings to bid on the street, we don't really know where hard costs are today. They are starting to come down, but you don't necessarily realize that on estimates, that you really only realize that when you're ready to go.
So what I would say is we have plenty of deals that do clear that hurdle. And indeed, we just started two deals this quarter that were in the mid-6s. And we have at least a couple more that could start over the next couple of quarters that we think are kind of in that position.
We do have some that, on the most current underwriting from 6 to 12 months ago, will probably fall a little bit short of that. And in many of those cases, we're hoping that with some value engineering, maybe some changes to the land economics with the landowner and changes in hard costs, that by the time those deals are ready to go, they will meet that.
Eric Wolfe
Understood. That's helpful. And then you gave some good detail on the building blocks for same-store revenue growth for next year. Obviously, the one piece that's missing is just your expectation around what market rents will do. And I know it's too early to provide that, but I was just hoping you could give us a sense for the process that you go through in terms of figuring that out, whether you're building up or down, and then sort of if you were to do it today, if you just have a sense for what market rate growth would look like.
Sean J. Breslin
Yes, Eric. It's Sean. Good question. Good crystal ball question, I guess, I'll characterize it as. But we sort of do two things. We have a macro view and then there's sort of a grassroots bottom-up approach.
From a macro perspective, in terms of providing commentary today, that's probably where I'd spend the time, which is based on what we know today, we would anticipate that from a demand standpoint, things would decelerate as we move into 2024, just given what we've been seeing in terms of the expectation for slower job and wage growth and other potential headwinds as it relates to whether it's oil prices, obviously, interest costs, student loans, et cetera, et cetera. There's a number of macro factors that appear to be more headwinds.
We take a really good look at the naive consensus forecast for a number of macroeconomic variables at multiple points throughout the year. But certainly, when we get into January, the latest forecast helps drive our outlook for 2024, like it does for pretty much every calendar year.
And then we line that up with what we're seeing on the ground in terms of what actually it's going to deliver as we re-scrub our supply pipeline, et cetera, to try and estimate what affected market rent growth would be based on the algorithms we use.
So it really is, again, a sort of macro top-down as well as a bottoms-up approach, depending on the variables that you're looking at. In terms of today, it's hard to provide an estimate other than, as I mentioned, we would expect a softer demand environment in 2024 as compared to '23 based on the current sort of consensus outlook for macro variables.
Operator
Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets.
Austin Todd Wurschmidt
More near term, I guess, has the moderation in lease rate growth been partly strategic as you sought to backfill some of the occupancy you lost around midyear? And then you've just kind of continued to build occupancy into the softer part of the leasing season. Or is this more related to the pockets of softness across the portfolio like in Northern California, it looks like, and then also in some of your expansion markets?
Sean J. Breslin
Yes. Austin, good question. I'd say it's kind of a mix of those answers, frankly. At the early part of the third quarter, I would say it was more a reflection of our efforts to build occupancy, which was successful in a number of markets. Combined with, I'd say, one or two places that continue to remain soft and even a little softer as we got to the end of the third quarter. And I would certainly point to Northern California as the primary region where we experienced that. So really, a combination of two things as it relates to what you saw in rent change through the quarter as well as into October.
Austin Todd Wurschmidt
And then just on the external growth side or just investment side. I mean how are you feeling about the size of the development pipeline? And based on what you do know today, do you think that as those deliveries and completions kind of pick up next year, are you going to be able to maintain the size of the pipeline in '24? Or do you think your dollars and dry powder are better spent on new acquisitions just given the risk reward profile and some of your strategic goals of getting into those expansion markets?
Benjamin W. Schall
Austin, I'll start with that. It's Ben. So on the developments we have underway, we do have strong conviction that those are going to continue to create meaningful earnings and value. And we obviously got good visibility there on when they're going to be delivering.
And as we head into 2024 and 2025, do expect a fairly significant ramp-up of that activity. It may not be quite at the same outperformance levels that we've seen over the last year, but still expecting strong performance out of that pool.
As we think about new capital and the decision-making process there on the development side, I think we've been very clear. We want to make sure if we're going to undertake new development that there's a sufficient profit margin relative to underlying market cap rates. Another way of saying, we want to make sure there's sufficient profit margin to where we could buy an asset.
And in today's environment, there's been opportunities in both. There are certain markets and certain projects that we've been able to structure for new development where we're able to obtain sufficient spreads. And there are other markets, and you saw this in some of our acquisition activity over the last quarter or two, as an example, in Dallas, where we're able to buy assets below replacement cost and start to build the portfolio in those markets.
So it's a multifaceted approach. We're fortunate in that we have multiple levels to grow over time. And as we've emphasized, it's on us as a team to make sure that we continue to stay flexible in that approach and change our approaches depending on what's happening in the market environment as well as what's happening with our cost of capital.
Operator
Our next question comes from John Kim with BMO Capital Markets.
John P. Kim
I wanted to ask on leasing trends in some of your markets, specifically Northern California, which looks like the lease growth rates kind of nosedived in September and October. And that diverged from Seattle, which is a similar market in terms of tech job growth, where you saw an improvement. But can you just discuss the demand picture? And why there was such a difference in performance in those two markets?
Sean J. Breslin
Yes, John. It's Sean. Good question. There's a couple of different answers to that. So first, as it relates to what you saw in Seattle, which also occurred by the way, in the Mid-Atlantic and Denver, is that we're just starting to get into a period, particularly as we get further into the fourth quarter here, where the comps are easier on a year-over-year basis. And that's a reflection of the step-up that you saw in rent change in those three regions in a more meaningful way, particularly in Seattle, as you may have noticed.
Whereas in Northern California, most concentrated in San Francisco, I would say, which is only 30% of our Nor Cal portfolio. Things did soften more so, particularly as we got to sort of mid-September into October, and that's what's reflected in the rent change you saw as it continued to tick down through the quarter and then more meaningfully into October.
And I think there's a couple of things there. One is San Francisco, just to pick on it, since everyone seems to like to lately. It's -- there's a number of different headwinds there. As I think we're all well aware of, probably not the best time of the year to be seeing some elevated demand there. It's just not the case.
And there's not really a great reason for people to be coming back to the office at this point still. So fundamentals have remained weak, and they did get weaker as we moved through the quarter into October. So trying to know exactly what's underneath that other than weaker demand overall, it's hard to be precise. But I'd say we did not see the same level of weakness in Seattle, and you combine that with the year-over-year comp in Seattle, and that's why you saw the uptick there.
So Seattle is still not strong. But on a relative basis compared to last year, for example, where there was a lot of short-term leasing activity throughout the year and then it burned off in the third quarter, put more pressure on rates at the end of Q3 and Q4. We didn't have a lot of that short-term demand in 2023 and, therefore, the year-over-year comp is easier.
So not to get too far into the weeds, but that's some insight into what you saw in a place like Seattle as compared to Northern Cal.
John P. Kim
That's very helpful. My second question is on bad debt, which you discussed, has improved this year and is likely to be a tailwind in '24 earnings. My question is how much of an improvement can you see from the 2.1% pre-resident relief funds that you got this quarter? And in particular, Southeast Florida was, surprisingly, your worst-performing market in bad debt. And I was wondering if you could provide some commentary on that.
Sean J. Breslin
Sure. So on the first question, as it relates to bad debt, so 2023, if you look at the beginning of the year to sort of where we're trending today, just sort of rough justice, there's about 100 basis point improvement in underlying bad debt, roughly 3%, down to sort of trending around 2% today.
We've seen improvement across almost all regions, Florida kind of being the outlier, as you noted. But I think what we've seen in 2023, there was meaningful improvement in a market like Southern California, which started the year at roughly 6%, and now we're below 3%, as compared to some other regions that certainly improved but it improved at a more modest rate.
So as we look forward to 2024, I think the expectation for continued improvement is there. But it may be at a slightly lower rate than what we experienced in 2023, given the meaningful improvement that we experienced in Southern California.
And now we're down to some regions, like New York as an example, where things are moving a little more slowly. So the pace of improvement throughout 2024 may be slightly lower than what we experienced throughout 2023, if that makes sense.
But the other thing to keep in mind is that we will have some meaningful improvement, but it will be partially offset by the loss of rent relief that's going to be, call it, roughly $7 million that we're not expecting to recognize in 2024 that we did recognize in 2023. So these are some of the building blocks as it relates to bad debt that hopefully are helpful.
As it relates to Florida, specifically, what I would tell you is where we've seen elevated bad debt and frankly, it's been beyond our expectations. It's really been in Miami and Fort Lauderdale. The West Palm Beach market has held up kind of where we would have expected it would have been, but it has been elevated in the other two markets beyond what our expectation was.
Operator
Our next question comes from Adam Kramer with Morgan Stanley.
Adam Kramer
Wondering where you're sending out lease renewals for November and December at?
Sean J. Breslin
Yes, Adam. We sent them out at 6% for November and December, which is relatively consistent with what we quoted for where we were for the 2 months of Q3 on the last call. We have seen in some markets a little more degradation in terms of the committed offer to realization. But it's still within sort of the 150 to 200 basis point range, where we're seeing renewals come in at 4% to 4.5%, depending on the more recent time period you're looking at.
Adam Kramer
Got it. Helpful. Yes. And then maybe just another quick one. Just remind us kind of where -- or in the most recent quarter, where -- what the percent of move-outs to buy a home was?
Sean J. Breslin
Yes. As I mentioned in my prepared remarks, it's been trending below 10% all year. It's about 9.5% in Q3. I think we're roughly 9% for Q2, so it has been trending down. As I mentioned, the long-term average is kind of in the mid-teens, and it's been as high as the sort of high teens kind of pre-GFC.
Adam Kramer
Great. And maybe just one last quick one for me, if that's okay, which is just from the bad debt kind of progression. I'm not asking for kind of a specific time frame or number necessarily. But if you think about kind of the recovery path back to pre-COVID levels, first of all, I guess, is that kind of the goal? To kind of -- or is it achievable, I guess, to kind of get all the way back to pre-COVID levels? And then kind of what's the rough kind of time frame for getting back there?
Sean J. Breslin
Yes. Good question. In terms of pre-COVID levels, which are typically, call it, 50, 60 basis points for us, the question is whether it's going to be a new normal or not. I think probably, the industry expectations, given various regulatory changes that have occurred in both markets or across the country, that it might be ideal to get back to 50, 60 basis points. Maybe 70, 80 is more realistic. I don't think we really know yet.
And in terms of the time to get there, certainly, what I would say is I don't believe we'll get back to full stabilization by the end of 2024. I would expect it to carry into 2025. And what we really need to see is a little more movement as it relates to cases moving through the courts, particularly in markets like Maryland, D.C. and the Greater New York region.
As I mentioned earlier, we've seen significant progress in Southern California, 6% bad debt, down sub-3% now. We haven't seen anything like that in terms of percentage improvement in some of the other regions I just mentioned.
Operator
Our next question comes from John Pawlowski with Green Street.
John Joseph Pawlowski
Just a follow-up on the -- just the delinquent tenant conversation. As you work through the backlog of evictions and long-term delinquent units, do you expect a meaningful acceleration in repair and maintenance costs next year?
Sean J. Breslin
Yes. Good question, John. We can. We have seen some of that this year as reflected in what we've posted in terms of cost because there's, yes, just greater damage in the units. And obviously, you might be billing damage receipts back to the resident, but then you're pretty much immediately writing it off because you're not collecting it.
So I would say that, that has been elevated this year, and I would expect that, along with legal and eviction costs, to also remain elevated in 2024. It may not be a significant growth rate from '23 to '24, but it should remain elevated in both categories.
John Joseph Pawlowski
Okay. Sean, one market-level question. Can you just give us a color -- some color on the large sequential revenue decline in D.C. proper this past quarter?
Sean J. Breslin
Yes, D.C. proper, there's a number of issues there, as it relates to -- primarily, what you've got is sort of a seasonal issue. We have probably three assets there that have exposure to the student population near AU or other universities. And so you typically see that occur sequentially during that quarter, and then it bounces back in Q4. That's the most meaningful component.
There are other miscellaneous things as it relates to supply in the NoMa submarket and other things that you could overlay on top of that. But by far, the sequential change of the student population is the most meaningful one.
Operator
Our next question is from James Feldman with Wells Fargo.
James Colin Feldman
Great. I guess for my first question, can you just talk more about the acquisitions, both in the quarter and the October acquisitions? I guess what I'd love to hear about is how distressed were the sellers? How much did pricing move before you decided to buy the assets? Just any color on what the market looks like in pricing.
Matthew H. Birenbaum
Sure. It's Matt. I'll speak to that one. So again, just taking a step back here, we sold $445 million worth of assets this year, including one -- our last dispo, which will close at the end -- close next week.
And those were at a kind of a blended average cap rate in the high 4s. And those were kind of sold and priced throughout the year, i.e., a better pricing earlier in the year, softer pricing later in the year. We bought three assets for about $275 million, all in the last 60 days. Those cap rates were more like mid-4s.
And I would say, in no cases were the seller distressed. In one of those cases, we did assume some debt, which probably gave a little boost to the price. So -- and all of those assets, if we -- if they were to price in today's market, would certainly price at a higher cap rate than that. I don't know how much higher.
But same with the dispos. And again, what happened is we pivoted to being a net seller of assets, so we sell first. And in many cases, we're holding some of those proceeds for a 1031 exchange, and that's informing kind of our appetite on the buy side. So we were net sellers of $200 million or really more like $230 million after you factor in the assumed debt in terms of the cash proceeds we realized from it.
The other thing I'd say is when you think about what we bought versus what we sold, it is a good illustration of what we're doing with our portfolio allocation. We sold the four assets out of our established regions. They were, on average, 25 years old. We sold them at an average price of $450,000 a unit, and the average rents on those assets was $3,300 a month.
The three assets we bought were in Dallas and in the Greater Charlotte area. In all three cases, they are assets where we are able to add value through our operating platform in many cases. It's part of getting to operating scale in those regions. So we think that while the cap rate is in mid-4s, the yield is more like a 5.
Between some value-add, we're doing a little bit of light value-add, with washer dryers and some hard surface flooring. But a lot of it is just bringing it onto our operating platform as we get economies of scale in those regions.
And those three assets, on average, are 7 years old. We paid, on average, $245,000 a door, which is below today's replacement cost, as Ben mentioned, and average rent of $1,700. So a much more affordable price point, which we think has a much better growth profile.
James Colin Feldman
Okay. I mean MAA commented this morning that they're seeing developers cut rents so that they can get occupancy up and get assets ready for sale if they're having debt maturities.
So I guess sticking with kind of the distressed line of questioning, I mean do you think that's coming your way in your expansion markets? And then similarly, as you think about the SIP book over the next few years, I know you mentioned $400 million, but do you think this environment helps you accelerate that? And do you have a view on maybe what you could do over the next 12 months? And what kind of yields?
Benjamin W. Schall
Jamie, it's Ben. I'll step in. We're not seeing distress at this point. We do expect there to be some dislocation that comes through the system. And on the buying side, a couple of different areas in which we're hunting.
One is what Matt talked about, places where we can be adding to the density of our portfolio assets and nearby other assets, places where we can add incremental value by bringing the operating initiative activity over to our acquisitions. So that's very much top of mind.
Another potential pool, and we've been staying close to potential opportunities here, are deals and lease-up that maybe are coming up against nearer-term loan maturities. What we've been seeing there to date is situations where equity capital is putting more equity into those deals, effectively recapitalizing them and/or lenders who are agreeing to extend out those loans.
And so what you're finding is borrowers and lenders are agreeing to say, I'll extend it out, you get the step-up in the interest rate. Not going to be a lot of cash flow generated off of the asset but better to extend there, get the asset fully leased, then monetize it, at least for the types of assets in the markets that we're looking to acquire in.
Now that won't be the case, right, for all types of equity. There's going to be equity that doesn't have the ability to put in more capital, and it won't be the case for all types of lenders, right? There's only certain profiles of lenders that can extend out. So it's an area that we are staying close to.
Quickly, on kind of two other areas of opportunity, one on the land side. So our developers, as Matt talked about today, are actively reworking our existing pipeline, recutting deals, restriking deals. We're also out looking for new land opportunities. And in the current capital environment and our expectations for what that capital environment will be over the next year, we expect to see opportunities there.
Apparently, there's going to be less competition from merchant builders in those markets. So we'll be selective, but that could be a fruitful area. And then the third area of opportunity is providing capital to the third-party developers. And we have two programs there, DFP and SIP.
We'll be selective. But for sure, in terms of the quality of sponsor that's approaching us, the quality of the real estate that they have under control and the return profile of those deals, all of that is enhanced in this environment. And so that's another place that we can deploy capital accretively.
James Colin Feldman
So on the SIP, do you have a sense of how much you can deploy over the next year or so?
Benjamin W. Schall
So in the SIP, it's -- we have a target of building that book of business up to $300 million to $500 million over a couple of year period. Given the financing markets, it is tough for deals to pencil, but there are some that do.
We are very selective. These are deals we're underwriting not to own them, but to be comfortable owning them if we need to. And in places where we can get a 13% return, we think that's a pretty attractive source of capital. So it's an area of focus. I wouldn't necessarily say it's an area we're looking to accelerate activity. We want to build that book up in a measured way over the next couple of years.
Operator
Our next question comes from Michael Goldsmith with UBS.
Michael Goldsmith
My first question is on customer behavior. Can you provide a little color on traffic, the percentage of people looking to move out to buy homes, and just if you're seeing anything about residents doubling up? And related to that, I believe it seems like a long time ago, but November, December of 2022 was particularly weak and then it rebounded in -- early in 2023. So how are you thinking about the last 3 months? Do you expect the trajectory to repeat as it did last year? Or should we see some better growth in the fourth quarter here on the easier comparisons?
Sean J. Breslin
Yes, Michael. It's Sean. I'll take those. So in terms of customer behavior, I'd say the trends we've seen this year have remained relatively consistent. As I mentioned earlier, in response to a question in my prepared remarks, move-outs to purchase a home is well, well below long-term averages, sub-10%, and has been below there for some time now.
So not surprising, given everything you're experiencing in the single-family for sale market, in terms of run-up in values and rates and now the slowing market, et cetera, people are not terribly inclined to purchase a home. And renting is not only more affordable, but if you're sort of in a risk-off mode, you may not want to consider it anyways.
Nothing else notable, I would say, in terms of customer behavior at this point in time. As you noted, the year-over-year comp does get easier as we proceed further into Q4. So a little bit of that, as I mentioned, in October as it relates to the uptick in rent change in the Mid-Atlantic, Denver and Seattle regions.
And we do expect rent change to somewhat stabilize as we look at November and December. And while it won't be anything that's super terrific in terms of a significant rebound, as an example, it should be more stable than what we experienced last year based on what we know today.
Michael Goldsmith
And my follow-up question is related to taxes. The New York City tax burn-off was a significant factor in the real estate tax. What's the expected impact going forward? And how should we think about real estate tax for the expansion markets versus the coastal markets?
Sean J. Breslin
Yes. Good question. As it relates to property taxes, which are about 35% of our expense structure, we do expect another elevated year of tax pressure in 2024. Most of it related to the expiration of those tax abatement programs that we experienced this year. And the level of impact next year will be relatively similar to 2023.
As it relates to tax rate -- or just tax growth in the Sunbelt or our expansion regions versus the established regions, independent of the expiration of those tax abatement programs, certainly, I would expect more pressure in the expansion regions and the Sunbelt in general, given the significant run-up in values that they have experienced over the last 3 years, relative to the established regions. I think that's pretty clear.
There's always a lag effect. So the question is just which market, which submarket, tax jurisdiction, et cetera. But certainly, expect more pressure in those regions as compared to our established regions, which is still the majority of our portfolio.
Operator
Our next question comes from Joshua Dennerlein with Bank of America.
Joshua Dennerlein
I appreciate the disclosure on the two new project starts in the mid-6s. And then also how you're kind of beating that with the projects in lease-up right now. You've got 90 basis point higher spread. Just trying to...
Benjamin W. Schall
Josh, we're getting a lot of feedback on the call. We can't really hear you.
Joshua Dennerlein
Is that better?
Benjamin W. Schall
Not really. Why don't you dial back in, and we'll you back in the line.
(technical difficulty)
Operator
The next question comes from Steve Sakwa with Evercore.
Stephen Thomas Sakwa
I just want to circle back on the development. So are you guys planning development starts in the fourth quarter? Or is it up in the air? It sounded like, Matt, you had some things that would pencil on that, high 6%, maybe 7% range. But I'm just not sure if you actually were starting anything in the fourth quarter. And if we think about '24 starts, would those most likely be back half-weighted to give yourself some time to kind of see how the economy plays out here?
Matthew H. Birenbaum
Yes, Steve. Yes, we may well start a deal in the fourth quarter that would be on similar economics to the Q3 starts. Again, we're 95% match-funded on development underway today. So if we have deals that we think make sense, we think we do have some room there.
So I wouldn't be surprised if we have a similar level of start activity in Q4 to Q3, maybe whether it's one or two deals, I don't know. When we think about '24, I think you're probably right. It probably is more back half-weighted based on kind of how the capital markets evolve and kind of our access to and pricing of new capital that would fund that business.
But we've been in a -- again, for us, if we track to roughly $800 million in starts this year or maybe a little bit under that, that would be a pretty light year for us and certainly lighter than what we expected going into the year, which was the same last year. So we're at a pretty modest level of starts volume relative to our kind of long-run capacity and averages. And that's a response to what we're seeing in the markets, but I don't think we would view that as a significant level.
Stephen Thomas Sakwa
Got it. And then just secondly, on expenses, they've come in a little bit better than what you originally guided, but still kind of elevated in the 6-plus range. Just as you think about the puts and takes into next year, how do you maybe see expenses trending? What might be a little bit better and what overall might be still headwinds into next year?
Sean J. Breslin
Yes, Steve. It's Sean. I can take that one. I mean we do expect 2024 to be another somewhat elevated year, primarily due to a few factors I can touch on. One, I mentioned earlier, property taxes, which is about 35% of our expense structure. We do expect it to grow at an elevated rate due to the expiration of those tax abatement programs that I mentioned previously.
The PILOT burden in 2024, the burn-off there is relatively similar to 2023, before we see it begin to step down in 2025. Utilities, which is about 12% of the expense structure. The continued implementation of our AvalonConnect offering, which is a profitable endeavor, we're expecting kind of $25 million of incremental NOI from that program. But it is a burden on OpEx growth as it's being implemented, and we do expect that to be continuing through 2024 as well.
And then two other sort of pressure points really are going to be insurance. Even though it's only 5% of OpEx, it's still a difficult market. We'll be trying to mitigate that pressure through the use of our captive and other strategies to help offset it relative to market growth rate. But it still maybe elevated relative to sort of normal trends.
And then the last one is the repairs and maintenance and legal costs, which I mentioned earlier, is a result of continuing to move out sort of the nonpaying residents and puts pressure on turn costs, legal and eviction cost, et cetera. Some of that will be offset by continued benefits from the initiatives, particularly on the payroll side of things. But certainly, we won't be able to offset all those other macro trends that we'd see occurring in '24 similar to '23.
Stephen Thomas Sakwa
So not to maybe put words in your mouth, Sean, but it sounds like the 6.3%, I don't want to call it a run rate, but it doesn't sound like there's a lot of nonrecurring that would really burn down. It sounds like expenses could be kind of in that ballpark for next year or maybe a little bit better, but elevated, I guess, relative to history.
Sean J. Breslin
Yes. I think the elevated relative to history is the operative statement there. I think that's appropriate. There may be a little bit of relief in some areas. Like in utilities, we should have some better contracts in '24 relative to '23. But we still do have the AvalonConnect offering. Again, it's profitable, but moving through the year. So I think your phrase is generally in the ballpark.
Operator
Our next question comes from Connor Mitchell with Piper Sandler.
Connor Mitchell
So my first question, you guys talked about distressed deals in the environment a little bit. So I guess I was just wondering, when you guys approach distressed deals in taking over private deals, how does it compare for the underwriting of those deals versus your internal underwriting? Are the assumptions similar? Or do you guys have to make a lot of adjustments? And maybe also that can relate to the SIP program you were discussing earlier about how you underwrite those in the case you have to take over a project.
Matthew H. Birenbaum
I guess I can try and take that one. It's -- we underwrite everything more or less the same, which is we develop our own view of what we think the NOI is going to be and where we think the asset value would be.
And so in the SIP, frequently, almost always, the sponsor will provide a projection of NOI that we think is overly optimistic. And again, we have a lot of data that we can leverage to do good underwriting in these programs. And the fact that we own and operate assets and have real rent rolls and everything else in all of these markets is one reason why we think that this is an appropriate place for us to invest in a prudent way and leverage our capabilities and our proprietary data.
So we get their underwriting. We kind of -- I won't say we throw it in the trash, but we do our own underwriting. And based on that, we come up with our own view of where we think the NOI would be for that asset, very similar to if it was an asset we were developing. And then we build in a margin of safety on that when we think about how high we're willing to lend in the capital stack under the expectation that, again, we're going to be paid back out of an asset sale in the back end.
And -- but we are prepared to step in at our lender basis and have the view that if we have to step in at our lender basis because they can pay us back, that would not be a bad outcome for us from an investment point of view, the basis we would be in that asset. So there are some assets we just wouldn't lend on because we wouldn't be prepared. We wouldn't want to own them really under almost at any price. So that's one of our screens in the SIP.
As it relates to acquisitions or development, it's kind of the same. We'll just look at where we think the deal should underwrite. And based on that, we'll formulate a view of what we think it's worth and make an offer and see if we can tie it up.
Sean J. Breslin
Connor, maybe just to add one thing. I'm not sure if this is exactly where you were going, but we do try to apply what we think is sort of a market-based underwriting given our standards.
Matt was mentioning earlier. We may be buying a deal at what we think is a -- we'll pick a number, a 4.5% cap, 5% cap, 5.5% cap. But when we bring it on our operating platform, we made use of 50, 60, 70 basis points from our own sort of operating platform. We would not underwrite the benefit of it being on our platform and have that reflected in the value of the asset. It would be based on sort of a stand-alone asset, with the sort of market-based underwriting, with our scrutiny of it, if that's where you're going.
Connor Mitchell
Yes, I appreciate that. That's great color. And then my second question, and apologies if you guys have already mentioned this. But how much of the improved earnings outlook is driven by developments versus operations?
Kevin P. O'Shea
I mean in terms of -- Connor, are you talking about the third quarter update relative to the midyear re-forecast? We have a page in our earnings release that will detail that for you, and it is on Page 5. And you can see there that, as you recall, our midyear re-forecast for core FFO for the year was $10.56. It's now $10.63, so a $0.07 increase. If you kind of go down the line there, you can see that $0.04 comes from improved same-store residential revenue, $0.01 from improved same-store residential OpEx, and then there are some puts and takes in terms of overhead and other that get you the additional $0.02 there.
Operator
Our next question is from Brad Heffern with RBC Capital Markets.
Bradley Barrett Heffern
So you guys reported a negative 80 basis point new lease spread in October. I'm curious how that compares to normal for this time of year and just generally how things are progressing versus the normal pre-COVID seasonality.
Sean J. Breslin
Yes, Brad, good question. I don't know if there's a normal per se for October. But I mean, generally, what I would describe for rent growth throughout the year is that it's a typical seasonal bell curve. We typically see rents run up from January to July or August, a 7% range or so an average year, and then they decelerate down by 4% or 5%. For this year, if you look at it sort of on average, point-to-point from January through year-end, you might see effective market rent growth in the 2.5% range, somewhere in that ballpark. And what I would say in general about what we've seen in the back half of this year is slightly less seasonality across most markets, with one exception being Northern California. That has been more seasonal than normal, relative to its history.
Bradley Barrett Heffern
Okay. Got it. And then I think in the prepared remarks, you talked about hard costs and said that you're not really seeing cost savings in bids, but you expect to see them when they actually start going. Can you give us some color of where you think real hard costs in real life have actually gone?
Matthew H. Birenbaum
Sure, Brad, it's Matt. I guess I'll speak to that a little bit. It is very regional. So where we've seen hard costs come down, say, compared to this time last year, we've seen it a little bit here in the Mid-Atlantic, maybe 5%. We've seen it in Boston, maybe to a little bit more significant degree, 5% to 10%.
And I think we are starting to see it in Northern California, where it's just been very, very soft for a while now. We have not yet seen it in Seattle. We haven't yet seen it -- maybe a little bit in Austin. But costs went up so much there that it's not, I would say, super meaningful yet.
So we haven't necessarily seen it as much in the Sunbelt markets yet, Denver, Southeast Florida, but we think that it's coming there. And I would caveat that by saying for us and others, that's what I was saying before, the best data is where you have a deal that's ready to go and you really can hard bid it. And we don't have deals that were hard bidding in every region at this very moment.
So it's hard to tell until you're at that place. So we're getting kind of discrete data points. And where we have them, it's very helpful because we do think, again, kind of like with the rents, that gives us a little bit of an informational advantage to have a real sense for what's going on in real time. But it really does vary based on the regional dynamics within each region.
Operator
Our next question comes from Rich Anderson with Wedbush.
Richard Charles Anderson
Just a question on expansion market and the process to getting in there. The word was used staying flexible about an hour ago. And I'm wondering, does the methodical way by which you're growing there offer you -- is that, what's the word, keeping you informed, I guess, and allowing you to pivot one direction or another?
Or if you had a chance to do it perfectly in one fell swoop, and everyone would stand up and applaud the transaction, if you could get there all at once tomorrow, would you do that? So how committed are you? And a related part of that question is how is the Sunbelt performing? Not so much relative to the urban coastal areas where everyone knows that. But how is it performing relative to your expectations? And is it getting -- is it even more interesting to you, even though it's underperforming relative to other areas of the country at the present time?
Benjamin W. Schall
Rich, it's Ben. Let me make a couple of comments. First, in terms of our long-term framework of moving 25% of our portfolio to our expansion markets, that remains. Primary drivers of that: one, the recognition that our core customer, our knowledge-based worker, is in a more dispersed set of markets. And second, we can take what we do well, bring it to those markets in order to generate incremental value for shareholders.
In terms of pacing and timing, we are seeing softness. We're starting to see some dislocation in our expansion regions, and we see it as a potential opportunity. It's an opportunity to potentially be buying assets below replacement cost, which we have started to do, and in a development market that maybe has less players in it or players that don't have the same access to capital or the same cost of capital that we do to be able to selectively step into some attractive development opportunities there.
There could be -- you fast forward, I don't think it's today, where we'd be looking to accelerate our movement given where our cost of capital is. But there could be an environment at some point over the next couple of years where something more substantial does present itself, and that could make -- that could, at that point, be the right risk-adjusted return decision. So it's on our radar. We're continuing to grow through our own development, through acquisitions and funding of third-party developers, and we'll keep our eyes out for larger opportunities as well.
Richard Charles Anderson
The follow-up question is to Kevin, perhaps. The 4.1x leverage, the target of 5 to 6, I mean, how do you ever get to that target anytime soon given the rate environment? And maybe one way is debt assumption, which was a part of a transaction you mentioned earlier. Is there any realistic lift to 4.1 in this environment? Or could there be transactions here and there where you add debt at reasonable costs through your transaction activities?
Kevin P. O'Shea
Sure, Rich. Again, it's Kevin. So I appreciate the comment. It's an interesting question. We discuss and debate internally here. As you point out, we are 4.1x net debt-to-EBITDA levered, relative to a 5x to 6x target range, which is sort of a -- it's been a long-term target range that we've had for more than a decade, which speaks to sort of a normalized environment.
If you look at the 4.1x, it's benefited from cash. If the cash weren't there, we'd be kind of in mid-4s, just as a further contextual comment. But more broadly, if you look back at the last 4 years or so, I don't think anyone would agree we've been in a normalized environment from the pandemic and its effects as it's moved through.
And as you think about how things have played out this year, we are at that low 4x leverage level in part because of our capital decisions over the last few years. And this year's capital plan, where we've essentially -- will have paid off about $750 million of debt this year and brought in about $750 million of new and recycled equity from the equity forward and the net disposition activity, that's deleveraging and not necessarily reflective of a normal year. But -- so this wouldn't have been our capital plan normally, but it has proven to be the right capital plan for this year.
And what that does is it gives us financial flexibility to deal with an uncertain and volatile capital markets environment, liquidity and strength to deal with an environment where we may wish to be patient in terms of additional capital formation, given the recent rise in debt rates.
And I guess to the point that you're getting at, it also gives us leverage capacity to the extent we wish to seize upon certain investment opportunities, whether they are in our established markets or in our expansion markets that we view as attractive, where we can bring the strength of our balance sheet to bear and potentially rely on a greater than normal level of debt that may be attractive relative to those opportunities and lean into the balance sheet and generate some growth in that regard.
So we are certainly willing and able to get to that 5 to 6x leverage in the right circumstances. I will note that there are some times when we've gotten there in less than desirable circumstances, such as 3 years ago in the pandemic, when -- we actually were 5.4x net debt to leverage EBITDA in Q3 of 2020, but that's sort of preparing the balance sheet for a downturn.
So given where we are, it's a low leverage level, but we think it's appropriately so because it gives us strength to deal with potential challenges that could happen ahead as well as strength to deal with potential opportunities that we hope will be in front of us.
Operator
Our next question comes from Haendel St. Juste with Mizuho.
Haendel Emmanuel St. Juste
I appreciate the color earlier on the renewals for October, November, color on October new lease rates. But I didn't catch if you did provide them, your expectations for new lease rates into the year-end, so maybe some color there. And then what would that imply for a full year '24 earn-in?
Sean J. Breslin
Yes, it's Sean. Just -- I didn't provide specific insight into the expectation for new move-in lease rates in Q4. The one data point we did provide is that renewal offers went out in the 6% range. And similar to what we've been seeing in the last few months, I would expect them to settle sort of in, call it, 150 to 200 basis points dilution off of that, so kind of 4% range, maybe 4.25%.
One thing to keep in mind that I mentioned earlier is the comps do get a little bit easier in November and December. And that's why in markets like the Mid-Atlantic, Denver and Seattle, you saw an uptick in rent change in October. So all else being equal, we expect sort of relatively, I'll call it, stable glide path through year-end as it relates to lease rates.
The earn-in, we provided kind of a snapshot of the earn-in on the slides that we presented or posted last night at about 1.5%. My expectation based on what I know today is that may soften a little bit between now and year-end, but haven't necessarily put a number to it yet.
Haendel Emmanuel St. Juste
Can you give us an update on the loss-to-lease in the portfolio and perhaps where it's highest and lowest?
Sean J. Breslin
Yes, that was posted on the slide as well. We recorded loss-to-lease roughly 2%, led by the East Coast markets, north of 2%, and then the West Coast and expansion regions trailing roughly 1.5 points at around 70 basis points in the expansion regions.
Haendel Emmanuel St. Juste
Okay. And then last one, and apologies if you already touched on this. But are there any markets that you commented that you're seeing an acceleration in concessions or perhaps more aggressive lease-up for merchant developers?
Sean J. Breslin
Yes. The one market I mentioned a couple of times earlier that has been softening more recently is Northern California, most notably San Francisco, but to a lesser extent, San Jose as well.
Operator
(Operator Instructions) Our next question comes from Anthony Powell with Barclays.
Anthony Franklin Powell
I guess a question on the expansion region, loss-to-lease of 70 basis points, which is maybe better than you would think, given all the concern about supply growth in some of these markets. Is any one market driving that positive loss-to-lease? And do you think expansion markets could be a positive contributor to your same-store revenue growth next year?
Sean J. Breslin
Yes, good question. I'd say what -- where it's coming from, for the most part, is a blend of Southeast Florida and what we've experienced a little bit that's going to be coming online in the Texas market. Where it's a more challenging environment is in Charlotte, which as you may have noted, the expansion region, rent change is negative. That is effective with the Charlotte market.
Three assets in the south end of Charlotte, there's a lot of supply coming online there. It's a great submarket. We love the submarket. When we bought the assets, we knew there would be a fair amount of supply in the first 2 or 3 years of ownership, which is what we're experiencing today. But we believe we acquired them at good values.
So it's probably a little too early to tell you what 2024 is going to look like there specifically. But anything that's coming through will probably be Texas and maybe a little bit in Southeast Florida and really not much, if anything. And we might be even be in a gain-to-lease situation in Charlotte.
Operator
Our next question comes from Joshua Dennerlein with Bank of America.
Joshua Dennerlein
I'm back. Hopefully, you can hear me now. So just my question, I just was curious because it looks like you're underwriting the new starts at a mid-6s, but you're achieving, call it, mid-7s on your stuff in current lease-up. Just kind of what would get us up to that mid-7s going forward? Or is there just some kind of element of conservatism built in?
Matthew H. Birenbaum
Yes, Josh. It's Matt. So the way we underwrite is we don't trend anything. So the reason why the current lease-ups are exceeding pro forma by so much, by 90 basis points, is -- I mean basically, it's got to be one or two things. It's either rent growth between the time we started construction and the time we leased it up, which -- that is what it is in the current situation.
Or in some cases, we were just too conservative in our initial underwriting. And even without market rent growth, the offering that we put out there got a bigger premium to the comps than what we had underwritten because we're pretty conservative in general.
So when you think about the deals we're starting now and you ask where are they going to stabilize 2 to 3 years from now when they lease up, the reason why they might outperform, we might get a little bit of hard cost savings, that's certainly possible based on what I was saying, although we tend to buy it out pretty quickly.
Or it could be rent lift between now and then or it could be just kind of a more favorable response from the market. So on average, over the long run, we tend to outperform by more like 20 to 30 basis points. So that's pretty consistent, but it will vary based on where we are in the cycle.
Joshua Dennerlein
Okay. Interesting. And then I'm not sure if I missed it, but did you guys disclose October occupancy? I know you put out the rent growth.
Sean J. Breslin
I don't believe we did, but we're trending in the same general range in terms of economic occupancy kind of in that 95.7% range or so.
Operator
We have reached the end of the question-and-answer session. I would now like to turn the call back over to Ben Schall for closing comments.
Benjamin W. Schall
Thank you, and thank you, everyone, for joining us today. We look forward to connecting further with you in November. Talk soon.
Operator
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
