AvalonBay Communities (AVB Quick QuoteAVB - Free Report) is well-poised to gain from healthy renter demand for its residential properties in the high barrier-to-entry regions of the United States. The company’s efforts to leverage technology to drive margin expansion seem encouraging. Strategic buyouts and development projects, backed by a healthy balance sheet position, augur well for long-term growth. 

However, elevated rental unit supply in select markets and high-interest expenses raise concerns. Moreover, the company is witnessing delayed development occupancies.

Last month, AvalonBay reported a second-quarter 2025 core FFO per share of $2.82, beating the Zacks Consensus Estimate of $2.80. The figure also climbed 1.8% from the prior-year quarter’s tally. The quarterly performance reflected favorable same-store residential revenue and operating expense performance. AvalonBay has revised its full-year 2025 outlook, reflecting higher same-store net operating income (NOI), offset by the delayed occupancies’ impact on development NOI.

What Is Aiding AvalonBay Communities?

AvalonBay owns high-quality assets in top U.S. markets, focusing on metro areas with strong job growth, high homeownership costs and vibrant lifestyles. This positions it to earn superior long-term risk-adjusted returns. Its well-diversified portfolio includes both urban and suburban communities. In 2025, management expects same-store residential revenues to grow between 2.3% and 3.3% year over year.

To enhance its overall portfolio quality, AvalonBay has carried out several strategic acquisitions over the years. AvalonBay expects its current 73% suburban submarket allocation to achieve the 80% target, while the current 12% expansion region allocation to reach a target of 25%. The company is also disposing of non-core assets for capital recycling. Moreover, AVB's growth over the intermediate term is likely to be supported by its increased development deliveries. In 2025, management is planning development starts of around $1.7 billion. In the next few years, the developments underway upon completion and stabilization are expected to fuel FFO and net asset value growth. 

AvalonBay has a healthy balance sheet with ample liquidity, positioning it well to capitalize on long-term growth opportunities. As of June 30, 2025, this residential REIT did not have any borrowings outstanding under its $2.25 billion unsecured credit facility. The company has a well-laddered debt maturity schedule with a weighted average year-to-maturity of 6.8 years. In the second quarter of 2025, its annualized net debt-to-core EBITDAre was 4.4 times, and unencumbered NOI was 95%, providing scope for tapping additional secured debt capital if required. 

Moreover, balance sheet flexibility is preserved for future opportunities, with around 103% match-funded on current development underway in the second quarter of 2025. The investment-grade credit ratings of ‘A3’ from Moody’s and ‘A-’ from S&P render it access to the debt market at favorable costs.

Solid dividend payouts are arguably the biggest enticement for REIT investors, and AvalonBay has consistently paid dividends each year since it went public in 1994. In February 2025, concurrent with its fourth-quarter earnings release, AVB increased its first-quarter 2025 dividend to $1.75 per share from $1.70 paid in the prior quarter. This represented a hike of 2.9% from the prior payout. Moreover, backed by healthy operating fundamentals and a solid financial position, we expect the dividend rate to be sustainable in the coming years.

What Is Hurting AVB?

The struggle to lure renters is likely to persist, as supply volume remains elevated in a few markets where the company operates. Moreover, the company is witnessing delays in its development deliveries, resulting in lower occupancy and higher concessions in markets like Denver and Maryland, in particular, pushing its NOI down.

AvalonBay has a substantial debt burden, and its total debt was approximately $8.71 billion as of June 30, 2025. Interest expenses increased 13.5% year over year to $64.8 million in the second quarter of 2025.

US Apartment Market and Residential REITs in Q2

The U.S. apartment market remained impressively resilient in the second quarter of 2025, absorbing more than 227,000 units between April and June, a robust second-quarter figure. According to RealPage data, annual absorption surpassed even the peak leasing surge of 2021 and early 2022, defying a backdrop of slowing job growth, weak business sentiment and broader economic uncertainty.

This signaled good for residential REITs like AvalonBay, Equity Residential (EQR Quick QuoteEQR - Free Report) and Essex Property Trust, Inc. (ESS Quick QuoteESS - Free Report) . Elevated absorption suggests that the renter appetite for professionally managed apartments is solid despite broader macro uncertainty.

Equity Residential reported second-quarter 2025 normalized FFO per share of 99 cents, which met the Zacks Consensus Estimate. The figure improved 2.1% from the year-ago quarter. Results reflected a rise in same-store revenues and physical occupancy on a year-over-year basis. The company increased its guidance for 2025 normalized FFO per share. 

Essex Property Trust Inc. reported second-quarter 2025 core FFO per share of $4.03, beating the Zacks Consensus Estimate of $3.99. The figure also improved 2.3% from the year-ago quarter. Results reflected favorable growth in same-property revenues and NOI. However, higher same-property operating expenses and interest expenses partly acted as a dampener. ESS raised its full-year 2025 guidance at the midpoint for core FFO per share.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.