The Ratings Game: AvalonBay’s stock should benefit as more millennials move to suburbs, analyst says

Investors should buy AvalonBay Communities Inc. shares, according to BofA Securities, on the belief that the residential real-estate investment trust will benefit from a demographic shift from cities to suburbs.

Analyst Joshua Dennerlein raised his rating on AvalonBay’s

stock to buy from neutral on Monday, and raised his price target on the stock to $212 from $199.

Dennerlein said the millennial generation, born from the early 1980s to the mid- to late 1990s, is reaching an age where they’re finding the suburbs more attractive.

“Demographics suggest we are at or past peak demand for urban apartments,” Dennerlein wrote in a note to clients. “[AvalonBay’s] portfolio skews more suburban, and [the company’s] portfolio and development strategy should position them well to capture the rotation.”

Dennerlein noted that AvalonBay’s exposure to the suburban market is 68%, versus 32% exposure to the urban market.

And while there has been a pullback in bank financing as a result of recent troubles in the regional-banking sector, land prices and construction costs for new homes have come down, which should also benefit AvalonBay, Dennerlein said.

“[I]f we get into an environment that is weaker from an economic standpoint,” AvalonBay Chief Operating Officer Sean Breslin said on the company’s earnings call with analysts in late April, he feels “very good” about the company’s suburban coastal portfolio, given that the exposure to new supply is quite a bit less than what is anticipated in urban environments.

“[A]s you look forward, depending on how the environment unfolds, we’d probably pivot more toward suburban assets outperforming,” Breslin said, according to an AlphaSense transcript.

AvalonBay’s stock, which slipped 0.8% to close at $178.66 on Monday, has rallied 10.6% year to date. In comparison, the Real Estate Select Sector SPDR exchange-traded fund

has edged up 0.2 this year, while the S&P 500

has gained 7.7%.


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