This is the one real estate area that seems to be looking up. There is no question that apartments really scream when it comes to actual performance and renewed investment confidence, says Hessam Nadji, managing director of research and advisory services at Marcus & Millichap. The apartments sector is leading the recovery. Nationally, apartment vacancies declined 20 basis points during the first half to reach 7.8%, setting the stage for rent growth.

Demographics: The rental sector is the one area that that is looking like its in a recovery. Residential housing was t was over built and overbought, while rental properties barely kept up with the demographics. Harvard studies indicate that if you couple the under 30 age group to new immigrants and retirees looking to move back to the city for convenience, as a whole they are a potential renter pool larger than the the boomer generation. That is huge!

Supply: Over 4.3 million loans are 90 days or more delinquent or in foreclosure. Moreover, the shadow inventory (chart) of REO properties, as well as distressed mortgages facing foreclosure, will take nearly three years to clear at the current sales rate, according to an S&P report. S&P analysts concluded that \many servicers will likely shift from mortgage modification to loan liquidation. Hopefully, the banks will distribute supply onto the market with an eye to price stability or at least an orderly decline. With that in mind expect supply to continue to increase and prices to continue to decline.

Jobs: The average number of days delinquent for loans in foreclosure is a record 492 days. Its pretty obvious that jobs are the main culprit now and the expectation is that unemployment will remain more or less constant for the next year. Apartments look better partly because they never participated in the building boom that homes experienced and supply to renter pool favors lower vacancy rates and higher rents.

Investor Psychology: The Census Bureau releases a Housing Tenure, which measures the balance between owner occupied and renter occupied housing units. Owner occupied units have been on the decline and the number of renter occupied units has soared to 34.% in 2009. Of course, jobs are highly correlated to rent and vacancy rates, so this should be seen as fragile and early recovery. Yet rent rates have been increasing and vacancy rates have been declining, even in this weak job market. I think there has been a shift in the investor psychology that benefits the rental property.

Politics of Housing: Congress had mandated that the GSE emphasize home purchases at the expense of rental property. The Congressional Budget Office reported, the government in 2009, devoted nearly four times as much to support homeownership.$230 billion for homes and about $60 billion for multi family property, helping fuel the bubble. It was a primary cause for so many bad decisions…..loose money always is. My guess is that GSE money flow will now favor rental property and affordable housing in particular. The new real estate opportunity is in rentals, they will be the first to recover.

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