It is a bullish sentiment that gathered steam through 2010. With few projects initiated in 2009, there will be a shortage in the supply of rental apartments this year. Combined with a stabilizing economy, continuing uncertainty in single-family home prices, and echo boomers boosting demand, it will be heaven for multifamily in 2011.

Expect rents to grow at rates unseen since the early 1990s, when the sector experienced a similar pullback in construction. However, will these good times be sustainable? Or will heaven crash back down to earth as soon as 2012?

There is compelling evidence that effective rents will indeed post strong growth in 2011. Despite moribund economic growth in 2010, apartment vacancies fell sharply, ending the year at 6.6% after starting from a record-high base of 8%. Concessions that included subsidies for utilities and broker commissions as well as months of free rent were withdrawn swiftly.

National effective rents grew by 2.3% in 2010, a healthy rebound given the record 2.9% decline in 2009. And this was when about 94,000 apartment units came on line and jobs were growing at a disappointing rate.

A rising tide …

Inventory growth will contract significantly in 2011. Reis projections add up to only about 51,000 units coming on line in 79 major metro markets. This is less than half of the 113,000 unit annual average over the last five years. These figures come from building by building surveys of developers across 79 major markets; the numbers might shrink even further if projects are delayed to 2012.

With economic growth expected to be close to 4%, job creation will ramp up, particularly for younger age groups that tend to be renters. The resulting increase in demand combined with a shortage in supply will boost effective rent growth significantly, and not only for typical high rent growth cities like New York. For some places like the Dupont/Logan Circle and Capitol Hill/Southwest submarkets in Washington, D.C., effective rents may post growths above 10%.

... will not lift all boats

Nevertheless, it would be foolish to think that every submarket will post strong gains in rents. Any benefit from a supply shortage in 2011 will be diluted if a market is contending with vacant space from overbuilding in recent years. A large shadow market of unsold condominiums being rented out by individual owners will also exert downward pressure, as I discussed in my column last June.

The experience of New York City may be illustrative. Manhattan submarkets have always benefited from relatively constrained supply: the entire island occupies roughly the same space as the Dallas-Fort Worth International Airport. But some Manhattan submarkets like Midtown West experienced a surge in building in recent years, and will not post rent growth above 10% like apartments downtown or the Upper East Side might.

Similarly, apartments in South Florida, Nevada and Arizona will contend with persistently high unemployment rates and resulting depressed demand through the year. It is unlikely that strong rent growth will come from states that are still dealing with a hangover from the last recession.

Sobering reality to hit in 2012

The critical question is whether strong rent growth will be sustainable after 2011. Developers are keenly aware that there are profits to be had from owning apartment properties. Assuming that permits and financing are available, it only takes about nine to 18 months to build a 200-unit multifamily complex, and there is evidence that developers are rushing to break out the shovels.

Reis also tracks buildings with planned and proposed deliveries, but no firm dates of completion, and these “soft estimates” for 2012 have risen from approximately 90,000 units four quarters ago to close to 170,000 as of the latest tally.

Not all of these projects will be completed in 2012, but the supposed benefits from constrained inventory growth may not last long if an increase in supply outpaces demand. Sky-high rent growth may revert to numbers closer to the long-term average sooner than investors wish.

Victor Calanog is head of research and economics for New York-based research firm Reis.