PHILADELPHIA - Apartment investors should be keeping an eye on the City of Brotherly Love as it is quickly becoming the City of Sound Apartment Investing. Specifically, the lack of new apartment construction and the popularity of urban living have created "an ideal return-on-investment atmosphere," says Ridge MacLaren, a senior associate in the Philadelphia office of Palo Alto, Calif.-based Marcus & Millichap.

The recent apartment activity in downtown Philadelphia is in the form of the conversion of older office buildings into apartment complexes. This has been influenced by a tax-abatement program passed by the City Council during the late-1990s, notes MacLaren. Under the program, building owners who convert their properties from office to apartment facilities will have no increase in their real estate taxes for 10 years.

Another factor in the conversion trend is the fact that no new apartments have been built in the area since the late-1980s, says MacLaren. Combine that with downtown apartment occupancy rates of 97% to 98% in recent years, and there is a nice environment for the rehabilitation of older office properties, he adds.

One of the most recent examples of the conversion trend occurred in March, when Cleveland-based Forest City Residential Group purchased the former Bell Telephone Building, used in recent years as a self-storage facility, from Philadelphia-based Pendell Associates for $6.5 million. MacLaren, who was then the president of Philadelphia-based MacLaren Management Co. was the sole broker in the deal.

Forest City Residential plans to spend about $24 million to renovate the 256,000 sq. ft., 16-story building, built in the 1920s, into 190 loft-style apartments. The conversion should be complete in about 18 months. Rents are expected to range from $1,300 per month to $3,500 per month.

"The building is in good shape," says David Levey, executive vice president of Forest City Residential. "It's in a good, strong market. All of the amenities for urban living are there: restaurants, retail and entertainment. We expect to do very well."

Last year witnessed the opening of Pennsylvania House, a 162-unit complex converted by Philadelphia-based Albert M. Greenfield & Co., where apartments range from 735 sq. ft. to 2,590 sq. ft. and rents are in the neighborhood of $1,125 to $4,400 per month. The 20-story, 196,000 sq. ft. building was built in 1922 as an office facility.

Also, the 17-story, 258,000 sq. ft. Avenue of the Arts Building, erected in 1904, opened last year as a 400-unit apartment complex. Philadelphia Management, the owner and manager of the complex, leased all of the units to the Art Institute of Philadelphia, which uses the facility for student housing. Other former office buildings, such as the 16-story Arch Street, are also being converted to apartments.

The outlook for the downtown Philadelphia apartment market is good, says MacLaren. Demand shows no sign of ebbing. Also, in recent years, rents have increased 10% to 15% annually, a marked contrast to the majority of the 1990s, when growth was flat. In fact, rents are increasing enough that new apartment construction could be in downtown's future, he says.

ATLANTA - Those seeking to investment in an apartment REIT could do a lot worse than Atlanta-based Post Properties. At least that's the verdict of Robinson-Humphrey, which is also in Atlanta and is the largest regional, full-service investment firm in the South.

"We view Post as one of a finite group of real estate companies that not only exemplify a proven growth strategy with high-quality assets and a strong balance sheet, but also whose management team understands that investment returns, not size, ultimately produce long-term shareholder value," says Robinson-Humphrey in a report released during the company's 29th Annual Institutional Conference in Atlanta.

Robinson-Humphrey lists four reasons that an investor should buy Post stock: a disciplined investment approach to developing and managing luxury apartment homes; Post's focus on urban, mixed-use communities; Post geographic growth; and finally, Post is showing considerable financial strength. As for risks in investing in Post, Robinson-Humphrey lists just one: a possible economic slowdown, which could make renters leery of leasing upscale apartments.