The big story in the apartment market is the continued investor interest in this property type, the solid performance in market fundamentals, burgeoning construction and the success of the Low Income Housing Tax Credit Program (LIHTC). Clearly, the apartment market was the first sector to experience recovery and, to date, the best performing property type in the 1990s. Based on market fundamentals, investor interest has been so high that a number of properties have traded above market prices. Since the inception of the National Council of Real Estate Investment Fiduciaries (NCREIF) Index, apartments have generated the greatest total returns (11.14 %) of all property types. Barring any significant overbuilding, the apartment market should continue to provide solid returns to investors.

Prior to 1995, strong investor interest was attributed primarily to the repulsion of other property types, making apartments the only viable opportunity to the investment community. However, other property types have enjoyed significant market improvement, thus, diverting investor focus from the apartment market. Although investor interest is still strong, prices have escalated dramatically. In turn, profit expectations have declined for those investors looking to enter the market. Clearly, all the signs of a peaking property type are being witnessed. As apartment markets continue to develop additional supply, overbuilding could saturate markets. A significant portion of the new apartment construction has been Affordable Housing or luxury housing with many amenities.

The LIHTC program originated during the Tax Reform Act of 1986 and provides tax credits to investors which can be utilized as a dollar for dollar reduction in total tax burden. The tax credits provide equity, as they are sold to investors in exchange for an ownership position. The program has been so successful, that nearly all states have received requests for tax credits exceeding their allotment, which they can then issue to projects they deem most deserving. Since 1986, over 750,000 units have been constructed under this program. Unfortunately, the program faces uncertainty, as key Congressional leaders have targeted the program for ultimate extinction.

In the first quarter of 1995, multifamily starts totaled 39,000 units, the strongest first quarter since 1990 and up by one-half from early 1994. The upswing in multifamily construction has spread throughout the country, with the notable exception of the Northeast. Of the 45 cities surveyed, 184,428 units were slated for construction from 1995-1998. This is an increase from last year's reported units under construction by 66,064 units. In fact, multi-family construction increased by 21.6% from 1994-1995. Nearly 272,300 units were constructed in 1995.

As a whole, the apartment market displayed positive movement in market fundamentals. Vacancy rates dropped from 5.9% last year to 4.1% this year. The most dramatic change was in total value change from 1992 to 1995, which totaled 13.7%, compared to last years 2.8% increase. This suggests that significant appreciation was enjoyed in 1995. The estimated years to balance remained quite strong at 0.4 years, increasing by 1/10 of a year. Although the inventory of units surveyed was down from last year, the data clearly suggests a further strengthening of this asset type, and the beginning of a construction period.

Overall, significant new construction should take place where markets have reached equilibrium. Construction will be prominent in those communities which exhibit strong household formation growth. Investor opportunities remain primarily in high-quality apartments targeted at the aging baby boomers and empty nesters, and affordable housing aimed at the increasing lower income categories. Values should stabilize as new supply hinders growth in rents and occupancies. Transactions will be affected by interest rates, which are expected to continue their decline, and the lack of available properties. The lone wildcard is the proposed flat tax, which would eliminate the mortgage interest and property tax deductions. This would have profound ramifications on the single family industry for obvious reasons and would also likely provide additional demand for rental housing, in light of the elimination of incentives for home ownership.

Top Apartment Markets

In order to quantify the 10 best apartment markets in the United States, we have analyzed vacancy rates, forecasted value change, estimated years to balance, forecasted population and household growth by percentage change and absolute growth. The following markets provide the best opportunity for investors:

1. Phoenix, AZ6. Minneapolis, MN 2. Denver, CO7. Boston, MA 3. Atlanta, GA8. Las Vegas, NV 4. Portland, OR 9. Orlando, FL 5. Houston, TX 10. San Antonio, TX

Phoenix is once again on top of all the markets surveyed. Phoenix' primary strength is its strong forecasted population and household growth expectations. Not only is this community expected to grow by 2.47% annuallyranked 4th among 45 cities surveyed), it is also forecasted to increase in absolute figures by 64,300 people annually (which is 5th among 45 cities surveyed).

Six of the top 10 return from last year, while Charlotte, Orange County, San Diego and Washington D.C. fell outside the top ten. Their replacements include Houston, Minneapolis, San Antonio and Las Vegas. Houston's primary strength is the forecasted increase of 80,050 people annually, which is second to Atlanta at 80,960. However, consideration to the 16,400 units, which are to be under construction from 1995-1998, must be given before investing in this market.