Apartments gaining ground as investment.

Apartments will lead real estate investment for the next year, according to new research released at the National Association of Home Builders convention in Las Vegas.

Speaking before the nation's home builders, Harry D. Hartnett, Ph.D., Director of Research for the national accounting firm of Kenneth Leventhal & Company, said, "Apartments are becoming more popular as a real estate investment vehicle, particularly with institutional nvestors - primarily pension funds - but also with wealthy individuals and overseas investors." He predicted, Once the economy shows signs of sustained growth, with more jobs being created and consumer confidence on the rise, household formations will bounce back, increasing apartment demand and decreasing the vacancy rate.

Now is a good time to invest in apartments in selected metropolitan areas, especially with the supply constraints which have existed since 1986, said Hartnett. "Nationwide, apartment development continues to be limited by the demise of traditional financing sources, growth restrictions and increased land and construction costs in some markets," he added.

According to Hartnett, another trend contributing to the decrease in apartment vacancies is the high cost of home ownership. With average housing prices in a number of major metropolitan areas approaching or surpassing $200,000, a growing number of households have decided that ownership isn t worth years of sacrifice for a down payment. Many are opting to remain tenants instead of buying a home - the result is an emerging class of permanent renters.

Hartnett also noted that the dramatic cutback of new multi-family units, from a high of 669,000 in 1985 to a low of approximately 175,000 in 1991, is a trend that bodes well for near-term investment. The multifamily sector was the first product type to curtail construction, thus, it has had a longer time period to adjust by several years, he pointed out.

Apartments have led commercial real estate in total return on investment delivering a 5.3 percent return versus 4.8 percent for the runner-up - retail. "Being in first place with a 5.3 percent total return over the last two years doesn t seem worthy or any trophies," said Hartnett, adding, Investment in aFartments offers a certain amount of risk with rather non-spectacular returns - at least for now. Hence an investor has to be well informed, perform detailed due diligence analysis and be highly selective."

According to Hartnett, several metropolitan markets are attractive for apartment development. Each market s potential was measured based on employment, population growth, multifamily housing starts, home prices and the supply-demand relationships for apartments. A development market is primarily characterized as a growth area with demand for more apartments. An investment market is a growth area which poses barriers to apartment development, creating supply constraints. According to Kenneth Leventhal & Company, 10 selective markets offering apartment development opportunities over the next five years include (in alphabetical order): Atlanta Chicago Dallas Houston Los Angeles Minneapolis Orlando Riverside-San Bernardino San Diego Seattle

Kenneth Leventhal's selective apartment investment markets for the current and near-term include (in alphabetical order): Anaheim (Orange County) Chicago Houston Los Angeles Minneapolis Riverside-San Bernardino San Diego San Francisco Sacramento Seattle