Clarion Partners study says rents will increase over decade.

The current decade will see a gradual rebound in apartment occupancy and rents, with returns to investors in the 9-11 percent range, according to a new research study from Clarion Partners, a leading national real estate investment advisory firm and member of ING Real Estate.

The Clarion Partners study, "Perspective on the U.S. Apartment Market, 2000-2010," examines U.S. demographic trends, and concludes that the formation of 12 million new households will require annual construction of 190,000 new apartment units this decade. This new construction will create important opportunities for investors. "We view the last few years as something of an aberration in the apartment market," said Dougal M. Casey, author of the study and head of Investment Strategy & Research at Clarion Partners, "A difficult economy and low job growth have hit new apartment absorption particularly hard. As economic conditions start to improve, we expect absorption rates to return to levels closer to historic norms."

Historically, apartments have been one of the most attractive sectors for institutional investors, generating the highest risk-adjusted returns of the four principal property types. According to the NCREIF Property Index, the real estate industry's benchmark, apartment returns averaged 9.2% over the 15-year period ending June 30, 2002, with lower volatility than the other property types. Casey further observed that "...householders 45 years old and above are expected to generate about three-quarters of net new demand for rental apartments, even though the vast majority of households in these age groups tend to own their own homes."

Shifting demographics are behind this surge in demand by older households, according to Casey who expects householders 35 years old and under to generate most of the remaining 25% of apartment demand. Clarion notes that the mature, more affluent households who rent are looking for different qualities in rental properties than the typical younger renter.

"Almost 90% of the nation's apartment inventory is at least 12 years old and more mature renters generally want larger apartments and more amenities than are available in most of the apartments now in place." said Casey. "We see a mismatch between the emerging demand on one hand, and much of the existing supply on the other." The Clarion report also states that condominium sales should reach 50,000 per year this decade, driven by the housing needs of the relatively affluent over 45 population.