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The Ernst & Young Top 10 Apartment Markets to Watch

By Steve Friedman, Ernst & Young

JANUARY 09, 2006If 2005 was the year of the condominium, 2006 may well be the year that the rental apartment markets come back to prominence. In fact, the trend may already be underway. That’s the big picture nationwide. Here’s a list of 10 apartment markets for developers and investors to watch in 2006, courtesy of Ernst & Young’s research.

New York Metro: N.Y./Northern N.J./Central N.J.

The New York Metro is still one of the best rental markets in the country from an ownership perspective. There is limited rental supply in key markets throughout the region, especially Manhattan, and high desirability among renters. Manhattan is the highest-priced rental market in the country and also exhibits the strongest rent growth. Both trends are likely to continue in 2006 and beyond. Northern New Jersey, Stamford, Nassau-Suffolk and Central New Jersey are also highly priced rental markets and, therefore, strong from an investment perspective. Condo projects in the market are putting additional pressure on the supply side.


The biggest determinant of continued strong rents for apartments in the Boston market may be job growth. While some job growth is projected in the next 12 months, most estimates suggest it will be less than 1 percent. However, a relative lack of new construction—due to rent control and long lead times for obtaining building permits—may continue to make this a top investment market despite slow economic growth. Questions about consumer confidence in the greater Boston economy and increased interest rates may give impetus to the rental market at the expense of the home ownership market.


This is the ultimate “barrier-to-entry” market. The market has limited development opportunities, and the high price of land in a highly priced for-sale market creates demand for rentals but limited supply. Housing here generally leads the nation in the “least affordable” category.

Northern California: San Francisco/San Jose/Oakland/Sacramento

Job growth in Northern California is projected to run from 2 to 2.7 percent in the next 12 months. Significant condo development and conversions, particularly in San Francisco, are causing tightening rental markets. In addition, a steadily recovering economy, especially throughout Silicon Valley, is driving rental demand again. High sale prices for homes and condos are also prompting many young professionals to rent. New construction has been hampered by long lead times for building permits and scarcity (and the extremely high prices) of land.

Washington D.C./Northern Virginia

Fairly high rents compared to national averages make this a good investment market for apartments. Strong rent growth is fueling new construction, and more is planned in 2006. Recent concerns over falling home prices in markets such as Loudoun County may dampen apartment demand slightly, but generally this market appears strong with growth in household incomes among the highest in the country. Metropolitan D.C. also has among the country’s strongest job growth numbers, which should continue into 2006. Plus, there’s a large pipeline of condo projects planned throughout the region, further strengthening apartment market fundamentals.

Southern California: Los Angeles/Orange County/Inland Empire

High home sale prices throughout the region are prompting many professionals to rent, and steady migration into the region makes apartments in high demand. Some condo conversions in San Diego and Orange County in the past two years have lessened supply of rentals. Orange County is among the top 10 markets nationally in rent growth and has one of the lowest apartment vacancy rates in the country. Look for a nascent trend of downtown multifamily redevelopment and rehabs in Los Angeles.


A “sleeper” city in past years, Baltimore is being rediscovered, especially as a livable and affordable alternative to Washington, D.C. To this extent, Baltimore is benefiting from apartment fundamentals in and around the D.C. area. This is spurring new construction of condos and apartments, especially in the city’s downtown core and around transit hubs.


According to the U.S. Census Bureau, Chicago has the highest rate of downtown homeownership in the country—40.7 percent. The story here is that major condo conversion activity downtown in the last two years has pulled a large number of rentals off the market and there has been little new construction of rental apartments in the major suburbs. In northwest Cook County, for example, there has been no major construction of rental apartments since 1989. Throughout the Chicago market, roughly fewer than 900 apartment units will be delivered in 2006, compared to more than 3,000 condos. However, job growth in the Chicago metro area is projected to be a respectable 1 percent over the next 12 months, and this should help the demand for rentals, especially among younger professionals.


Job growth in Miami/Fort Lauderdale/West Palm Beach is projected to be 2.4 percent over the next 12 months. Miami is another market with high levels of homeownership in its downtown core, and the whole market has seen strong condo activity, with conversions resulting in reduced apartment supply. However, the run-up in single-family home pricing has made multifamily a much more attractive option.


Long a bit of a laggard in terms of its attraction as an investment market for apartments, Denver just saw the highest price paid ever for an apartment complex—$176 million for a 1,184-unit complex in suburban Denver’s Highlands Ranch. Meanwhile, vacancies statewide are on the decline, especially in resort markets like Aspen, while conversions to condos have pruned the rental market over the last two years. Job growth at nearly 2 percent should further help Denver apartment fundamentals.

Steve Friedman is Americas leader of homebuilding services at Ernst & Young LLP.

Drew de la Houssaye is an associate with THE BROKERAGE Real Estate Group Beverly Hills. Drew specializes in westside luxury real estate, renovations and probate sales. He blogs on Westside real estate, entertainment and local events. If you would like to contact him, he can be reached via twitter, facebook, LinkedIn or email.

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