02/08/2012 | by
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With a total return of nearly 40 percent in the last three years, the apartment sector is riding a prolonged streak of outperformance. Rent growth is slowing in the sector, but apartment fundamentals remain strong, according to industry analysts.

2011 was a "banner year" for the apartment sector, due to improved demand, low supply growth and cheap debt, according to Green Street Advisors. Green Street recently released its optimistic 2012 outlook for the apartment sector.

"Rent growth is slowing, but is expected to stay positive, after coming off of two really good years of growth in 2010 and 2011," said Andrew McCulloch, managing director with Green Street.

Rent growth rates are expected to range from 3 percent to roughly 7 percent, according to McCulloch, who said there is currently not much difference between high-and low-barrier markets. Job growth does remain an issue in the sector, however. McCulloch said some tenants are beginning to push back against rent increases, especially those who have already seen their rent increase without similar growth in their incomes.

Rent growth over the next five years is expected to favor high-barrier markets, which are less exposed to new apartment demand, according to Green Street's outlook.

Supply-demand dynamics do continue to work in the sector's favor. However, Mark Obrinsky, chief economist with the National Multi Housing Council (NMHC), said the supply of new apartment housing is starting to increase.

"In the face of an unprecedented virtual shutdown of development, the apartment market continues its strong recovery, as developers play catch-up to the growing demand for rental housing," Obrinsky said.

In NMHC's quarterly apartment market survey, released in February, the council noted that new multifamily development activity continues to increase across the country. More than half of the survey respondents reported a "substantial" uptick in land acquisition, financing activity and building permit applications. McCulloch noted that a handful of U.S. markets are witnessing outsized supply growth relative to the rest of the country. They include cities like Seattle, where technology-driven job growth has played a role in the expansion, and states like Texas, which has benefited from the energy industry.