Even as Housing Revives, Apartment Growth Set to Boom

Apartment for rent
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With housing now in recovery and apartment rents rising, there is new concern that tenants and investors alike will move out of the multi-family space.

A huge drop in the number of new apartment buildings started in April only fueled that fear, but it may be unfounded, according to one noted analyst.

Multi-family is in the, "calm before the [development] storm," according to Ivy Zelman, who is known for calling the housing crash and for recently turning bullish on the home builders.

(Read More: Despite Rising Demand, Some Builders Slow Production)

"Despite overtures of the headwinds from new supply, our April survey results showed positive gains in both occupancy and rents ahead of expected seasonal trends," she wrote in a report to clients.

(Read More: Apartment Building Bubbles as Single-Family Homes Struggles)

Zelman noted an intentional slowing by home builders, who are strapped by labor and supply shortages and who are looking to gain pricing power as the market recovers, as a key driver of apartment demand.

Rising rents are pushing some tenants to move, but not as many as expected. 11.5 percent of departing residents in April left due to rent increases, according to the report, up from 10.9 percent in 2012 but way down from 17 percent in 2011. In addition, more than half of those moving out remained in the apartment rental market. Thirty percent bought a home, and ten percent rented a single family home; the remaining moved in with family or friends.

The concern for investors in the apartment sector, especially in multi-family REITs (real estate investment trusts), is that there is too much new supply coming on line, just as demand is about to turn. The government numbers for housing starts in April added confusion to that argument, but some say the monthly numbers, especially for new construction, which have a wide margin of error, are just "noise."

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"Multi-family starts plunged 38.9 percent to 23,000 units, but the more important average of March and April was still a solid 321,000 units," noted Michael Montgomery, an economist at IHS Global Insight.

Investors have been turning away from the multi-family sector, which is now underperforming other REIT category, despite still strong fundamentals.

"While the multi-family REITs have lagged in 2013 we remain modestly overweight the sub-sector at this time. We believe the industry retains its attractive fundamentals," wrote analysts at Cantor Fitzgerald in a note Friday.

(Read More: Map: Tracking the US Real Estate Recovery)

Supply of rental apartments is still far lower than buyer demand. The spread between the two, in fact, is at the highest level since August of 2011, according to the Zelman report. That reflects, "an exceptionally competitive market," for apartment investors even as single family home ownership comes back to life.

—By CNBC's Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

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