What type of investment real estate has been holding up best in tough economic times?

Everybody's heard of the problems in commercial and retail - but how about multifamily apartments?

You just might be surprised.

According to National Association of Realtors research economist George Ratiu, while almost every type of commercial or income property has had a rough going in the past two years, "the (rental) apartment sector continues to maintain a stronger performance compared with other sectors."

Those include office buildings, which have seen widespread property value declines -- and retail real estate, which has been particularly hard hit as consumers penny-pinched during the recession and stayed away in droves.

Multifamily, on the other hand, has done better holding value, keeping units filled and rent rolls stable or growing. During the second and third quarters of this year, demand for rental apartments as measured by net absorption, increased by more than 89,000 units nationwide.

Rental building owners have done particularly well in keeping vacancies low, with rates in some major metropolitan markets in the five percent range.

For example, apartment buildings in Pittsburgh, where the excesses of the real estate boom years never produced speculative overbuilding, had just a 3.5 percent average vacancy rate during the third quarter just ended, according to Ratiu.

In northern New Jersey, vacancies were four point three percent. In San Diego and Philadelphia, 5.1 percent. In Washington D.C., San Jose and Albuquerque vacancies averaged 5.5 percent.

Of course, not all apartment markets are doing that well: In Tucson and Phoenix, vacancies are expected to hit or exceed 11 and 12 percent, respectively.

The national vacancy rate stands at about 7.4 percent -- well below where it was in previous recessions and remarkable in view of an unemployment rate just under 10 percent.

Other evaluations of the relative performance of multifamlly investments have come to similar conclusions. The National Council of Real Estate Investment Fiduciaries, which has no ties to any particular segment of the industry, reported earlier this year that multifamily investment returns exceeded all others during the 10-year period it studied.

Similarly, a report from Boston-based Torto Wheaton Research for the National Multi Housing Council, found that over the past 20 years, apartment building investments have averaged returns of ten point one percent compared with nine and a quarter percent for industrial real estate and seven point eight percent for office buildings.

Bottom line: There is no risk-free real estate investment. But apartments perform well even in bad times, so they're worth a look.

Published: September 25, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.