From peak to trough, apartment REITs fell the hardest on Marcus & Millichap’s 2009 U.S. Public REIT Valuation Indices. The index of publicly-traded apartment firms fell 64 percent from its peak of 712 in January 2007, while the S&P’s index fell 52 percent from its peak at 426 in late 2007.

Some people think the fall was too steep, and, as a result, apartment REIT stock prices have jumped dramatically since early 2009—rising approximately 50 percent since February.

“That overly-hard punishment is now coming back in the form of recognition that the sector was hit way harder than it should have been hit,” attests Hessam Nadji, managing director of research services for Encino, Calif.-based real estate brokerage firm Marcus & Milli-chap. “Apartments are leading the REIT index recovery.”

Paula Poskon, a senior research analyst with Milwaukee-based financial services firm Robert W. Baird & Co., says the rally is being driven by investors who are increasing their real estate allocations and looking past a rough 2009 and 2010 to a better rental market in 2011. “At least part of the rally can be attributed to people looking further out,” she says.

There’s a sentiment that this rally will provide the REITs with the dry powder to start making acquisitions in 2010. “Management teams could feel more comfortable about coming back to the equity markets to fund growth opportunities as they also try to keep leverage in check,” Poskon says.

But that’s only if the REITs continue to rally—or at least hold their ground. For instance, Eric Bolton, CEO of Memphis, Tenn.-based Mid-America Apartment Communities, recently said that a decline of 25 percent in the REIT index or Dow Jones would thwart plans to deploy capital.

It’s anyone’s guess as to whether the uptick will continue. “When you have NOI growth, expenses under control, and vacancies and occupancies looking good three years out, I think REIT stock prices are headed higher,” Nadji says.

But others aren’t so sure. “Several of our names are trading at premium to NAV [net asset value],” Poskon says. “I don’t necessarily think that’s wrong. I just don’t think there’s a lot of room for continued upside.” —Les Shaver