The editors at APARTMENT FINANCE TODAY could have collected a handful of reports from a number of research firms and written profiles on the markets those firms determined were the strongest performers.

But there was a problem with that. What about smaller multifamily markets like Allentown, Pa.; Santa Fe, N.M.; or Medford, Ore.? Trying to find data for those markets takes some digging. And that’s what we wanted to do—to provide you with as comprehensive a picture as possible.

The methodology

In consultation with economists and research analysts, we came up with an exclusive methodology that accounted for some of the most important factors that shape multifamily markets: demand (job growth, home affordability), supply (inventory growth), and the current market dynamics (rent growth, vacancy rate). For job growth, vacancy rate, and rent growth, we collected the most recent data at press time—second quarter, year-over-year numbers. To figure inventory growth, we mined the number of existing multifamily units at the time of the 2000 Census to provide a baseline. We then collected the number of multifamily units permitted for each market at the end of 2006. From there, we calculated the annual inventory growth.

We also calculated home affordability for each of the 83 markets we evaluated by looking up the median family income for each market and plugging that into the National Association for Realtors’ formula to come up with a home affordability index (HAI) score. We assumed a monthly mortgage rate of 6.55 percent. The HAI is a ratio of an area’s median family income to the income needed to purchase and finance the area’s median-priced home. An index score of 100 means that a family earning the median income has just enough buying power to purchase a median-priced home. The higher the score, the more expensive a home a median income family can afford. A lower score indicates that a higher income is needed to purchase a median-priced home.

Each market was ranked and scored based on each of the five market drivers. The lower the vacancy rate in a market, for example, the more points it earned. (Any markets that recorded the same numbers received the same amount of points.) Then the five scores were combined, giving us our final ranking.

This approach helped to prevent cities with outliers in just one category from rising to the top. Have a look at Fort Lauderdale, Fla. It’s ranked No. 46. Surprisingly, Buffalo, N.Y., fared better. Although Fort Lauderdale is the eighthmost expensive home market in our pool, the fact that the market has witnessed a lot of inventory growth and taken a hit in rent growth bumps it down a few notches.

Before you head off to build your fortune in Buffalo, though, there’s a lot to think about. Many factors like the mortgage crisis are still playing themselves out. It’s hard to say at this point how the credit crunch will affect multifamily investors. Everyone is wary.

“The motto right now seems to be, ‘Trust no one,’” said Linda Barden, senior associate with the multifamily division of Colliers International’s private capital advisors group. “Sellers are afraid to list properties, afraid they won’t be able to sell. Potential buyers don’t have much confidence in the market. It’s not all doom and gloom, though. The housing market decline is creating an overflow of renters in many markets.”

Another factor that is still playing out is the shadow market created by all those condo deals gone wrong. Those units that have yet to revert to rentals may influence more markets than just Miami, said Sam Chandan, chief economist with Reis, Inc., a New York City-based real estate research firm. So keep in mind that we treated the condo market as shadows in our research. It was just impossible to find out how many condos in 83 markets across the country reverted to rentals.

The west wing

One thing we noticed, though, was that the West seemed to be the best. That is, nine California markets placed in our top 20. You’ll find only one Texas market in the top 20. And then there are Boulder, Colo.; Reno, Nev.; and Tucson, Ariz. They all made the top 20. The San Francisco Bay Area, San Jose, and Orange County, Calif., all have home values approaching Saturn’s moons. Those expensive California cities snapped up the points in that category. But there are elements other than numbers affecting the multifamily climate, as you’ll see in the market profiles. Hopefully, in our list you’ll find your diamond in the rough.