As the apartment recovery takes shape, market watchers have pretty much agreed on a term to describe the way things are progressing so far—surprise.

“Usually, we see a recovery in occupied space before we see a recovery in rent growth,” says Victor Calanog, director of research for New York-based Reis.

But this time, rents are rising. Reis said effective rents moved up 0.3 percent in the first quarter of 2010, as vacancy hovered around 8 percent due to an additional 20,000 new units coming online. That was the first positive rent movement since the third quarter of 2008. Yes, after months and months of dropping and dropping rents, an interesting phenomenon occurred sometime in the first quarter. Landlords suddenly pushed rents upward in many markets—seemingly out of the blue.

 National Occupancy and Rent Trends for the Past Five Quarters
Year Vacancy rate Asking rent Change in asking rent Effective rent Change in effective rent
2009 Q1 7.4% $1,044 -0.6% $982 -1.1%
Q2 7.7% $1,039 -0.5% $973 -0.9%
Q3 7.9% $1,033 -0.6% $971 -0.2%
Q4 8.0% $1,026 -0.7% $964 -0.7%
2010 Q1 8.0% $1,027 0.1% $967 0.3%
Source: Reis

“The most surprising thing I see going on is how quickly we’ve gone from rent cuts to rent hikes,” says Greg Willett, vice president of research and analysis for Carrollton, Texas-based M/PF Research, which still reported same-store rents falling 3.1 percent. “We didn’t have that period where they got stuck at the bottom.”

Calanog agreed. “It was a really strong quarter,” he says. “It was the strongest first quarter on record in about 10 years. Even compared to boom times, this was a really strong first quarter.”

But as apartment owners look back over the first part of the year, the question is: "why did things change?" And ultimately, will they continue? Conventional wisdom says that revenue management and LRO systems kept bigger operators from letting their vacancies fall too far. Instead, they cut prices.

“What LRO allowed us to do is to see that rents would have come down faster than we otherwise thought,” says Thomas L. Grimes Jr., executive vice president and director of property management at Mid-America Apartment Communities. “That allowed us to maintain occupancy during the downturn. We gave up rents a littler earlier than we otherwise would have. And frankly, as a person who went through the last downturn, where we gave up occupancy and then rents, this seems like a better plan.”

But Willet contends that’s it not just LRO. “I think management people have gotten through to their on-site people to change their mindset,” he says. “Usually, when we come out of a recession, it takes a long time to get the confidence in the on-site people to go out and try to get those units leased to higher rents. The change has been overnight. The moment the market gets to the point where you would say a little bit of rent increase would be justifiable, the operators are actually doing it.”

In some cases, owners may have cut rents too far, but Willet says that’s mainly been an issue on the West Coast. “We’re seeing big rent cuts on the West Coast,” he says. “I didn’t get it. It deteriorated, but it didn’t get awful. There was a big premium to buy versus rent. It didn’t make sense to have 10 percnet or 15 percent rent cuts.”

Calanog attributes much of the jump to an unseasonal spike in demand. “Most households don’t move or lease new space until the second or third quarter,” he says.  “I think the downturn was so severe that it broke traditional expectations of seasonality. The guys who are leasing space in the first quarter of the year were probably the folks who graduated in May 2009 and/or folks who are still looking for jobs and landed them late last year or early this year.”

But Calanog, who sees another 75,000 units in supply coming online later this year, doesn’t know if this trend will continue. With the European economy in trouble, it could eventually cost Americans jobs. Add that to new supply coming online and apartment operators may not quite be out of the woods yet.

“There is a whole lot of supply coming online,” he says. “Unless job growth keeps on pace, then we may see a case where the first quarter was strong, but we basically run out of gas. We need to keep this positive trend of 200,000 to 300,000 jobs created every month for us to create this absorption rate and positive rent growth.”

Editor's Note: The second part of The Upside-Down Recovery will be published online next week. Stay tuned!