Investors and lenders are aggressively pursuing opportunities in the greater New York City metropolitan area, and it's easy to see why.

Apartment rents in Manhattan, the surrounding boroughs, and Long Island have nearly surged past peaks last seen during the boom years, witnessing rent growth of more than 5 percent in 2011. The tremendous demand for rentals has pushed vacancy rates to all-time lows (4.9 percent for the region) and placed upward pressure on rents.

The growing list of investors looking to capitalize on this environment has compressed multifamily cap rates to record lows for well-located product. And as values continue to rise and yields continue to drop in the five boroughs of New York City, investors are increasingly casting their eyes east to Long Island.

Long Island is supply-constrained due to geographic and regulatory barriers. Traditionally, it's been an underserved multifamily market, but as developers ramp up their pipelines here, several trends are beginning to take root.

First, there's a greater focus on transit-oriented development. Many urban pioneers active in Manhattan, Brooklyn, Queens, Staten Island, and the Bronx have begun to hawk their vision on newly receptive Long Island communities. Walkable downtown apartment complexes where there's more space for growing families, with an easy connection to New York City, are becoming more common.

The ownership profile, as well, is starting to change on the island. The market has been predominantly owned and developed by families and privately held firms instead of institutional owners. The demographic trends, strong fundamentals, and current focus on the multifamily sector by institutional debt and equity are changing that dynamic, however, pushing Long Island developers to build more projects and owners to sell existing complexes.

City Planning

Long Island is undergoing the nascent stages of a transformation, moving away from being a community dominated by 80 percent–plus homeownership. Municipalities on the island are now recognizing that this isn't a sustainable model and that a more centralized community will have to be developed to attract the next generation of residents. Certain towns, such as Patchogue in Suffolk County and Great Neck in Nassau County, have embraced this work/ live/play concept and are moving forward with new multifamily development projects in prime downtown areas.

Given the increased focus on affordable communities and thriving downtown areas, multifamily deliveries are expected to increase. Local governments are easing zoning restrictions and residents are starting to support new projects. In fact, Mill Creek Residential, AvalonBay Properties, and Tritec have started construction on projects in Hempstead (166 units), Rockville Centre (139 units), and Patchogue (291 units), respectively.

A dozen multifamily projects with a total of 1,588 units were approved in 2011, according to Northport, N.Y.–based smart-growth advocate Vision Long Island. Many towns are pushing for continued multifamily development as they revitalize their downtown areas to increase tax revenues and accommodate an influx of young residents who demand retail and lifestyle amenities within walking distance. This vibrant community creation is best seen in towns like Bayshore, where recent multifamily projects have encouraged further downtown development.

On the transaction side, there have always been a limited number of trades on Long Island, given that assets have been primarily familyowned, with long-term hold periods. This is slowly starting to change as some REITs and equity funds grow more active. One recent, large transaction was Savanna Partners & Pantzer Properties' $196 million recapitalization of Atlantic Point, a 795-unit multifamily community in Bellport.

Fundamentally Sound

Nassau remains the more popular of Long Island's two counties with renters, due to its proximity to New York City—the average commute is about 40 minutes. The vacancy rate there has declined to 4 percent and is projected to remain at that level for the next few years. The current average monthly rent is $1,651, and the projected rent growth over the next five years is expected to average 2.1 percent.

Supply should remain fairly muted, as 997 units are expected to be delivered between 2013 and 2016, representing 1.17 percent of the existing multi-housing stock, according to Boston-based market research firm Property and Portfolio Research (PPR).

Suffolk County is largely dominated by single-family homes with very limited urban locations. Multifamily communities in these areas are often affordable, and the typical target is young professionals and elderly residents. Average commute time to Manhattan exceeds an hour, but many Suffolk County residents are employed on the island.

The current average monthly rent in the county is $1,553, and rent growth over the next five years is expected to average 2.35 percent. Vacancy is higher than in Nassau County, at 6.8 percent, due to limited job opportunities in the area. PPR projects 1,368 units to be delivered between 2013 and 2016, representing 1.92 percent of the existing stock.

The average rent on Long Island is $1,556 per month, compared with $3,418 per month for Manhattan. The high cost of living in Manhattan and the inner boroughs is producing a mushroom effect that should cause renters to seek alternative apartments in the more affordable island suburbs.

Investors continue to pour money into the New York City multifamily market, forcing players seeking additional yield to consider development opportunities outside the city. As more Long Island towns recognize the need to attract a new, young generation, more transitoriented development projects will be approved and institutional capital will finally have the opportunity to take advantage of this desirable but underthe- radar market.   Jeffrey Julien is a managing director in the New York City office of HFF.