AS THE INCOMING CHAIR of the Mortgage Bankers Association, I've been privileged to get a behind-the-scenes look at the development of MBA's programs, research, and publications. Through all of these activities, it is clear that understanding market conditions and trends has never been more important.

Like many other parts of the economy, the apartment market is beginning to edge out of the worst recession since the Great Depression. The market's current conditions warrant neither a “clear the decks” nor an “all clear.” Instead, it comes down to knowing individual assets and markets, and how they fit into the broader economic and real estate cycle.

Here are several trends key to understanding where the multifamily market is today—and where it may be headed.

Investor Demand

Apartments have typically commanded the lowest capitalization rates (and therefore the highest prices per dollar of net income) of the major income property types. When condo conversions peaked in the fourth quarter of 2005, investmentgrade apartment buildings were selling at average cap rates of 5.8 percent—a 17 percent premium to the average cap rate for office properties and a 21 percent premium to caps for retail, based on data from Real Capital Analytics.

However, the same data shows that with the recession and subsequent investor reticence, the volume of multifamily property sales fell to a relative trickle—just $14 billion in 2009. Prices for the properties that did change hands—often distressed transactions—fell too, and cap rates rose. According to the Moody's/ REAL Commercial Property Price Index, peak-to-trough prices fell by 40 percent for apartment buildings, compared to a decline of 36 percent for office properties and a 32 percent decline for retail.

Lately, we have seen price declines moderating and actually improving for some property types. This is particularly true for Class A apartment buildings, which have seen even stronger price increases and cap rates that, for the best assets, are once again dipping below 5 percent. Considerable capital has been raised to invest in apartment and other properties, and the current challenge for the market is less about finding money to invest and more about finding deals in which to invest.

Capital Markets

A similar story is unfolding on the borrowing front. Through the toughest parts of the recession and credit crunch, banks, Fannie Mae, Freddie Mac, and the FHA all continued to lend on quality multifamily properties. As the markets stabilized, life insurance companies and other lenders have also re-engaged.

Current property valuations and cash flows make it difficult for some deals to fit within lenders' underwriting boxes, but for borrowers with stabilized properties and reasonable expectations, numerous lenders are competing for the business.

Even so, slack demand means that commercial and multifamily mortgage borrowing is well below its 2007 peaks. MBA's most recent surveys show Q1 2010 multifamily borrowing volumes were 5 percent below an already low 2009 level, making them the lowest since the survey began in 2002.

Property Fundamentals

The capital markets aren't the only source of mixed messages. Many local apartment markets have been both cursed and blessed by the stress in for-sale housing.

The curse? The overbuilding of singlefamily homes and condo units brought significant excess housing supply. Some units were converted to rentals and now serve as direct competition to apartment buildings. Others, now for sale at extremely low prices, act as a form of indirect competition. The result is that apartment vacancy rates are at or near record highs, depending on the data source.

The counter-veiling blessing, however, is that the distress in the owner-occupied market has led to a jump in the share of households renting. The resulting shift of owners to renters is a key reason multifamily vacancy rates leveled off in the first quarter and declines in national average asking rents appear to be slowing. Most forecasters are calling for increased stability and improvements into 2011 and 2012.

Of course, every market is different. Greater stability—and investor demand—is generally seen in primary, space-constrained markets, while markets with the most severe overbuilding are more likely to be experiencing continued pain.

MICHAEL D. BERMAN is chairman-elect of the Mortgage Bankers Association and serves as the president and CEO of CWCapital.