(Bloomberg News) Real estate investors competing to buy Manhattan apartment buildings have sent prices to record highs as rental demand surges, reducing yields on the properties to the lowest in more than six years.

The capitalization rate, a measure of investment return that declines as prices rise, averaged 4.4 percent for Manhattan multifamily buildings in first three months of this year, the lowest since the third quarter of 2005, according to New York- based data firm Real Capital Analytics Inc.

"It's the strongest of all asset classes," said Doug Harmon, senior managing director at Eastdil Secured LLC, who brokered deals for six Manhattan apartment properties priced at more than $100 million in the past 13 months. "There is still plenty of room to run on rents, and I see absolutely no reason why this action will or should stop anytime soon."

Investors including UDR Inc. and Kuwait's social-security system are homing in on rental buildings as stricter mortgage- lending standards limit home purchases. Tenant demand for Manhattan apartments drove the median rent in the first quarter up 7.1 percent from a year earlier to $3,100 a month, the largest annual gain since 2007, appraiser Miller Samuel Inc. and brokerage Prudential Douglas Elliman Real Estate said. New leases jumped 14 percent.

The vacancy rate for borough apartments was 1.22 percent at the end of last month, brokerage Citi Habitats said. Landlords can expect rental revenue to climb as much as 6.75 percent this year from 2011 as occupancies rise, according to Axiometrics Inc., a Dallas-based multifamily research firm.

Apartment investors may have to rely solely on rent increases to profit from their deals as yields on the buildings approach the 2 percent return on risk-free U.S. Treasuries, according to Sam Chandan, a real estate economist.

"The gains are more limited going forward," said Chandan, president of Chandan Economics LLC, a New York-based research firm. "That being said, the market is significantly supply constrained, and that's one of the key factors that will support rent growth irrespective of market conditions."

Institutional investors are willing to "stretch" what they will pay to acquire high-end property in Manhattan because of projected revenue growth and the limited supply of new units on the market, Harmon said. Many top-quality apartment buildings are held for decades by family owners, which limits how many become available for sale, according to Paul Leibowitz, executive vice president in the investment properties division of brokerage CBRE Group Inc.

New-Building Premium

Manhattan multifamily buildings sold at an average of $493,980 per unit at the end of 2011, the highest in 11 years of record keeping, Real Capital data show. Before last year, the previous peak was in the first three months of 2007, when the average was $379,970.