Class C Properties
The declining rate of homeownership fueled creation of an estimated 700,000 new renter households in the U.S., half of which were in multifamily buildings, AvalonBay's Blair said on a February 3 call with analysts and investors. That helped push the firm's rental revenue from apartments leased at least one year up 2.5% in the fourth quarter compared with a 4% decline in the first quarter of 2010.

Nationally, effective rents at class A and B properties climbed 5.3% in the fourth quarter over a year earlier, according to Axiometrics estimates. By the final quarter of 2011, class B properties may see effective rent growth of 5% over the year-earlier quarter, compared with 4.8% for class A properties. Rent on class C properties may increase 5.3%.

Revenue from class C properties increased 5.3% in the fourth quarter, after bottoming at negative 8.7% in the third quarter of 2009, Axiometrics estimates.

The interest in value-add properties will come primarily from investors who are paying cash, or from real estate investment trusts and pension funds, which don't need to take on high loan-to-value debt and tend to hold assets for a long time, says Mike Kelly, president of Caldera Asset Management, a Denver-based multifamily consulting firm.

Multifamily Financing
The crisis in commercial real estate was compounded by property owners who borrowed on assumptions of future rent, known as underwriting, that were too rosy, he says. These days, borrowers can get a loan only against the last 90 days of the property's income, rather than future projections, Kelly says.

"You're going to get tremendous rent growth-you just can't underwrite it," Kelly says of value-add properties. "These guys can't underwrite the giant rent growth and not get laughed out of the room for it."

Fannie Mae and Freddie Mac, which offer financing for multifamily acquisitions, "are much more heavily weighted to core assets since the downturn," Chandan of Real Capital says in an e-mail. Value-add properties accounted for 12% of Fannie and Freddie lending by dollar volume in 2010, he says.

'Little Less Heady'
The biggest metropolitan areas, notably New York and the suburbs of Washington, D.C., have led the apartment recovery, as their growing job markets lure investors to well-leased properties, especially trophy assets considered the best in the market. Cap rates on Manhattan properties averaged 5.1% in the fourth quarter, compared with the national average of 6.6%, according to Real Capital.

In Washington, cap rates averaged 4.8% in the quarter, the research firm says.

"Rather than buying in D.C., where you get 50 bids on the asset that was just put out there, you'll probably look at traditional top 20 markets and go into the ones that are a little less heady-an Atlanta or a Charlotte," Baker of Savills says. "We're starting to see that happen. They don't have a lot of choice if they have certain yield requirements."