Echo Boomers

Building tenants in wealthy neighborhoods "are the so- called echo boomers-the sons and daughters of rich baby boomers," said Mark Crawford, president of Crawford Park Financial Inc., a Beverly Hills-based real estate investment firm. "You combine those with a growing and upcoming immigrant population and you have set the stage for a tremendous run in the apartment business."

U.S. apartment vacancies declined to the lowest in almost three years in the first quarter as the weak homebuying market fueled rental demand, New York-based research firm Reis Inc. said last month.

Cap rates for apartment buildings also are dropping in Manhattan and Connecticut, including such wealthy areas as Greenwich. In those areas, they declined to 6.7% in the first quarter from 6.9% in July 2010, Real Capital said.

In Southern California, the search for safe investments is driving high-net-worth individuals to buy multifamily properties in upscale neighborhoods, said Jason Thomas, Los Angeles-based chief investment officer for wealth management firm Aspiriant.

Nervous Investors

"The interest in these areas is less driven by the valuations, which in fact are high, but by the fact that they are nervous about any other investment," he said. "They are excited by the yields relative to fixed income, and they are focused on the tax advantages. Plus you can walk down the street and look at it."

Buying apartment buildings in affluent neighborhoods is an investment strategy that can take years to pay off, said David Cohen, president of Los Angeles-based apartment investor Karlin Asset Management. It's "a great investment strategy -- if you have patient capital," he said.

A rebound in the real estate market may boost buyer confidence and spur investors to focus less on wealthy neighborhoods and more on "class B assets or mid-tier areas," Nadji said. An economic recovery also will lead to price appreciation in upscale neighborhoods, diminishing demand.

"Prices that are happening at the moment are incredibly high in respect to a year ago," said Soroudi of Charles Dunn. "In another six months, the market may get too hot for many of these buyers."