There will be more sales closed before the end of the year, but we bet fewer apartment units will sell this year than in any year since 1976, more than 30 years ago.

We didn't look at the long term trend in dollar volume because the impact of inflation would make those numbers meaningless. But even a comparison of units sold understates how dramatic this year's drop is. There are more than twice as many apartment units in the market today compared to 1976, and our population has increased 80 percent. So even though this year's sales activity is almost the same as it was in 1976, it should have been double to just keep up with growth since then.

Financing

There are a lot of reasons investors give for this year's drop in sales activity. Some say there's no financing. We've heard that before, so we've learned it doesn't really mean there's no financing. It just means investors don't like the terms. We surveyed lenders this fall and found more than 20 companies with significant capital ready to lend on apartments.

It's hard to say exactly how much money is available for our market, but a number of lenders surveyed said their goal is to place anywhere from $40 million to $140 million or more in the local apartment market over the next 12 months.

Prices

Another reason given for the dismal sales volume this year is owners are not putting properties on the market because they don't like the fact that prices have fallen. It's true that capitalization rates (cap rates) have increased significantly. They bottomed out in 2007 at 4.8 percent and average almost 6 percent this year. In recent months they've been closer to 6.5 percent, which represents a 25 percent drop in value.

Prices didn't drop that much because net income kept rising, at least until this year. But reminiscing over what was won't get it back. We expect the market and prices will deteriorate more next year, so selling sooner is better if you plan to sell in the next year or two anyway.

Some investors say they are sitting on the sidelines, waiting for prices to fall more before they jump into an uncertain market. And some are just sitting things out until it's clear the market is improving. Neither group can be faulted for inaction during uncertainty. In the play “Waiting for Godot” Godot never showed up. There's a risk in waiting.

Boeing bust

Our market is about to set a new record. Development activity peaked this year, with more than 6,100 new units beginning lease-up. That's the highest level of production in almost 20 years. But things are about to change dramatically. Developers will open fewer apartment units in 2011 than in any other year in the prior 50 years. That's right, developers even built more apartments right after the 1970 Boeing bust than they will in 2011. And when you take into consideration how much larger our population and economy is today, that's saying a lot.

Why does this matter? According to Conway Pedersen Economics, our region will start adding jobs again by next spring. That, along with major demographic changes and in-migration, will fuel demand for apartments. With virtually no new supply in 2011, we expect the rental market will start to tighten quickly. That boosts bottom line performance well beyond any norm.

So, even though investors are facing a rental market that should deteriorate more before it starts improving, they stand to do better financially by investing before the market rebounds rather than waiting and paying higher prices. We expect vacancies to climb more next year and rents to fall some more. That doesn't make the thought of buying now very appealing. But we also expect net income to grow significantly after 2011 because of the lack of new units.

That growth more than offsets next year's deterioration, resulting in higher than normal returns for investors, given today's prices. Of course, it would be great to wait until the very bottom of the market has been reached, if you can time the market, and if you can find what you're looking for then. But with capitalization rates above 6 percent for most of this year, buyers are already getting a risk premium, especially given today's still attractive mortgage rates.

Many investors say they need higher capitalization rates to justify buying today. We contend that even if rates were 30 to 60 basis points lower than they are right now, investors should see returns that compare to those buyers expect in a stable market.