"The San Jose apartment market is nearing the bottom," says GaryR. Lucas, senior vice president and regional manager of the firm'sPalo Alto office. "Vacancy improved early in the year, due toheightened demand for apartments. Job creation is essential for therecovery of the local apartment market and over the next year; theresurgence of employment growth is forecast to generate enoughdemand to keep market fundamentals moving towardsstabilization."

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After falling by 4.3%, or 39,000 jobs, from mid-2002 tomid-2003, employment is forecast to grow by 0.5% from mid-2003through mid-2004. While that works out to a net gain of 4,600 newjobs, a few sectors will continue to contract includingconstruction, which is forecast to shrink by 1,600 jobs over thenext year.

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In support of the recovery, developers abandoned projects indroves and delivered just 800 units in 2002, according to thereport. That figure is expected to rise to 1,150 units in 2003 andthen fall back to 950 in 2004. The North Park complex in San Joseis home to 43% of the units slated for completion in 2003.

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While the 6.5% vacancy rate during the second three months of2003 is a decline from the second quarter of 2002, combined firstand second quarter vacancy is higher than the first half of 2002.Moreover, vacancy is expected to continue rising over the next yearbefore stabilizing at around 7% by mid-2004.

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In an effort to hold occupancies, average asking rents slippedby an estimated 7% over the last 12 months, to $1,356 per month.Over the next 12 months, they are forecast to fall by another 4%,to $1,302 per month, with the bulk of the change taking placeduring the latter half of 2003. The Cupertino submarket was thehardest hit over the year, with rents falling 10.5% to an averageof $1,575 per month.

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On the investment side, the gap between buyer and seller iswidening, slowing sales dramatically. Sales will continue to besluggish as deals are called off after buyers in escrow look torenegotiate based on the falling fundamentals, according to thereport. Up through June, however, prices remained high relative tomarket conditions, with the median price per unit, at $128,125,down just 8.8% from 2001, when prices peaked.

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