"Though the 93 first-quarter sales transactions is up slightlyfrom 87 transactions in the first quarter of 2007, the slowerdouble-digit activity reflects the continuing disparity in pricesbetween what cautious investors want to pay and the value existingowners continue to see in their properties," said George Carlson,associate director and apartment specialist with Cushman &Wakefield San Diego. The number of apartment units sold betweenJanuary and March is also down 48.9% from the 2,854 units thattraded in the first quarter of last year, and marks the lowestunits, of units sold in a quarter since 1992, when 1,352 unitschanged hands.

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Overall, C&W states that multifamily assets in San DiegoCounty are well positioned given the high barriers to entry andlittle new construction. There were just 2,490 new unit additionsto the area in 2007 and only 1,290 units are slated to hit themarket this year, the firm reports, citing data from MarketPointeRealty Advisors. Further, vacancy as of the first quarter was just3.6%, while rents rose nearly 4% over the year to $1,311 a unit.This, says the firm, continues to support the hold strategy of manyexisting owners.

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"Many existing apartment owners are adjusting their investmentstrategy to a focus on cash flow through higher occupancy andrental rates," says Carlson. "They recognize the growing demand forrental units due to recent home foreclosures, as well as the factthat in San Diego housing prices, though down from recent years,are still out of reach for many." And given the caution in theinvestment arena due to the slowing economy and capital marketconstraints, he adds, there "has been a shift in investmentstrategy rather than a fallout with declining values."Meanwhile,Marcus & Millichap Real Estate Investment Services has asimilar opinion. Fundamentals in the market are tight, though itdoes face some threats from failed and unsold condominiums thatpose competition. The firm expects employment to take a hit ascompanies, particularly those in the housing industry, continue tolay off workers. The good news is that deliveries will be fairlymodest at 990 new units this year, up from 920 last year. Despitethis, vacancy will edge up 80 basis points to 4.5% by year's end,after a 30-basis-point decline in 2007. Rents will also rise,though at a more sustainable pace, says the company. Both askingand effective rents should go up by 2.9% to $1,336 per month and$1,297 per month, respectively, by year-end.

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Investors will continue to be interested in the market, but theshift in the capital markets and waning of the condo sector will"dampen" deal flow, contends Marcus & Millichap. Volume fell by21% in 2007 and 33% the year prior. Meanwhile, the median salesprice fell just 1.8% over the past 12 months to $133,800 a unit,following a 10% drop last year. Cap rates haven't budged muchbeyond the mid-5% range, though most communities on the block nowhave yields near 6%.

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The firm's analysts believe that local properties' stableoperations and low housing affordability will continue to supporthealthy investment activity, especially among investors with largesums of cash. Given the area's pricing and the current lendingenvironment, they add, last year's trend of deal-making byinstitutions and REITs will likely carry over into 2008.

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