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SACRAMENTO, CA-With sales prices way up and rent growth slowing, lower returns will put downward pressure on apartment investment activity over the next 12 months, according to the latest apartment market research report by Marcus & Millichap Real Estate Investment Brokerage Company.

The average rent in the Sacramento region increased 3.2% over the last 12 months and is forecast to reach $891 per month over the next year; however, concessions increased over the last year as well, and effective rents are currently 3.1% below asking rents, compared to 1.9% one year ago. New product coming online will boost the average rent over the next 12 months, but existing properties will have to compete, keeping a lid on rent growth.

Prices are not forecast to soften, according to the report, but appreciation will slow in 2003. Investors interested in the market or in need of 1031 exchange properties helped to generate an 11.4% increase in sale prices during the first half of 2003, according to the report, pushing up the median price per unit to $68,917. The sales climate will remain in sellers’ favor, according to the report, but owners who price properties aggressively are likely to experience much longer marketing.

“Demand for apartment properties in Sacramento is currently running well ahead of supply; however, over the next few years, price appreciation is forecast to slow, allowing time for rents and occupancy rates to catch up with selling prices,” says Robert Hicks, regional manager of the firm’s Sacramento office. “Slower, more sustainable growth will help maintain the market’s health and benefit the multifamily investment climate over the long term.”

Developers are expected to deliver 4,300 apartment units to the Sacramento region from mid-2003 to mid-2004, up from 2,900 units over the previous 12 months, according to the report. Close to 30% of the new units slated for completion over the next year are located in the Roseville/Rocklin submarket, while another 21% are in the Elk Grove submarket.

Region-wide apartment vacancy is forecast to rise slightly to 6.9% over the next year, as employment growth remains relatively low and new supply increases. The South Sacramento submarket is currently the tightest in the region, with vacancy reported at just 3.3%.

Regarding the people who rent apartments, from second quarter 2002 to second quarter 2003 job growth reached an estimated 0.7%, but is expected to hit 1.7% by second quarter 2004. The most significant employment gains over the next 12 months are expected in professional/business services and the financial activities sectors, which combined are forecast to add 6,400 jobs.

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