Over the past two years, owners have achieved an average rent growth of 6% per year due to significant rental increases in 2000. M&M says that local brokers have reported an increase in the availability of high-quality property in very desirable neighborhoods. "There are investors that have been waiting years to find available property in these areas; this helps to explain the increase in sales prices during 2001 when compared to 2000," says M&M. "Vacancy increased significantly last year and rents adjusted downward, yet prices continued to reflect tight market conditions. This trend also occurred in the San Jose region. Unlike the close correlation between vacancy and rent, where owners adjust rents almost immediately in order to fill vacancies, sales prices lag the change in rents by up to six months.

"Many brokers and owners are watching and waiting to see if the downward trend in market rents catches up with sales prices. Even if it does, price dips will be minimal and will occur during the first half of the year as owners typically hold properties rather than sell into a falling market, especially when there is evidence that conditions may be about to improve. During the second half of 2002, market stabilization and economic recovery will support values, and the expectation of improvement in 2003 may allow for continued escalation in prices."