Further, fundamentals among markets should vary even more as the cycle continues. Next year, the analyst predicts, firms that have large concentrations of high barrier-to-entry coastal markets in their portfolios will likely perform the best. Housing prices are less affordable in these areas, giving landlords like Archstone-Smith, AvalonBay Communities, BRE Properties and Essex Property Trust pricing power. These coastal areas are expected to generate same-store NOI growth of between 7% and 9% next year.

BofA is more cautious about companies with many communities located throughout the Sunbelt, where the single-family housing market has been cooling and therefore making it more affordable to pay a mortgage versus rent, and where NOI is expected to decline to 5% or 6%. Firms in these areas also generate part of their income from condos, and could see some trouble as that market cools. Such companies include: Apartment Investment and Management Co., Camden Properties Trust, Equity Residential, Post Properties and United Dominion Realty Trust.

Areas of the Northeast and Midwest, such as Boston and Chicago, are expected to endure "generally lackluster" economic conditions. The double-digit NOI growth that Texas has been experiencing is unsustainable now that comps have become tougher, says Nussbaum, who also expects conditions in South Florida and Phoenix to worsen as condominium units and single-family homes revert, flooding the rental pool and increasing competition. And as the jobs that were created during the housing boom decline, the deterioration in once-hot markets could be detrimental to the overall pace of economic expansion.

On the plus side, the job market has been strong, with unemployment at a cyclical low of 4.5% in November. "According to the 51 forecasters surveyed by the Federal Reserve Bank of Philadelphia, nonfarm payroll employment is expected to increase at a rate of 119,000 per month in 2007, down from 155,000 per month in 2006. If we apply the rough rule of thumb that for every five to seven jobs created, one new apartment is rented, this suggests demand for 250,000 apartments in 2007," the report states. "While this level of demand represents nearly a 20% year-over-year decline if the forecast holds, we believe it should still be a positive for apartments, as estimated new supply remains in check, representing just 1.5% of total stock."

Still, there is some cause for concern. Though the multifamily pipeline didn't surge like in single-family homes, it hasn't slowed, either—apartment starts have been at a relatively steady pace of 300,00 new units a year. The significant increase in construction costs in the past several years has acted as a sort of governor on new supply, Nussbaum maintains. "With rents rising, increases in construction costs abating and the condo market cooling considerably, the risk of higher-than-expected multifamily construction activity in 2007 is a real threat, in our view," he says. "While the added supply would not hit until at least 2008 or 2009, we can't help but wonder if an unexpected jump in new supply is a risk that the market has been underestimating."