The production of single-family homes has just about reached the sales pace, but there's still a glut of homes on the market for sale. As a result, home prices have declined 5% to 20%, depending on the market. "I do think we're not done," says Obrinsky. The ratio of home prices to rents exceeded its long-term norm by 50% to 60% during the housing boom, he explains, and though it's come back down, it has only declined by about half or two-thirds of the way. "That leaves us with another 10% to 20% of combined rent increases and/or home price decreases before that ratio is back in the normal range. All in all, I don't see recovery in the for-sale housing market until probably at least 2010."

Surprisingly, the current operating data for the apartment market is positive. By midyear, reported the economist, vacancy rates were hovering around 5.5% to 6%, similar to last year, and rent growth has been between 2.25% and 4.25% over the year. "That's not as good as it might sound when considering inflation's running higher than that," says Obrinsky. "New leases seem to be coming in weaker than renewals at this point and competition from condos in some markets may be impacting rents. This actually delays the needed restructuring in the rent price to home prices ratio. New apartment supply continues to remain modest, at best, which is a positive."

Also a positive, he adds, is the increased demand for apartments due to the implosion of the for-sale market. However, the key concern going forward is the fact that the slumping employment picture is undercutting that demand. Still, Obrinsky believes the long-term outlook for apartments is bright, particularly given the increased attention density and multifamily are receiving due to issues with sprawl and rising gas prices.

For his firm's holdings, David Schwartz, managing member of Waterton Associates in Chicago, says multifamily is doing relatively well in this economic environment, with some modest rent growth nationally, though fundamentals in the once-hot housing markets, such as Florida, Arizona and Nevada, aren't as strong as those in others. Compared to the last recession in 2001, he noted, the supply-demand cycle this time around is a lot better. Fundamentals, in short, are "lackluster, he says. "It's nothing to get excited about."

At Denver-based UDR Inc., president and CEO Tom Toomey related that higher fuel costs, among other issues, are putting downward pressure on revenues. "We're finding that most of our residents are less receptive to rent increases, not that they were before. However, our expenses are remaining pretty well in check," he says of the REIT's portfolio, which is approximately 50% on the West Coast, 25% Washington, DC, 20% in Florida and 5% in Texas. He anticipates UDR's same-store revenue this year to be in the range of 4% to 4.5%. Same-store expenses, meanwhile, should remain in the 3% to 3.5% range. The good news, he points out, is that occupancies are at their highest level in the past five years.

Aside from operations, much of the discussion centered around the investment climate and the capital markets. Schwartz pointed out that it's a difficult environment to consummate transactions for both debt and equity. The bid-ask spread is not shrinking as much as it should be, and cap rate expectations are actually rising. "We're at a point where we can't deny we're in a rising cap rate environment," he says. "That's driven by the fact that more equity is on the sidelines and there's less discretionary equity. Equity typically wants higher returns. It's also driven by tougher financing and underwriting criteria. We only have two real lenders out there--Fannie Mae and Freddie Mac. And then we have lackluster fundamentals. There is a lot of pressure on cap rates to go up, and we just haven't seen anyone blink. So the transactions are really slow right now."

Toomey concurs that equity is hard to obtain, and the amount players are willing to put out is expected to decrease. "People have too many deals piled up on their desks," he noted. "They all feel that asset prices are falling, so why buy now when they can buy a year from now at better prices?" That said, REIT stock prices have held up pretty well this year. If that keeps up, it potentially could support REITs raising equity on the open market through public offerings, he points out.

In terms of the capital markets, Toomey observed that spreads in construction financing are widening. "One of our goals is to complete financing of our development with construction loans, and right now, we're getting proceeds of anywhere from 65% to 70%," he related. On top of that, spreads are moving up very rapidly. The executive expects construction lending to stop "or come to a screeching halt where the price is going to make it too painful. We're trying to close out what we can because we think that window is going to shut, for a number of reasons." The lack of construction financing will also help to free up land to purchase as developers with entitled land will look to unload it, he adds.

What lenders do seem to be receptive to is granting extensions for debt maturing in 2009 or 2010. The rollover of deals financed in the 2005 to 2006 time-frame will also create some purchasing opportunities, since the owners of those assets may not be able to lever up as much as they did when they initially purchased it.

It's difficult for a property owner, particularly if it bought the asset in the past few years, to sell today since it would probably be taking a loss, said Schwartz. The only way that would happen, he explains, is if it's hand is forced due to maturing debt it can't refinance or an equity partner wanting out of the deal. "I think a lot of people are in a situation where they have relatively good, long-term or mid-term debt and they can ride this out," he says. "And if the cap rates go up, they think that the NOI will rise over time, so they could make a profit on the deal if it can hold onto it for a longer term.

"You will see the sales occur when a lot of the short-term, high-leverage debt from the 2006-2007 period beginning to mature and won't be able to be refinanced," he continues. "That's interim conduit or investment bank debt, and there's going to be quite a bit of that maturing. That's going to create some opportunities that will bridge the gap between buyers and sellers.

Indeed, waiting it out seems to be a better investment strategy these days, since there's a lot of uncertainty in the market today and many believe asset values are on the decline, executives agreed. Cap rates will ultimately rise and remain higher, but it's going to take some time.

It's that uncertainty that has UDR shaping up its strategy, relates Toomey. "We're playing probably 75% defense right now and 25% offense, and our defense is all built around how we can make ourselves completely self-funded through 2010 and let this market and asset prices sort themselves out," he says. "When you take 80% of the capital source for the industry [the GSEs] and give it a new boss and new rules, I don't know what's really going to happen there. I can hear all the commitments and all the discussion, but I've got to lay back and wait. The good news is that we're a rated company and we can go into the unsecured market, but right now the unsecured market is at about 8%. For now, defense is the game for us."