Opinion: Keep Your Eye on Apartment REITs

Thompson continued: "It's very difficult to get a 50 bps move across that average in a given 12 months, but with unemployment the way it is, we see the vacancy rate going up 1%, which is going to be a challenge."

Indeed it will be, and investors know it. Bad news spreads like wildfire, and fearful investors bail in an already volatile market. Many of the largest apartment real estate investment trusts, including BRE Properties (BRE Quote), Equity Residential (EQR Quote), Apartment Investment & Management Company (AIV Quote), Essex Property Trust (ESS Quote) and AvalonBay Communities (AVB Quote), have been pounded in recent months. All of them are at five-year lows.

Many investors and real estate enthusiasts believe commercial properties will face widespread vacancies as a result of rampant overdevelopment like those of the 1980s and 1990s, but the only sector to enter the downturn with too much construction is retail. According to the National Association of Home Builders, multifamily starts fell to the lowest number the association has on record, with just 119,000 units.

That should bode well for the multifamily housing market. The recent increase in apartment vacancies is the result of rising unemployment and the competing shadow market, not new development.

"We're in the early middle stages of this 20-year expansion of rental demand," Thompson said, referring to the echo boomers as they mature into their prime rental years. "We believe that once we hit bottom and once we start climbing out of this recession, we're going to see a fairly steep recovery."

Commercial real estate sales have dropped significantly even though prudent investors know this is the time to buy. Apartment REITs like AvalonBay and BRE have canceled or postponed development projects throughout the country. REITs and private investors alike cite the cost and availability of capital coupled with job losses and slumping housing prices as top concerns.