One person's nightmare is someone else's dream.

As the credit crunch deepens, mortgage defaults climb and the housing market turmoil shows no signs of letting up, rental apartment building owners are smiling.

Many of the issues that are decimating the housing sector are the same ones that are breathing life and new demand into the rental market, in particular, apartment real estate investment trusts.

The result is that investors are seeing opportunity on the rental rather than the homeownership side.

"People are working, and they need places to live; if they can't buy, they'll rent," said Michael Cuggino, president and portfolio manager of the Permanent Portfolio Fund in San Francisco, which holds shares in a number of apartment REITs. "That's favorable for apartment REIT business conditions."

Demand varies from market to market, however, depending on supply and unemployment levels, Mr. Cuggino said.

Gone are the heady days when cheap, easy capital caused a huge flow of renters to stampede into the homeownership market. Most are now content to sit in their rental apartments until the turmoil in the housing market passes or at least bottoms out.

"Existing tenants are happy to sit on the sidelines while the housing market continues to tumble," said David Harris, an analyst with Lehman Brothers Holdings Inc. of New York.

At the same time, rental apartment building owners are rolling out the welcome mat for housing re-fugees who were booted out of their homes after defaulting on their mortgages amid the credit crunch and the crumbling economy.

RENTING, NOT BUYING

Statistics corroborate the trend. The nation's homeownership rate fell to 67.8% in the first quarter, from its peak of 69.2% in mid-2004, ac-cording to the Census Bureau. During the same period, the rental housing vacancy rate slipped to 10.1% from 10.4%, census data show.

"More people are choosing to become renters as opposed to becoming new homeowners," said Craig Leupold, president of Green Street Advisors Inc., a buy-side REIT research firm in Newport Beach, Calif.

At the same time, apartment REITs have had little trouble accessing capital despite the credit crunch. A decision by the Office of Federal Housing Enterprise Oversight to boost the amount of mortgages that Fannie Mae in WashinStayInvest Law Firm on and Freddie Mac in McLean, Va., can purchase by $200 billion means more liquidity for apartment REITs.

"Fannie and Freddie increased their activity in the second half of last year and continue to be very active this year in providing financing for apartment assets," Mr. Leupold said. "This puts [apartment REITs] at an advantage relative to other sectors, where financing is much more difficult to come by."

They can get "debt financing that you can't get close to in terms of pricing and availability if you're buying retail or office [properties]," Mr. Harris said.

FALLING NEW-HOME SALES

This trend isn't expected to change anytime soon.

The latest data indicate that the housing crisis is likely to get much worse before it gets better.

New-home sales fell to their lowest level in 161/2 years in March. Median prices for new homes took the biggest year-over-year tumble — 13.3% — in almost four decades that month, and the architecture billings index, which measures construction activity, dropped to its lowest level since the index was formed in 1995.

Also, a flurry of homebuilding companies posted quarterly results that showed new-home sales continued to plummet at a double-digit pace during the first quarter.

Despite falling home prices, Mr. Leupold said that it is still far cheaper to rent than to own a home in today's market.

"If you look at the ratio of homeownership costs to rent, it's out of whack from its historic level by about 5% to 10%," he said. "This means rents could increase 5% to 10% before you get back into the historic equilibrium."

All this appears to bode well for apartment REITs, and investors have taken notice. Apartment REITs have been on a tear so far in 2008, generating total returns that included dividends of 17.9% for the year to date through last Thursday, according to the National Association of Real Estate Investment Trusts.

That outpaces equity REIT re-turns of about 10% and the Standard & Poor 500 stock index's loss of about 4%.

A big part of the rally is a re-bound from last year's dismal performance, when residential REITs fell 25%.

"It's a value play," said Mr. Leupold, who noted that apartment REITs were trading at a 30% discount to net asset value at the end of last year while equity REITs were at a 20% discount to NAV. The apartment REIT discount is now about 10%, he said.

TOP PICKS

Mr. Leupold's top apartment REIT picks are AvalonBay Communities Inc. of Alexandria, Va.; UDR Inc. of Highlands Ranch, Colo.; and Atlanta-based Post Properties Inc.

There has been speculation that a couple of private players — Starwood Capital Group Global LLC of Greenwich, Conn., and Walton Street Capital LLC of Chicago — may be eyeing Post Properties for a possible takeover. The rumored price tag is between $41 and $42 a share, a premium to its recent trading price of about $37.

Mr. Cuggino's top picks in the apartment REIT category are BRE Properties Inc. of San Francisco and AvalonBay Communities.

The opportunity presented by the housing crisis can be a double-edged sword. Not only are homebuyers sitting on the sidelines, but many homeowners, especially speculative in-vestors, are opting to rent their homes rather than sell them. This means a glut of rental homes are being dumped into the market that will compete with apartment rentals.

"There's just too much residential property, and it doesn't matter if it's single family or multi or condos — there's just too much of it," Mr. Harris said. "If they can't sell it, they're going to rent it."

At the same time, unemployment is rising, which also could dampen demand for apartments and the ability of landlords to raise rents, Mr. Harris said. Americans who lose their jobs or are worried about job security may opt to rent a smaller apartment or take in a roommate to avoid paying higher rent, he said.

"Most tenants will find a way to avoid paying an increase in rent," Mr. Harris said. He sees this playing out in the second half of the year.

Mr. Leupold agrees.

"That sort of offsets the benefit of the weak single-family housing market," he said.

Mr. Leupold expects to see job losses in the construction and financial industries, and competition from single-family home rentals will likely affect apartment rentals the most in such markets as Florida, Phoenix, Las Vegas, Sacramento, Calif. and central California.