Toti and Mehta noted that unlike previous recoveries in which supply initially increases in low-barrier markets, developers today are targeting the highest-tier, coastal, so-called A markets. That is because lenders are more willing to fund projects in these less risky areas, such as downtown Bethesda, Md., where cranes rise above the busy streets. Once considered a suburb of Washington, D.C., Bethesda is now a prime urban market, and developers and REITs such as ederal Realty Investment Trust are reaping big rewards, despite what some call an overheating market.

“We’re not concerned about any of that,” said John Tschiderer, vice president of development for Federal Realty. “I think a lot of it is location-driven and place, quality of place-driven, and in our investments our locations are strong, based on transit and the quality of what we build.”

Apartment vacancies fell to just 4.2 percent nationally in the first quarter, down from 5 percent a year earlier, according to Reis Inc. That pushed rents higher by more than 3 percent year-over-year.

“Analysts have wondered how rents could keep climbing when jobs are being created at a sluggish rate and wage growth has been relatively stagnant,” Reis economist Victor Calanog wrote in a recent report. “One answer is that the moribund housing market left households with little choice but to absorb rent hikes, but with the housing market now recovering, does that mean the tide is turning against landlords?”

(Read More: Boomers a Boon to Urban Home Builders)

Article source: http://www.cnbc.com/id/100646124