New apartment construction in the Washington area increased significantly during the first half of 1987, despite fears that recent federal tax law changes would curtail such development.

Robert Sheehan, consulting economist for the National Apartment Association, said that the number of building permits for new apartments rose 47 percent between January and June compared to the number issued during the same six-month period in 1986. Overall, 7,113 permits for multifamily housing units, of which rental apartments accounted for about 80 percent, were issued for the first six months of 1987, up from 4,850 a year ago.

"We are seeing a boom in this area in apartment construction," said Tom Bozzuto, executive vice president and regional partner for Oxford Development Corp., which is building three complexes in the Maryland and Virginia suburbs and is planning four more. Those seven are in addition to three the company recently opened, according to Jeanne Hendricks, an Oxford vice president.

The areas experiencing the greatest increases are Fairfax County, with 1,881 units approved compared with 707 for the first half of 1986, and Prince George's County, with 922 units compared with 152 the year before. Alexandria also experienced a significant increase. City officials there issued 738 permits, up from 102 during the January-to-June period of 1986.

Almost all of the new apartment construction is occurring in the suburbs. Developers in recent years have virtually stopped apartment construction in the District of Columbia because of the city's rent control law. But now builders have again started looking for apartment sites in the city.

The construction trend seems to belie earlier fears that recent federal tax code revisions would wipe out such development by eliminating most of the tax breaks available through apartment construction. Brian Trossen, director of real estate advisory services for the accounting firm of Laventhol & Horwath, said that most of the money for new rental projects formerly came from tax-exempt bonds and syndicated limited partnerships.

The new tax law, which went into effect Jan. 1, capped the amount of bonds local governments could issue. Consequently, "that source of financing has all but disappeared" as local governments used the bonds for other purposes, according to Dennis Tomsey, a residential division partner for Trammell Crow Co., another apartment developer.

New tax rules also trimmed the amount of financing apartment developers got from syndications by limiting their usefulness as tax shelters. Trossen said that most investors "got into syndicated limited partnerships {for apartments} to be able to offset losses against their incomes" because many apartment projects often lost money. But, under the revised code, investors cannot use the losses to shelter their salaries or other "active income" from taxes, but only to shelter income from other real estate ventures or "passive earnings," he said.

However, increased demand for apartments, a shortage of units caused by a cessation of new rental development and the wave of condominium conversions during the 1970s and early 1980s have enabled landlords to charge higher rents and to obtain financing for new developments from other sources. That is spurring the current round of development even though many of the projects were already under way before the tax law was changed.

Jeff Franzen, a partner with Lincoln Property Co., said, "The Washington market is a very lucrative market to be in. While the loss of tax incentives makes it tougher to make money, the returns are enough to justify" building new apartment complexes.

Vacancy rates here typically average between 3 and 5 percent, with some areas such as Alexandria at 1 1/2 percent, Sheehan said. Nationally, the average is 9 percent or higher, he said.

Trossen said that landlords have taken advantage of the low vacancy rates to boost rents. "Eight-to-10-percent increases are not uncommon," he said. Sheehan said that the majority of new units typically rent for $500 to $700 a month for one-bedroom apartments.

As a result, developers have had an easy time getting financing for new projects from sources other than tax-exempt bonds or syndications. Bozzuto said that while Oxford used to rely on tax-exempt bonds and syndications for 60 percent of its financing for new apartment development, it now relies on insurance companies and commercial banks to back its ventures. Interest rates also have fallen, which makes conventional financing affordable for new projects, Bozzuto said. And the company still has been able to use syndications to raise money, but they have become "economically centered rather than tax based," he said.

Industry sources also attribute the boom to commercial developers switching from office development. Kevin Keegan, vice president of the Alan I. Kay Cos., said that his company, a commercial developer, left the rental market five years ago "because the partners felt there was greater opportunity in the office market." But with office vacancies in the District hovering around 10 percent, "we're looking at getting back in," he said. The company, he said, is looking at several properties on which to build apartments, even though it has not signed any contracts to date.

But the increase in apartment development has not alleviated a crunch in low-to-moderate-income housing. While developers using tax-exempt bonds had to reserve 20 percent of the units for tenants earning less than 80 percent of the median income in a specific community, the shift from tax-exempt bonds to conventional financing has virtually halted construction of low-to-moderate-income housing.

"With land prices and construction costs so high, we can't offer moderate rents. We can't do it with conventional financing" and still make money, Tomsey said.

He said that land prices alone for new apartments typically average between $15,000 and $22,000 per unit.

The spurt in apartment developments does have some landlords seeking new ways to attract tenants to fill them. Hendricks said that Oxford is offering tenants such services as free laundry pick-up and loaner bicycles.

Despite the surge in construction, most developers said they do not expect a glut to occur because the boom should slack off as suitable sites are taken and developable land becomes scarcer, Franzen said.