We kept them through the downturn even managed a couple ourselves remotely and waited for them to rebound... one we made $70k additional on this year and it's waiting for a 1031 exchange now.

Most of Arizona has rebounded but my town has not due in part to drawdowns on the base and many commercial stores have closed.

I'm looking forward to 2018 having fewer new units coming online so the market can begin to rebound.

They bought these for capital appreciation (generating rental income while waiting for prices to rebound).  

The market has made quite a rebound in the Palm beaches.

Are there any other rebounding cities you're liking better for a 1-2 house rental investment?

On the thought of appreciation, you should be looking to hold longer than 2 years, with transfer taxes/commissions/etc you won't be sitting pretty unless the market tanks tomorrow and rebounds that quick.  

The advantage here is if you buy real estate at the top of the market, you can continue to collect monthly rent payments while you wait for the market to rebound.

He's done some work on the property but seems he bought mostly expecting the market to rebound after the crash (paying off now).I do expect we may lose every tenant over the next year, but that will pay off long term, I believe.

In some areas of the country real estate is booming, some areas are "OK", and others are stagnant or haven't rebounded to peak prices.