For more on the financial crisis, check outGlobeSt.com's Webinar, "Wall Street In a Freefall—TheWinners and Losers."

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DALLAS-Whether it's bravado or foolhardy development, Texas'multifamily developers haven't been stopped cold by the financialchokehold on new projects prevailing in many markets. There are55,516 units under construction in the four major metros, withDallas/Fort Worth at the head of the pack in the 18-monthpipeline.

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In North Texas, there are 20,585 units being built. Houston'sadding 16,282 units while Austin is in line for an additional13,018 and San Antonio, 5,631, according to a just-releasedthird-quarter report by Carrollton, TX-based M/PF YieldStar. "It'saggressive everywhere. Austin is the one that frankly scares memore than any," Greg Willett, M/PF's vice president of research andanalysis, tells GlobeSt.com. "It's over what you'd like to see inall those markets."

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Willett says red flags start to rise when construction levelspush past 2% of the inventory. Austin's pipeline will add 8% to its162,280-unit inventory, he says. The existing inventory inDallas/Fort Worth totals 562,465 units; Houston, 497,010; and SanAntonio, 136,455.

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Dallas/Fort Worth's construction level is at its highest pointsince 1999. In the third quarter, 4,000 units got under way and6,000 began in second quarter.

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The curious part of the building surge is it flies in the faceof Main Street's perception that lending has dried up. Willett saysmany developers reported they had financing in hand before thecapital markets stalled while others say they've resorted tolayering funding through more than one source.

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"Between commercial banks remaining willing, even if havingbecome more discerning, to lend and the ongoing involvement ofFannie Mae and Freddie Mac, the flow of mortgage financing formultifamily properties will no doubt slow, but is unlikely to grindto a halt--especially for good assets that are well leased and infavorable locations," says Richard F. Moody, chief economist forAustin-based Mission Residential LLC.

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In a recent report, Moody points out that Fannie Mae and FreddieMac can "add to their holdings through 2009" and then are requiredto "begin shrinking their portfolios in 2010" under the terms oftheir takeover. The agencies' direct holdings account for 19.2% ofall outstanding multifamily mortgage debt and securitized pools ofmortgage-backed securities, according to Moody.

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In the second quarter, Moody's research shows the agenciesprovided $13.26 billion of the net $16.26-billion increase inmultifamily mortgage debt in the US. Commercial banks accounted for$3.19 billion of the net increase in Q2 multifamily mortgages andhold 20.1% of all outstanding multifamily mortgage debt and 50.2%of all other commercial debt.

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"While the longer-term outlook for Fannie and Freddie remainsuncertain, thus far the takeover by the federal government has notled to any disruption in their multifamily funding activities,"Moody concludes, "which is fitting in light of the fact that thissegment of the agency portfolios continues to turn in a solidperformance--highly profitable with very low default rates." As forthe future, he says the feds are likely to keep multifamilymortgage money flowing due to the commitment to affordablehousing.

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However, Moody says tighter lending standards--now inplace--will dramatically affect development loans going forward.,but "does not mean qualified borrowers will be automatically turnedaway." The silver lining is the measured slowdown will "prevent thetype of significant supply-demand imbalance that developed in thelate 1980s/early 1990s cycle," he concludes.

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Willett says the difference between the present and the past isTexas is adding jobs. The impact of the state's economic health wasreflected on his Q3 report card, with increased rents andoccupancies in Austin, Dallas/Fort Worth, Houston and SanAntonio.

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On the occupancy front, Austin climbed to 94%, up six-tenths ofa point since midyear; Dallas/Fort Worth, 93.2%, up ahalf-percentage point; Houston, 91.7%, up nine-tenths of a point;and San Antonio, 92.8%, just a blip higher than the lastreading.

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As for rents, Austin gained 3.1% to bump its average to $838 permonth. Dallas/Fort Worth and Houston picked up a 2.9% gain, pushingthe average monthly cost to $766 and $764, respectively. SanAntonio's rents ticked up 1.9%, driving the average to $712 permonth.

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Dallas-based ALN Apartment Data's newest research shows theTexas markets clearly are outperforming top multifamily marketpeers. Texas occupancy statewide is 89.8%, down 0.9% in theyear-to-year comparison. However, Florida dropped 1.9% to 89.5% andArizona plunged 3.4% to 88.9%. Of the three, only Texas gained onaverage rent, jumping $23 to $771 statewide.

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"In terms of overall performance, the Texas markets are inpretty good shape," Willett says, adding concessions havepractically gone away. "Our concern is in the near term, given theamount that's under construction."

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The Austin market already is showing signs of damage from theconstruction level. Occupancy might be OK, but rent growth as 5% to6% when the year began. Houston's window will start closing inearly 2009 while San Antonio will hold its own due to slower growththan the others. In Dallas/Fort Worth, the units are still in earlystages. "It will take a little longer for it to show up," Willettforecasts.

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