(To read more on the multifamily market, click here.)

HOUSTON-Statistics issued recently by CB Richard Ellis Group Co. about multifamily investment players tell an interesting story. Nationally, concerning deals of $20 million or greater, 27% of transactions were driven by life and pension funds, while 30% of those deals were spearheaded by private capital. But comparing Houston transactions to the national norm reveals a vastly different story, with 9% of those deals going to the institutional side–and 54% of the deals driven by private capital.

This news doesn’t come as a surprise to area experts, who tell GlobeSt.com that Houston’s multifamily market has long been appealing to the private capital entities. On the other hand, institutional money tends to shy away from the area for a variety of reasons, one of which is because the Bayou City is perceived as having a one-horse economy.

Though Houston’s economy has diversified over the past decade, the fact that energy and oil are its mainstays remains on investors’ minds, says Craig LaFollette, senior vice president and multifamily housing specialist with of CBRE. “The energy industry is volatile, and the institutional investors don’t like volatility,” he says.

Also considered volatile is land use. “At the land use planning level, Houston is unpredictable,” says Wil Balthrope, senior director, Cushman & Wakefield, Texas Inc. “There’s no zoning in Houston. No zoning means there’s no predictable land use and no restrictions on nearby or adjoining developments.” Institutional investors, who dislike unpredictability, are reluctant to invest in a multifamily project on the chance that another such project might go up on the vacant lot right next door.

In addition, private investors are attracted to the current environment, with its low interest rates and favorable lending parameters. “These investors can leverage their properties and earn a good return on investment,” says Doug Lockwood, vice president, multifamily investments with Grubb & Ellis Co.’s Houston office.

Furthermore, the low rate of return on the stock market has attracted private money to real estate. “There are a lot of people out there with a high-net work value, or even individuals who are willing to put $20,000 into a TIC or a partnership because they don’t want to put it in the stock market,” explains David Mitchell, vice president with Apartment Realty Advisors’ Houston office. “The stock market is down, more household money is going into real estate, and aggressive financing vehicles are out there. This allows them to compete with REITs and institutions.”

But those REITs and institutions are taking a closer look at the multifamily market, due to an improving economy. LaFollette and Balthrope point out that institutional investors are showing a high interest in multifamily properties inside the Loop as well as in the Galleria, Medical Center and CBD submarkets.

The experts also say that slowly rising interest rates are putting a crimp in the style of the private capital investors. “Private guys are having a harder time making deals that make sense, and are running into competition from pension fund advisors and institutional groups,” Mitchell says.

While no one is predicting that institutional investors are suddenly going to embrace the market as the place to be, they acknowledge that changes are coming. “Houston is becoming an almost fashionable place to invest because it’s considered by many to be the world’s center for energy exploration, development and engineering in all aspects of energy,” Balthrope says.

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