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(Read more on the multifamily market.)

HOUSTON-Once upon a time, private investors and small investment groups were the driving force behind the multifamily market locally and statewide. Experts are telling GlobeSt.com that these days the state’s inventory for all category classes has caught the eye of larger, well-funded investors, private and institutional–and the trend is likely to continue.

Teresa Lowery, principal in Colliers International Inc.’s Houston office, finds that a good chunk of buying interest is coming from newly formed funds with purchasing powers well in excess of $1 billion. “The size of these funds are forcing out a lot of the smaller private companies from the market,” she says.

Don Ostroff, senior director with Cushman & Wakefield of Texas Inc., agrees that Houston in particular and Texas as a whole is a magnet to both mega-funds and institutional investors, partly because of climbing interest rates. “Everyone had predicted, correctly, that when interest rates rose and availability of capital in terms of rates or loan-to-value would change, it would favor institutional investors,” he explains. “And, they’d be more successful in acquiring property.”

Mega-buyers’ interest in Texas also is the outgrowth of steadily rising jobs and population counts plus projections for the future. “That’s not missed by institutional players who read economic research,” Ostroff says.

Both multifamily experts are quick to point out that while at one time, growth occurred along the coasts, population shifts are headed to Sunbelt states. “A list of the largest cities in the US shows all major Texas cities ranked in the Top 20,” Lowery says. Houston is in fourth place; San Antonio, seventh; Dallas, ninth; and Austin 16th.

According to the Institute for Demographic and Socioeconomic Research at the University of Texas at San Antonio, the state’s population increased 22.8% between 1990 and 2000. This decade most likely will beat the last one as Northern snowbirds and Hispanic immigrants pour into Texas.

The report shows the Hispanic population in Texas grew 20% between 2000 and 2005. In the multifamily arena, 37% of the 382,642 renters in Greater Houston were Hispanic while African-American renters accounted for 30% and Anglos, 27%. Statewide, Hispanics represent 34% of the 2.67 million renters and Anglos, 44% of the base.

The Hispanic population also tends to rent for longer periods of time than other demographic groups. “This isn’t a group that moves away from home, takes an apartment for two or three years, then buys a house,” Ostroff says. “They remain renters for awhile.”

As a result, investors are examining every class of property from class A plus to class C value-adds. Lowery says many investors she’s working with are focused on class B, or even class C-plus complexes that can be raised to a class B with some capital infusion.

David Wylie, a principal in Houston for Apartment Realty Advisors, confirms that he too is encountering more investors who want class B and C assets. In many cases, it’s an alternative because it’s so pricey to build.

Investors are looking at existing complexes and bidding on them, even if they aren’t for sale. “Because the market is so strong, these guys are getting aggressive and are coming in with offers,” Wylie says. “But they’re buying the lower-class deal and making interior improvements. They know there’ll be demand for it.”

What does this mean for the smaller, private investor who’s been the bread-and-butter for multifamily investment? Wylie suspects many smaller investors will hold onto their properties until the right deal comes along or to wait and see what the market does.

Lowery also believes smaller, private investors will be sidelined for awhile–at least until financial dynamics change. “The perspective is that some of the smaller, private equity-funded competition will be forced to the sidelines, with larger, fully discretionary funds having a clear path to the current investment pipeline,” she says.

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