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HOUSTON-Houston moved up six places on Marcus & Millichap’s National Apartment Index for 2009 compared to its last year’s placement, thanks to a forecast for the nation’s strongest employment growth. But it still ranks only 29th overall for multifamily investment potential due primarily to rising vacancies and, paradoxically, the market’s underlying strength, which limits value-add opportunities.

The outlook for the market is generally positive, according to the report writers, and it remains attractive to investors due to the wide array of purchase options and rising cap rates that were in the mid-7% range at the end of ’08. The report predicts more distressed properties will come to market this year, offering some opportunities for value-add investments, but the number will be below that of other regions.

As the report notes, the national housing and financial crises have had minimal direct impact on the local economy. Where most US markets are suffering job losses, Houston employers are projected to generate 13,400 jobs this year, a 0.5% increase over ’08. While an increase in employment ordinarily would be good news for apartment owners, according to Marcus & Millichap researchers, in this case the opposite is happening because the local for-sale housing market remains relatively healthy, enabling tenants to continue moving from rental stock into their own homes.

In addition, construction of new multifamily properties continues. Though the real estate services firm expects the level of deliveries to be 11% lower than last year, enough up-to-date product will hit the market to spread the tenant base thinner. As a result of both trends, the report predicts vacancies will rise 110 basis points to 11.4%, following a 150-basis-point rise in ’08. Despite the rise in vacancies, it also predicts rents will rise, but only marginally as owners will be forced to offer greater concessions in order to achieve desired rates. So while asking rents are projected to rise 1.6% to $771 per month, effective rents will advance only 0.9% to $711 per month.

In regard to submarkets, the researchers say suburban assets, especially in Montgomery County, should begin to perform better this year due to strong population growth and delayed home purchases. But Brazoria County, which received a boost late last year from Galveston residents displaced by Hurricane Ike, is expected to suffer a reverse as people return to their original homes.

Additionally, the report says class A complexes near the Texas Medical Center are well-positioned to provide stable returns for larger investors willing to pay premiums. It also says buyers looking for properties with the opportunity to improve occupancy levels may target assets southwest of the city center, where the end of the FEMA voucher program has resulted in many struggling properties. Though this may motivate out-of-state owners to sell, the report authors warn that deferred maintenance could significantly boost ownership costs.

Despite the generally positive outlook, the report cautions that a significant economic downturn could lessen import activity at the Port of Houston, while a global reduction of demand for gasoline may impact exports and refinery operations, diluting apartment demand near the port. If revenue falls, it says some smaller oil companies may slow expansion or even cut positions, leading to reduced demand for class A units.

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