It's time to wave the checkered flag in the multifamily sector. It was the first property sector to see recovery and first to see a renewal of construction activity in the fast growing markets of the Sun Belt. Now, it may be the first sector to experience a slowdown in activity. Some of multifamily's hottest markets are beginning to get that overbuilt feeling, places like Dallas, Atlanta, Tampa and Tucson. On the lending side, competition has been so fierce, spreads have come tumbling down.

Emerging Trends in Real Estate 1998 by ERE Yarmouth and Real Estate Research Corp. has also waved the caution flag about multifamily. Last year (1997), Emerging Trends noted an ebbing of investor sentiment for apartments and this year the drop from favor is even more pronounced as the industry expects tepid appreciation and rental growth. In addition, the sector's risk-adjusted return profile has shifted into the "chancier" parts of the spectrum. One concern for investors, a relative supply/demand balance that will be upset by a continuing surge in new construction.

Even multifamily developers and owners are suggesting caution. The MIG Cos.' The Advisor newsletter observed, while national construction levels of multifamily matches well with demand growth, certain submarkets will experience excessive building that will affect near term performance. The Advisor warned, "it is time to pay close attention to local development activity."

Staying healthy This is not to say multifamily faces a collapse like that which hit it and other real estate asset classes just a decade ago. In fact, there are plenty of signs the market is still very healthy. Lenders and investors lean toward multifamily because generally there is less volatility in the markets. Stability has an attraction in and of itself. "There is lots of capital chasing apartment deals," says David Jacob, a managing director and research director at Nomura Securities International. "Particularly because it is the only 'obviously safe' sector remaining after the retail sector's problems beginning in 1995. Apartments are the last haven for dumb money."

"Apartments have stayed pretty steady," says Randy Hawthorne, chairman of the National Multi Housing Council in Washington, D.C., and a senior vice president at Boston Financial. "They continue to be viewed as investment grade property as there is a reasonably good balance of supply and demand."

Going into autumn, multifamily housing starts rose significantly. At a 293,000 units seasonally adjusted rate, starts were up 14% and were at there highest level in seven years. The NMHC's Market Trends newsletter reported "the pipeline of projects under construction has grown in recent months and an increase in apartments coming on line is probable."

With all the construction activity, it would appear that vacancy rates would begin to rise and they have, up 9.4% by autumn. According to Dallas-based M/PF Research, the good news is that the vacancy rate among professionally managed apartments inched downward to 5.2%, near the lowest reading in five years.

Stan Harrelson, president and chief executive officer of Pinnacle Realty Management based in Seattle, can look around his corporate headquarters and see a wealth of opportunity for his company's hometown and the rest of the Pacific Northwest. Pinnacle Realty is national in scope with 86,000 apartment units under management, up from 75,000 at the beginning of 1997. While Harrelson touts Seattle, Portland, San Francisco and San Diego as good markets, he pans the Sun Belt cities of Austin, Atlanta, Dallas, Orlando and Tucson.

"It is not just geographic markets that need to be investigated for construction and lending purposes, but the type of product as well," says Harrelson. "If you look around the country, multifamily has become polarized. Some 60% of it is fueled by tax-credit construction, and the other 40% will be high-end residential. The missing segment is what I consider conventional, non luxury stock."

Boston Financial, an equity investor and property manager for pension funds, has made considerable forays into multifamily having accumulated 40,000 apartment units in 25 states. It, too, is looking at the West Coast as well as the East Coast north of Washington and some of the Rocky Mountain areas like Colorado and Utah. In the Sun Belt, Boston Financial eschews former hot spots like Arizona and Atlanta, but likes San Diego.

"Good markets, in general, create their own problems and you can certainly sell for a very fair price," says Hawthorne. "However, you end up with investment risk. If you are really committed to reinvesting capital back into the same market in the same segment. You may just have to turn those profits back into the cost of acquiring someone else's existing assets."

REITs Except for retail, there are more REITs categorized as multifamily than any other sector. However, it is an unstable category as mergers and acquisitions are rife within the group. Among the names disappearing from stock charts are