The pace of apartment construction in the 25 largest metros nearly doubled to 20,000 starts in the third quarter from 11,000 in the second quarter. Unfortunately, most development is occurring in markets that don’t need it, according to a recent analysis by Deutsche Bank Securities Inc.

“In the Texas, North Carolina and Atlanta markets, it’s easy to build and that’s what developers are doing,” says analyst Louis Taylor. “They seem to be building not for what the market needs, but what the developer needs, and that is fees.” Taylor is a senior real estate analyst at Deutsche Bank and the chief author of the company’s Apartment Market Analysis, published this month.

Raleigh-Durham, N.C., for example, had 2,970 apartment units under construction on Sept. 30, equivalent to 3.4% of existing inventory, despite a high vacancy rate of 8.5%. By contrast, some markets in desperate need of new supply, including Orange County, San Francisco and San Jose, Calif., had no apartment starts and precious little under construction in the third quarter. Why are multifamily developers building in markets flush with inventory rather than in places where low vacancy rates suggest greater demand for new units?

For one, markets in general are on the upswing. On average, apartment fundamentals are improving in the 25 markets covered in the Deutsche Bank report, with a 5% vacancy rate in the recent quarter that was down from 5.5% a year earlier. That’s only slightly different from the 5.7% vacancy rate Property & Portfolio Research found in a larger sample of 54 U.S. markets in the third quarter, when vacancy reached its lowest point in five years. With low vacancy and rising rents in many markets, developers are understandably anxious to deliver new units.

Development is more difficult in the markets with the lowest vacancies. Barriers to development include high land prices and a limited inventory of developable sites. Many of the best sites have been tied up for planned residential condominium projects, and are only now becoming available for purchase again as a softening condo market has caused some developers to scrap their plans to build for-sale multifamily projects.

The tendency to develop where it’s easiest has enabled construction to ratchet up more quickly in places like Charlotte and Raleigh, N.C., and in the major Texas cities. That means soft conditions will persist there for the foreseeable future, Taylor says. Those markets have languished under high supplies of apartment space since the 1990s.

Houston is on a slightly better footing than its Texas peers due to an influx of residents from areas ravaged by Hurricane Katrina, who drove vacancy rates down to 6% by the end of the second quarter this year from 10.8% a year earlier. The rate inched upward to 6.3% in the third quarter, but that’s still well below 7.8% in Dallas and 7.1% in Austin.

At least the initial rounds of apartment construction will be welcomed in some of these relatively soft markets, according to Michael Cohen, a research strategist at Property & Portfolio Research. Atlanta, for example, has recovered from a 13.1% vacancy rate in 2002 to a more modest 8.6% today, and is expected to experience above-average growth in its population of renting households. Similarly strong growth is expected in some of the other markets with low barriers to entry, which fuel rapid economic growth and job creation.

“Both Atlanta and Dallas have very healthy expected growth in apartment-renting households, so certainly the demand is there. But builders tend to overbuild in those markets at a certain point in the cycle,” Cohen says.

Soon, development well gain momentum in markets with greater barriers to entry, including New York and Los Angeles, experts agree. That’s because development capital, contractors and prime sites once devoted to residential condominium projects will be shifted to the rental market. The supply of apartment units is projected to leap ahead by 97,000 units in 2007, compared with a net increase of about 19,500 in 2006, Cohen says.

Apartment construction will accelerate in 2008 and 2009, Property & Portfolio Research projects. That suggests landlords will be able to boost rents through 2007, with rents stabilizing as supply increases and comes closer to equilibrium with demand in subsequent years.