When Gerald Hines talks, people listen.

And as 2011 unfolds, the Hines development organization has a new word for the future: Apartments.

The Houston development firm has been known for developing the Galleria and high-rise towers around the world. Hines is the major sculptor of the downtown Houston skyline of office towers.

But Hines and other developers around the nation have come to the conclusion that under current market conditions — apartments are the one development that really makes sense right now.

Hines, one of the biggest real estate companies in the world, has formed a Multifamily Division and hired apartment industry veteran Alan Patton to lead it.

"We think Hines can become a very successful player in multifamily, especially with someone of Alan's specialized knowledge and experience base on our team," says Hines president and CEO Jeff Hines. "The multifamily sector is poised for near-term growth, and we are seeing strong interest among our investors."

Patton was formerly president of The Morgan Group, a Houston-based multifamily developer.

A National Trend

Hines isn’t alone. PM Realty Group, a Houston-firm that has been a fixture in office leasing for decades, is starting a 23-story apartment building in the Design District in Dallas.

But the trend extends across the nation. The national apartment vacancy rate is 6.6 percent, down from 8 percent a year ago, according the REIS real estate research firm.

One of the key drivers behind the boom is the slowdown in apartment construction over the last few years. Sharon Dworkin Bell, senior vice president of the National Association of Home Builders, says America has a “shortage” of apartments.

“We are going to have a supply/demand imbalance and we will have rental increases,” Bell says.

The nation’s apartment development fell to barely more than 100,000 new apartment units starts in 2009 and again in 2010. That’s not enough to keep up with the natural population growth. The huge Generation Y generation is maturing and leaving home and getting their own apartments. More Americans turned 18 years old in 2010 than in any prior year.

The home builders association is projecting a 16 percent increase in apartment construction in 2011, followed by a 53 percent increase in 2012.

With employment growth recovering as the economy revives, the demand for apartments will rise significantly.

A national study by the Marcus & Millichap firm, said all 44 cities in its annual survey will have rising apartment rents, declining vacancies and employment growth in 2011. It will be the first time since 1990 that the nation has shown such thorough vacancy declines.

Marcus & Millichap declared that 2011 will usher in a “sweeping recovery and expansion in the U.S. apartment sector.”

The softness in single-family home sales also points to a more favorable market for rental housing. Mortgages are more difficult to obtain for many buyers. And widespread foreclosures and financial failure have darkened the credit records of many would-be homebuyers, who are turning to rental housing instead.

Calling on Architects

A number of developers are looking into apartment development. The American Institute of Architects’ architecture billing index, an indicator of future construction activity, showed the apartment sector was the strongest sector for the upcoming year. In other words, apartment developers have been going to architects to get new projects designed for upcoming construction starts.

One potential hot spot of development activity is in the Katy area west of Houston where several apartment developers are scouting around for building sites.

Martin Fein Interests, one of Houston’s most experienced apartment developers, recently purchased 16.7 acres in the Katy area near the intersection of the Grand Parkway and Kingsland Boulevard. Fein will build a 356-unit apartment project there.

Hines does not have any proposed Houston apartment projects that are ready to be started soon, says Charles Baughn, executive vice president of Hines. But Houston, Dallas and Austin are all on Hines’ multifamily prospect list.

Hines will probably be looking closely at “infill” locations such as “inside the Loop” in Houston, Baughn says. Finding sites where old, small commercial buildings can be torn down to render a prime apartment location will be a priority for Hines.

Expect to see Hines developing four-story apartments with parking garages in urban locations, as opposed to two-story garden apartments on far-flung suburban land.

Hines has developed condo towers around the world, including the Illa del Mar in Barcelona, Spain; the 21st Century Tower in Shanghai, China; and Donskoy Posad in Moscow. But most of its residential developments have been condos for sale, rather than apartments for rent.

But with office development at a standstill, it’s time to find new things to build.

“The office development business is going to be slow for the next few several years,” Baughn says. “We are always trying to find things that fit in with our business.”

And for 2011, Hines is betting that apartment development is a good place to ply its trade.

Ralph Bivins, former president of the National Association of Real Estate Editors, is editor-in-chief of RealtyNewsReport.com.