Long considered a sleepy beach town, Galveston is now wide awake. The city, situated along the Gulf of Mexico about 90 minutes south of the Houston metro area, is benefiting from the economic boom that Houston has experienced over the past three years.

“In the past, Galveston bumped along with no growth,” said Bob Pisaturo, vice president of the Galveston County Apartment Association and managing member for Assurance Realty Group LLC, a Houston-based property management firm that manages three Class B apartment complexes in Galveston. “With the addition of more tourists, restaurants and condos, the city is moving forward at a faster clip.”

Houstonians are flocking to Galveston, flooding the city with tourists and buying vacation homes in several of the new high-rise condos that have popped up along the city’s seawall, which was constructed in 1902 for protection from hurricanes. “Galveston feels much more vibrant than it did even a couple of years ago,” said Randall Davis, founder of the Randall Davis Co., a Houston-based development firm. “The city is doing a much better job of maintaining the beaches, while new restaurants and the trolley system have made the city much more attractive to tourists.”

More than 4 million people visit Galveston annually, and the city’s population fluctuates with the seasons, not only because of “Winter Texans” but also because of the medical students who attend the Galveston branch of the University of Texas Southwestern Medical School. The Galveston Economic Development Partnership (GEDP) estimates the city’s residential population at roughly 57,250 people, a slight increase over 2006.

Currently, there are about 4,200 residential condos under development in Galveston, according to Lisa Elikan, vice president of project development for the GEDP. In total, there is $1.6 billion worth of residential construction on-going in the city.

The Randall Davis Co. is actively developing condos in Galveston. The firm recently completed Emerald by the Sea, a luxury condo tower situated on five acres along the city’s seawall. The 113-unit project sold out quickly, prompting the developer to embark on another condo project, said founder Randall Davis.

“Galveston is entirely different today than it was when I started Emerald,” Davis recalled. “At that time, there were only three condo buildings in the whole area, and there was a huge pent-up demand.”

Davis’ newest project, dubbed Diamond Beach, is located on Galveston’s West Beach, overlooking the ocean. The first phase of the twophase project, which is designed to mimic large resort hotels, is under construction. Of the 120 units in the first phase, 62 were sold out as of early October. Davis is unsure of when he will break ground on the second phase, which consists of another 115 units.

Other condo projects include Palisade Palms, a 16-acre development featuring 288 units. Developed by Houston-based Falcon Group, the project is scheduled for completion in spring 2008.

“Galveston has gone through a condo building boom and the condos that are under construction are being offered at fairly substantial prices,” said Jim Gaines, a research economist at Texas A&M University’s Real Estate Center. “Galveston attracts a lot of people who want a place to go on the coast.”

On average, condo units start at $350,000 and top out at about $800,000. Those prices are significantly less than any other beachfront property in the U.S., Davis pointed out.

The condo market, driven by tourists and second-home buyers, is vastly different from Galveston’s apartment market, which caters to the city’s permanent resident base. The bulk of Galveston’s permanent residents are employed in the service and tourism sectors—relatively low-paying jobs.

“The Galveston market is fairly bipolar because you have wealthy people from Texas and other states who have nice second homes near the beach, while the remaining folks are lowerincome locals who primarily work in tourism-related jobs,” explained Harold Hunt, another research economist for Texas A&M University’s Real Estate Center. “As a result, you see the greater abundance of Class B and Class C apartment units reflecting the need for cheaper rental housing by the lowerincome groups.”

Nonetheless, the growing tourism industry pushed Galveston County’s unemployment rate down to 4.4 percent in August 2007 compared to 5.7 percent a year earlier, according to The Work Source, an organization that oversees employment programs for the Houston-Galveston region.

As a result, Galveston’s apartment market, which consists of only 34 complexes totaling more than 5,700 units, is quite healthy, with a high occupancy rate and rents growing at one of the fastest paces of any city in Texas.

At the end of the third quarter, the marketwide occupancy rate was 94 percent, according to O’Connor & Associates, a Houston-based multifamily research firm. For the first nine months of 2007, 224 units were absorbed.

“Galveston is beginning to grow steadily, and investors are beginning to see a better return on their money,” said Judy Blizard, a property manager with Joe Tramonte Realty, a locally based firm that manages properties with one to 20 units. “Our occupancy level generally runs over 90 percent for our properties.”

Over the past four years, Galveston’s rental rates have increased 24 percent, according to RealFacts, a San Francisco-based multifamily research firm. At the end of the second quarter, the average rental rate was $836 per month, an increase of 19 percent over 2006.

Pisaturo of Assurance Realty said his portfolio experienced dramatic rent increases over the past few years. In 2007, he estimated rents would increase about 5 percent. “In 2002, rents were $400, and now they’re $525,” he said, adding that he expects rent growth of 3 percent to 5 percent in 2008.

As long as Galveston continues to attract tourists in large number, there’s no reason to think that the city’s apartment market won’t continue to do well, said Elikan of the Galveston Economic Development Partnership. No apartment projects are currently under construction. In fact, only two complexes have been built in Galveston since 1994. Just two apartment complexes are currently proposed. They would add a total of 344 units to the city’s inventory, according to O’Connor & Associates.

Even with these high barriers to entry, it’s hard for an investor to get a foothold in Galveston. Land costs are relatively high, and only two apartment properties have changed hands over the past two years.

“There is not a lot of investor activity at this time, but I expect we will see more investors looking at Galveston for long-term investment,” said Blizard.