Apartment owners in Memphis may not have the blues as bad as local legend B.B. King, but they didn’t exactly have the sunniest year in 2006, and it’s unlikely things are going to get too much better for them anytime soon.

Vacancy rates are high, rent growth is tepid, and the lukewarm prospects for future employment and household income growth in Memphis suggest the apartment market in Tennessee’s largest city will remain in the doldrums for another year or more. What’s more, prices for single-family homes in the metro area remain relatively affordable, so there’s little of the price pressure that has pushed households in other cities toward apartment living.

The vacancy rate for Tennessee’s largest city rose more than a percentage point last year, to 10.7 percent, from about 9.4 percent at the end of 2005, according to Reis, Inc., a New York-based real estate market research firm. On the flip side, occupancy levels declined to 91.3 percent in the third quarter, data compiled by research firm M/PF YieldStar shows.

“It’s the worst occupancy rate across the 57 markets we track,” said Greg Willett, M/PF YieldStar’s vice president of research. “It’s not a pretty picture in Memphis right now.” One contributing factor to the high vacancy rate: Scads of evacuees from Hurricane Katrina were evicted last year after their housing vouchers from the Federal Emergency Management Agency expired, M/PF YieldStar reported.

“The thing that’s troublesome is that there hasn’t been a lot of multifamily construction in the metro,” said Sam Chandan, chief economist at Reis.

No new apartments were built in Memphis through the third quarter of 2006, and just 522 were constructed in 2005, less than half the 1,239-unit average for the five years ending in December 2005. Construction may perk up in 2007, as 1,998 units had been permitted over the 12-month period ending in September, according to M/PF YieldStar.

Inventory will probably grow at about a 0.7 percent pace each year for the next three years, according to a Reis forecast.

“On the whole, the market has been fairly weak in spite of there being really restrained behavior on the supply side,” said Chandan. “That’s reflected in cap rates,” which have remained “stubbornly high,” he said.

In the year ended in October 2006, purchasers spent a total of $389 million acquiring 24 Memphis apartment properties for an average per-unit price of $52,058, according to data from market research firm Real Capital Analytics. That put the weighted average capitalization rate, or cap rate, at 6.4 percent. That’s down from 9.6 percent in the first quarter of 2001, but still close to a percentage point above the average U.S. cap rate of 5.6 percent.

Meanwhile, employment growth in the city is expected to pick up slightly this year, with annualized gains surpassing 1 percent and continuing a slow but steady rise over the next three years or so, projects Reis. That would be good news for Memphis, which in November registered the second-highest unemployment rate among metro areas with populations of more than 1 million, at 5.6 percent (the highest was Detroit, at 6.8 percent), according to Labor Department data. Memphis gained about 6,500 jobs over the year ended in November, giving it job growth of 1 percent.

Reis projects rents will rise 2.9 percent this year as the vacancy rate inches down from the stratosphere, and the job gains will likely be one factor behind the improvement.

Also, concessions are projected to decline from an average of just under a month’s free rent.

Plus, the picture in this mid-South city is better than the overall statistics suggest, with the downtown sub-market putting in a strong performance, said Willett. “We always bring up Memphis as a real role model for developing the urban core for smaller-tier cities,” he said. “They have done a really incredible job there of getting product that hits all price points. It’s a very desirable downtown market, and that area tends to hold up well in occupancy performance and squeeze in a little bit of rent growth as well.”

Mud Island was one of the first developments to draw residents downtown, and the city’s core has also seen some rehabilitation of historic buildings, as well as new construction and affordable housing developments. “It’s a very vibrant downtown community,” said Tom Grimes, a senior vice president and director of property management for Mid-America Apartment Communities, a Memphis-based real estate investment trust. “The condo market has just gone off the charts in downtown Memphis.”

In addition, apartment performance in the metro is highly dependent on a property’s age, with developments built in the 1980s and later performing much more strongly than older communities. Properties built in the 1990s had the highest occupancy rate among Memphis apartment communities as of the third quarter 2006, at 96.5 percent, according to M/PF YieldStar.

Grimes sees the Memphis market continuing to chug along without any big moves up or down. “Memphis’ real strength is that it’s just a very stable market; it doesn’t boom, it doesn’t bust,” he said. “Supply is in check, so absorption will be positive.”

Looking ahead, he said: “It’s just sort of steady as she goes.”