1. Split Personality: The Good and Bad Side of Low Interest Rates Low interest rates created an unusual paradox for the multifamily industry in 2003. By making homeownership affordable, low rates hammered property owners on the revenue side. But they also lowered the industry's cost of capital, made development more feasible, and contributed to a trend toward soaring property values, as investors sought out buildings to buy. Go figure.

Vacancies rose in many markets as renters decided to own instead. About 70 percent of the renters who left Fogelman Properties communities departed for homeownership, says Mark Fogelman, president of Fogelman Management Group in Memphis, Tenn. And David Schwartz, managing member of Waterton Associates in Chicago, adds, "The rent versus own decision is made a lot easier for people by the low interest rates."

On the upside, low rates enabled private buyers to bid for properties that were unattainable in the past. "As interest rates went down, the pool of available buyers got more aggressive in their underwriting," says Kevin Scherer, director of research for SSR Realty in Morristown, N.J. "Buyers are increasing their risk by employing more leverage." This, combined with an influx of investors who were disenchanted by the stock market, increased the flow of capital in the multifamily sector and raised property values.

That made 2003 a seller's market. And many firms took advantage of it to trim their assets, unloading smaller buildings or properties in difficult markets. "You can sell about anything and get a reasonable price," Schwartz says. "It's a good time to clean up your portfolio."

The Solutions

While high property values and cheap refinancing are nice, many firms spent much of 2003 trying to stop renters from leaving. Fogelman Management trained employees to stress the lifestyle flexibility renting provides. When residents indicate that they are moving because they've decided to take advantage of the low interest rates, managers and agents will talk to them about how renting takes maintenance costs and real estate taxes out of their hands.

Still, Fogelman admits that these arguments fell on many deaf ears. "There's a certain segment of the population that, no matter what we do, will still move out," he explains.

In some locations, the migration to homeownership caused Fogelman Management to change its target market. Focus shifted from people in their mid-20s and 30s with home buying aspirations to echo boomers just out of college, who may not have built the credit history to buy a home or condo, and empty-nesters, who may rent because they prefer a maintenance-free lifestyle.

Low interest rates provided some comfort for the vacancy hardships they caused. In a market where firms were running low on revenue and needed to find ways to cut expenses, refinancing mortgages to lower interest rates provided a way to save.