Outlook 2004
When gazing into 2004’s crystal ball, most multifamily firms not only want to know if interest rates will rise but what will happen if they do. Across the board, experts predict that rates may go up incrementally in 2004, but that it won’t make a huge difference. “I believe we are in a lower interest rate environment for a while,” Scherer says. “We have global competition that will hold down inflation. That will allow the government to keep rates low.”
Regardless of how quickly rates rise, there seems to be a feeling among multifamily developers that they weathered the worst part of the home-buying storm. “A lot of people who wanted to buy homes bought them already,” says Ned Midgley, vice president of CB Richard Ellis in New York. If interest rates do go up in 2004, they also may pull private money out of the multifamily sector.
hile Scherer doesn’t think this will cause a tremendous drop in property values, it may change the demographic of the multifamily investor. “As the economy recovers and interest rates go back to normal levels, the leveraged buyers will slowly retract and other buyers, such as institutional ones, will come into real estate,” he says.
“You take the economy, combine it with home purchases, and it has created a challenge for maintaining occupancy,” says Steve Eddington, senior vice president of operations for Camden in Houston.
These high vacancies sent firms scrambling for ways to attract new renters. Most popular: One to two months free rent. Other concessions usually came off the front end of the lease. “Customers typically want lower sign-up costs to diminish the move-in fees,” says Victoria Blanton, vice president of sales and marketing for AIMCO in Denver.
The Solution
Multifamily firms didn’t just lay down and offer concessions. Many looked for alternatives. In some cases, operators instituted across-the-board rate reductions. “We tried to get away from concessions and just acknowledge that we were going to lower our asking rates,” says Todd Pope, president of Simpson Property Group LP in Denver. “But we continue to use up-front concessions to stimulate demand.”
This strategy worked for other firms as well. In Phoenix, some property owners gave away three and four months of free rent, essentially cutting their prices by 33 percent, says Ed Lange, CFO for BRE Properties based in San Francisco.
BRE kept acceptable occupancy levels without dropping rents by 33 percent or offering concessions, says Lange. He says his company could resist these forces because BRE has good communities — plus he thinks some of his competitors may have gone further than necessary with their concessions.
Few firms used solutions to the occupancy problems that went beyond rate reductions and concessions. Simpson did try something new. It ran a promotion where it gave away $25,000 to one lucky person who visited one of its Denver properties. “It did OK, but it was nothing as significant as lowering the price,” Pope says.
