The pending state of interest rates: while rising interest rates bolster rental demand, higher cap rates for apartment communities can follow. These conditions will also help define tomorrow's renter and condominium buyer.

Are bounding economy offers several pros and cons for the rental housing industry. While a stronger economy is clearly a favorable factor, there is also a downside. First, the recovering economy has replaced all the jobs lost during the recession and is now adding new ones. This net new job growth will provide the housing industry with fresh consumers, paycheck in hand, who need to find a place to live. The housing demand pie gets bigger.

Second, higher interest rates that usually accompany an economic recovery can be both good news and bad news.

On the brighter side, higher interest rates normally bolster rental demand, meaning more traffic and more leases for existing properties because many consumers are priced out of home ownership by rising rates. Expensive mortgages may mean lower rental remover as well because fewer residents will leave to become homeowners.

Now, the bad news. An extended period of rising interest rates may force cap rates for apartment communities up as well. Unless net operating income (NOI) grows faster than cap rates rise, a property's market value would decline. Lower property values would likely mean fewer sales transactions and perhaps reduced new construction as well.

Today's apartment investors could find opportunity in local markets where NOIs will grow faster than cap rates may potentially rise.

Apartments for Sale

Considerations for the multifamily for-sale industry vary depending on whether a company deals with entry-level condominium buyers or with mid- to higher-priced buyers.

In many markets today, condominiums are providing an affordable option for consumers who are priced out of single-family home purchases by skyrocketing home prices. For companies building to this "substitute" buyer--buying a condominium as a second choice to a single-family home--higher interest rates may cause a change in the composition of demand. That is, buyers who can scarcely qualify for an entry condo may be forced by higher rates to reconsider renting. Replacing them as condo buyers may be a new set of prospects: consumers who would have bought single-family homes when rates were lower.

With higher mortgage rates, a different kind of substitute buyer may seek out condominiums--probably somewhat older, with somewhat higher income and more discriminating taste, but still relatively price sensitive.

Other condominium buyers today are scaled-down empty nesters, seeking not the affordable price point a condominium can offer, but instead its lower maintenance and greater convenience. Because these buyers typically bring much more equity to the condominium purchase, higher rates are less likely to change their housing decision, unless rates are so high that these prospects are unable to sell the homes they now occupy.

Broadly, a better economy is good news for the multifamily housing industry, but it also brings a unique set of challenges for the multifamily professional to manage.

G. Ronald Witten is President of Witten Advisors LLC, Dallas. He can be reached at 214/360-4561 or www.wittenadvisors.com.