Not too long ago, the multifamily sector enjoyed a Teflon-like reputation for its resiliency in all sorts of economic conditions. But no more. This economic slump has produced the lowest interest rates in 40 years, making home ownership easier and apartment buildings emptier.

Today, investors are rethinking multifamily as rents fall. A February report by Connecticut-based Mercury Partners LLC found that real estate mutual funds have reduced their holdings in apartment real estate investment trusts (REITs) to just 11.9% of portfolios vs. the 18.1% weighting that the multifamily sector comprises on the overall NAREIT Equity Index. According to Paul Adornato, director of research with Mercury Partners, multifamily was the only sector significantly under-represented in the portfolios of these funds. No other sector deviated by more than three percentage points from the index.

REITs are also on the defensive, selling assets to raise capital, reduce debt and improve returns in the face of deteriorating fundamentals. In March, Apartment Investment & Management Co. (AIMCO) put a 12-property $150 million portfolio in the South on the block. In the same month, Pennsylvania Real Estate Investment Trust (PREIT) announced it had signed an agreement with Morgan Properties of King of Prussia, Pa., to sell its multifamily portfolio for $420 million. PREIT redeployed that capital in the retail sector by purchasing six malls totaling 5.6 million sq. ft. from The Rouse Co. The newly acquired malls all are located in greater Philadelphia.

Post Properties is making similar moves. The Atlanta-based REIT is exiting markets in which it owns a single asset or shedding older properties in markets of high concentration. Post recently sold Port West Avenue Lofts and an adjacent two-acre parcel in Austin, Texas. The transactions were valued at $34 million. “Asset sale proceeds are being used primarily to pay down debt,” explains Dave Stockert, president and CEO of Post. “By strengthening our balance sheet, we hope to solidify our investment-grade credit rating and increase our capacity for future investment.”

Post expects to be a net seller of assets during 2003 with a stated goal of raising $100 million to $150 million through selective dispositions. The company hopes to execute most of these sales during the first half of the year to take advantage of the extremely favorable interest rate environment. The 10-year Treasury yield, the benchmark for long-term commercial real estate loans, dipped to 3.6% in early March.

As in any market, one company's trash is another's treasure. Boca Raton, Fla.-based Gables Residential was all too happy to acquire the Post property, which it renamed Gables West Avenue. The 239 apartment homes and 7,400 sq. ft. of street-level retail are situated in the southwest corner of Austin's CBD, which happens to be one of Gable's eight core markets. Gables hopes to benefit from additional operating economies, thanks to its existing Austin presence.

That acquisition illustrates that REITs remain buyers as long as properties meet their selective criteria. But given today's share prices — both Gables and Post, along with most apartment REITs, are trading near 52-week lows — private equity investors are typically better capitalized to bid more aggressively for apartments. For now, multifamily REITs seem content to modify their portfolios and focus on core operations.