It clearly does reduce off road capacity. The sole reason the muffler is high on off road bikes is to allow long travel suspension to do its job without slamming the muffler against things. Imho, lowering the pipe is absolutely fine if your off roading is limited to gravel country roads. Luggage capacity can be greatly increased. If you plan to actually do any serious back country work with it, its not a good idea.
Sorry Ken, but I have to respectfully disagree. Perhaps if you're talking about a 'Dakar' level competitive bike, this may be valid, but the lowered pipe mod I did to my 12GS never presented a problem, even in deep sand and heavily rutted trails. Even when the bike wound up "resting" on its left side a number of times, the muffler did not contact anything, and the bike was sold @ 45,000 km with absolutely no damage at all to the original muffler. The new owner is also an off-roader, and reports no ongoing problems.
The mod was basically an appropriately sized 15 degree adapter where the muffler joined (a different clamp may be necessary), and an extended (or in my case, because of the system cases, a dogleg) hanger. Also, because my bike was a 2005, I had to modify the centerstand stop. The beauty of this setup was that it was easily reversible should any future owner want to return to the stock or other setup. I would recommend this to anyone.
Oh yeah, I never "cooked" anything in my luggage either...