|
Apartments
The valuation of apartments can be complex. Sources
of value that make one apartment different from the next are gross rent,
vacancy, the expense ratio, the responsibility for the payment of heat
(landlord or tenant), the potential for condominium conversion, and occupancy
by tenants on government subsidies, to name a few. But a simple method
is available for apartments and allows us to find the general range of
value for any building: the GRM, or gross rent multiplier.
The gross rent multiplier is the ratio of the selling price of a building
to its gross rent. The multiplier is effective and roughly accurate since
landlords are generally able to succeed in maintaining rents at current
market rates, and rates are typically consistent between similar buildings.
For the majority of average quality buildings, the range in the multiplier
is between 5 and 6 times gross annual rent. On one end are well located,
good quality projects with high rents and generally high historical operating
expense ratios. Upside potential for rental increases is typically weak.
On the other end are lesser quality buildings with correspondingly lower
operating expense ratios and good upside potential for rental increases.
Care should be exercised in selection of the multiplier. The multiplier
should consistently reflect either potential gross income or effective
gross income. Similarity of operating expense ratios for the sales and
the subject is also a factor in selection of the rate, as are physical
and locational considerations.
The use of the GRM provides a check for the reasonableness of the indicators
by the various other approaches to value.
Concerning value, it is noted that prices of multi family properties
have generally been increasing since late 1992 and early 1993. The primary
reason for the increase in value is demand. Demand appears to be driven
by the persistently high cost of home ownership. Demand is also pushed
by the continued dissolution of households that were "doubling up"
as a result of a formerly weak economy.
Demand is projected to remain strong into the near term in part because
of weak supply, with only about 400 new market rate units planned for late
1995 and early 1996 in Greater Boston. Also, there is a lack of available
(and affordable) land suitable for development. Weak future supply is related
to feasibility issues, such as high development costs relative to achievable
rents and high costs relative to current sale prices of existing product.
Also, down zoning in most municipalities has resulted in low development
densities that further impair feasibility of new construction.
As demand for units increases, rents (and values) tend to rise. Activity
in the apartment sector is increasing since financing is readily available.
Current interest rates are providing favorable coverage ratios, and, due
to current price levels, returns to equity are good. The apartment market
appears to be nearing equilibrium, where value is maximized.
James H. Symington, MAI, Principal, Real Property Valuators
The Reenstierna Associates Report is published as a service to the clients
of Eric Reenstierna Associates and other real estate professionals. The
views expressed are those of the articles' authors and do not necessarily
reflect those of other members of the organization. Copyright 1996. All
rights reserved.
Eric Reenstierna Associates
24 Thorndike Street
Cambridge, Massachusetts 02141
(617) 577-0096
Home
|