NEW YORK CITY—When I started in the business 16 years ago, New York City multifamily operators would ask me “what’s the multiple” when I presented an apartment building for sale. What they were referring to was how many times the gross revenue multiple (“The GRM”) the asking price was. Although the GRM isn’t exact, as it doesn’t factor expenses or pass-throughs, it gave the buyers an easy metric for comparison, as expenses could widely vary greatly from broker setup to setup.
In 2000, I remember selling a 54′ wide apartment building in Chelsea for a record 12 times multiple for $3,600,000. The 30 unit apartment building had almost all two and three bedrooms averaging monthly rents of only $800. Even back then, it had tremendous upside. This price equated to a 6% capitalization rate, but only $157/SF.
According to Cushman & Wakefield’s 2014 Year End Manhattan Property Sales Report, the average walk-up apartment building sold for 18x rent roll translating to a 4% cap rate. Comparing these metrics to the above sale, it would suggest that in the last 15 years values jumped a solid 50% due to cap rate compression and the GRM increase.
However, when the 2014 average price per foot of $858/SF is considered, it would suggest an increase of over 500% during this time frame. At 36% each year it is no doubt impressive, but this of course does not consider the time and money invested over the years. Another clear reason for the large increase in values over the years is the rent increases.
Regardless, most operators will tell you today that if they’re buying at a 4% cap rate or less, it’s probably a break-even proposition for them at the start until they start turning units and increasing rents. We shifted years back to quoting cap rates, not only because it was more exact, but the GRM’s were getting out of hand. Old time operators would say you couldn’t even make money if you paid over 10x.
Today, we often receive offers for apartment buildings with little consideration to the rent roll. They are focused on $/SF, because if it’s low enough, the buyer knows there’s enough inherent upside.
A great example of this is 25 Grove Street, a 32′ wide, 19 unit apartment building that we have for sale in the heart of the West Village. The asking price of $14,950,000 is an aggressive, but not outlandish one, when considering a price per square foot of $1,176/SF. There is certainly long term value in the bricks alone, as single family shells in the area sell for $2,000/SF and condos at the nearby 150 Charles Street have reached over $7,000/SF.
But operators who are reading “the fine print” might be amazed to learn that the gross rent multiple on this listing is over 26x and the cap rate is 2.9%, even with a generous projection for an owner’s unit. That being said, I could certainly make the argument that a 2.9% cap in the West Village might be a safer bet than receiving virtually nothing in US Treasuries!
It’s certainly a new world that we live in. New operators coming into the market will use their own metrics, but one consistent them I’ve seen throughout the years, is the desire for upside in the rents. Unless of course, we’re referring to core buyers looking for yield. There cap rates still reign supreme.