“LOS ANGELES APARTMENT GROSS RENT MULTIPLIERS REACH HISTORIC LEVELS”

Reposted from PMI Properties:

“LOS ANGELES APARTMENT GROSS RENT MULTIPLIERS REACH HISTORIC LEVELS”

Los Angeles Non Rent Controlled Apartments reached a milestone gross rent multiplier (GRMs) of 15 times rental at the end of the second half of 2015 according to the Hanes Company. Cap rates for all apartments fell to 4.66% at the end of the second half of the year. Since the reported expenses for most small apartments are unreliable, I have used the GRM as a more accurate index. GRMs on the Westside are reported at 17 to 21 times rental. My own comps that track Echo Park and Silver Lake show GRMs at between 14 to 15 times rental from 10 to 12 times rental a few years ago.  My research can find no GRMs this high or cap rates this low going back to the 1920s. A Los Angeles Times article from 1998 reports a Grubb Ellis Survey showing 1998 GRMs at 5.75 times rental.  The previous peak occurred in the second half of 2006 when GRMs reached 14 times rental, according to Hanes Company data.

We are at the apex of the perfect storm driving these yields. First, interest rates are also at historic lows. Investors are starved for yield. Second, we are witnessing the move of highly educated young people and tech/media/biomed companies to certain urban cores. “Unlike previous generations, today’s college graduates younger than 40 — the nation’s largest demographic — are moving in droves to neighborhoods in San Francisco, Seattle or New York, Portland economist Joe Cortright said. Companies are also increasingly setting up in or near city centers, offering well-paid jobs to those graduates, Cortright said. As more people move to urban cores, they’re competing for a limited number of rentals. Housing construction is still lagging behind pre-recession levels, data show. (Los Angeles Times , November 15, 2015).

However, despite these trends, one has to reflect whether to buy at these levels reflects value investing or shrewd marketing timing.

Why Investors in Net Leased Properties Need Asset Managers

Net leased investments remove a lot of the complexity from individual property investing by focusing on properties which in many ways manage themselves. Still, administrative burdens and complexities exist and to the uninitiated it can be daunting.

Tenants in net leased properties are responsible for most of the onsite maintenance and upkeep of the property. However, there is still a need to collect the rent, pay some bills, keep a set of books, get the tax return prepared, make distributions and prepare for a re-sale when the current tenant’s lease expires, or sooner.

An asset manager can add significant value by dealing with these issues. The cost of an asset manager is relatively low based on the services provided.  An asset manager will handle all of the day to day details associated with the property like collecting rent, paying bills, including the mortgage payment, providing monthly reports, arranging for tax return preparation, and making the required cash distributions. They can also provide guidance and insight as to current market conditions, transaction support and due diligence in the acquisition and disposition of the property itself, and sound advice on the positioning of the property throughout its holding period.

Professional asset managers can provide advice as to when the optimum time to sell is, and whether there are other net leased property opportunities that might provide a better return.

Net leased properties are one of the most passive real estate investments in the market. However, like all investments, proper management is needed to ensure a stable and substantial payoff.

We would be happy to discuss our professional asset management services.