Los Angeles Non Rent Controlled Apartments reached a milestone gross rent multiplier (GRM) 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. This is up 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 at historic lows. Investors are starving 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. According to Cortright, companies are also increasingly setting up in or near city centers, offering well-paid jobs to those graduates. 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 market timing.