Wednesday, July 15, 2009

Santa Monica Income Property Round-Up: 2nd Quarter 2009

Investors have returned to the Santa Monica multi-family market during the 2nd Quarter 2009 – in a big way.

Fourteen income properties sold during this period, including a 23-unit building that closed for over $7.5 million, compared to six sales during the 1st Quarter 2009, with a top sale price of $4.5 million, which was for a development opportunity.

The rise of multi-family sales activity in Santa Monica could be explained as a reaction to the rout in the financial markets during the 1st Quarter of 2009. As investors suffered heavy losses, they may have turned to multifamily investment as an alternative to equities.

The large number of apartment building sales gives a good indication of what kind of returns investors are expecting in this area.

811 6th Street
The big sale of the quarter was 811 6th Street, a 23-unit building with 28,644 sq ft of living area on a 14,998 lot, which sold for $7,550,000. The 1972 building is located just off Montana Avenue, a short distance from the beach, and has some updated units. Unit mix consists of 11 x 1 bedroom, 1 bath, 6 x 2 bedroom, 2 bath, and 6 x 3 bedroom, 2 bath. Originally listed at $8,000,000, the building closed 6% under the asking price in 148 days.

Gross annual rent is $463,000, giving a GRM (gross rent multiplier) of 16.3.
1901 6th StreetAnother building of nearly the same vintage sold on 6th Street – this one south of the 10 Freeway. 1901 6th Street, a 16-unit building with 14,399 sq ft of living area on a 10,411 sq ft lot, sold for $2,975,000, 4% below its $3,100,000 asking price, after 30 days on the market. The 1969 building has 15 x 1 bedroom, 1 bath units and one single, some of which are updated. Rents are approximately 40% below market.

Gross annual rent is $242,018, yielding a GRM of 12.5.

811 and 1901 6th Street are on the same street, but have much different GRMs – what can this difference be attributed to?

First, location. 811 6th Street is in one of the best Santa Monica neighborhoods; 1901 6th Street, less so. Second, market rents. 811 6th Street is capturing market rents; 1901 6th Street has below-market rents. Third, unit size. 811 6th Street unit size averages 1,245 sq ft per unit; 1901 6th Street averages 900 sq ft per unit.

Two other buildings point to the consistency of a GRM of approximately 16 for Santa Monica.

2805 3rd Street2805 3rd Street, an 8-unit building with 8,110 sq ft of living area on a 7,744 sq ft lot, sold for $2,525,000, a hefty 28% below its $3,500,000 asking price, after 104 days on the market. The 1961 building has 6 x 2 bedroom, 1.5 bath units and 2 x 3 bedroom, 1.75 bath units. Some units are renovated and there is an upside in rents. Gross annual rent is $155,943, yielding a GRM of 16.2.
1524 7th Street1524 7th Street, a 10-unit building with 6,693 sq ft of living area on a 7,497 sq ft lot, sold for $2,425,000, just below its $2,495,000 asking price, after 91 days on the market. The 1958 building has 8 x 1 bedroom, 1 bath units and 2 x 2 bedroom, 1 bath units. Rents are below average for the area. Gross annual rent is $152,257, yielding a GRM of 15.9.

It’s remarkable how consistent the GRMs are for 2805 3rd Street and 1524 7th Street. Although this is a crude tool in evaluating income property, it’s quick, easy, and seems to provide a reliable means of evaluating income properties that are consistent in neighborhood quality, unit mix, condition, and age of construction.


GR82CU said...

1901 6th Street was the better deal for the buyer at 12.5 GRM, even though it is in a lesser neighborhood. This is after-all income property. So how does the income look? Average annual rent per square foot is at $16.8, better than 811 6th Street which is at $16.2.

"Rents are approximately 40% below market." Sellers always say something like this. What are we supposed to assume? The Seller is giving the units away? No, they are priced right otherwise the seller would have gotten higher rents! And in this case, looks like the seller did just that.