Friday, November 13, 2009

Hollywood Multifamily Market 3rd Quarter 2009 -- Prices Trend Down -- Lower Rents and Lower GRMs Translate into Higher Sales

In the Hollywood multifamily market in the 3rd quarter of 2009, sales are up and gross rent multipliers (GRM) are down. The GRM in Hollywood has declined from 10 - 11 in the first half of the year to 9 - 9.5 in the 3rd quarter. In layman's terms, new owners are demanding lower building prices for the same rents.

Ten of the seventeen properties that sold (all of them for $565,000 or less) were distressed properties -- short sales, pre-foreclosures and REOs. (Good luck to any owner selling a non-distressed property in this price segment.)
1811 CherokeeThe highest sale was 1811 N Cherokee Avenue, a 32-unit building, which sold for $3,400,000. This property has 10 one bedroom units and 22 studios. On current rents, which are approximately 26% below market, the building is trading at a 9.4 GRM.

1406 N Serrano1406 N Serrano Avenue, a non-rent control building with 12 units, sold for $1,625,000. The unit mix is 8 two bedrooms and 4 one bedrooms. GRM is 9.6 on the sale price.

5628 Harold Way5628 Harold Way, a 12-unit building with 7 two bedrooms and 5 studios, sold for $1,400,000 at a 9.0 GRM.

5965 Fountain5965 Fountain Avenue, a 6-unit property (3 of which had been substantially renovated), has 2 two bedrooms and 4 one bedrooms, and sold for $850,000 at a 9.0 GRM.

1535 Normandie1535 N Normandie, a foreclosed duplex with two 2 bedroom units sold for $355,000 or a 9.9 GRM on current rents. 2 - 4 unit properties cannot be put on par with buildings that have 5 or more units because they are financed as residential income property, with more lax underwriting requirements than 5+ unit properties, which require commercial loans. Nevertheless, values are remaining consistent across property types.

Why are GRMs trending down? One good reason is that the rental market has softened during the current economic rout. We've spoken with many a property owner who bemoans the decline in rents (of 5% or more in some cases) and the increase in vacancies. One needs only to tour neighborhoods to see the abundance of "For Rent" signs.

Savvy investors know that the rental market that has suddenly slackened may suddenly tighten up. There are few (to no) new low- to mid-range apartments being constructed in central Los Angeles, and when (and if) the economy improves, rents could trend higher -- dramatically. Income property buyers today are trading off low rents, weak demand and uncertain visibility for decreased prices and the hope that when the market turns around, so will returns.