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Three Cents Worth: The Manhattan GRM Is Too Damn High

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[This week, real estate appraiser, Curbed graph guru, blogger, and podcaster Jonathan Miller analyzes Manhattan's gross rent multiplier and laments the shortness of the three-day weekend.]

Not a very original title, but after realizing the long weekend was unfairly ending after only three days, I took a look at the relationship between sales prices and rental prices through the "gross rent multiplier" aka GRM. I presented the relationship between median sales price and annualized median rental price since 1991 as a ratio.

Median Sales Price = Gross Rent Multiplier (GRM)
Median Rental Price (annual)

In my analysis of co-ops and condos, I was trying to replicate how a small investor of a multi-family rental building might view a purchase of a single apartment. I realize that the mix of sales and rental properties are different: condos and co-ops tend to be larger than rentals in square footage, but the relationship in size is generally consistent across this 2+ decade period of time. And hey, this is Curbed. In the late 1980's (pre-dating the chart), GRMs for small rental buildings were around 10x. Now with crazy low financing costs our commercial appraisal firm is seeing GRMs of 18x, 20x or higher. Very similar to the individual apartment market trend shown in the chart.

If an investor pays a high GRM, it suggests that sales are NOT being driven (i.e. buyers aren't only being motivated) by the income stream (i.e. rent) that a property could potentially generate. They are more focused on future value upside. To many economists, a high GRM infers that prices are too (damn) high because rent reflects a way to quantify the occupancy of the space.

A few observations:

· The Manhattan 22-year average GRM was 16.6 and 1Q13 had a GRM of 21.5.
· Tremendous disparity between the low (7.3, 4Q96) and the high (26.7, 2Q08)
· GRMs haven't fallen much since Lehman in 3Q 08 since both sales prices AND rents fell, keeping the multiplier the same.
· I have no way of confirming what a normal long term level would be since my data goes back 20-25 years. I suspect it's closer to 12x.

The high GRM levels of the past 5 years (post-Lehman) suggests buyer attitudes haven't changed much, that the sale of individual apartments is not economically driven by investors looking for rental income that justifies the purchase (and equates to the value of occupancy). This is perhaps one of the reasons there is an underlying uneasiness about the market within the current housing euphoria.

A 4-day weekend might fix that.
· Matrix [matrix.millersamuel.com]
· Three Cents Worth archive [Curbed]