The valuation of apartments can be complex. Sources of value that make one apartment different from the next are gross rent, vacancy, the expense ratio, the responsibility for the payment of heat (landlord or tenant), the potential for condominium conversion, and occupancy by tenants on government subsidies, to name a few. But a simple method is available for apartments and allows us to find the general range of value for any building: the GRM, or gross rent multiplier.

The gross rent multiplier is the ratio of the selling price of a building to its gross rent. The multiplier is effective and roughly accurate since landlords are generally able to succeed in maintaining rents at current market rates, and rates are typically consistent between similar buildings.

For the majority of average quality buildings, the range in the multiplier is between 5 and 6 times gross annual rent. On one end are well located, good quality projects with high rents and generally high historical operating expense ratios. Upside potential for rental increases is typically weak. On the other end are lesser quality buildings with correspondingly lower operating expense ratios and good upside potential for rental increases.

Care should be exercised in selection of the multiplier. The multiplier should consistently reflect either potential gross income or effective gross income. Similarity of operating expense ratios for the sales and the subject is also a factor in selection of the rate, as are physical and locational considerations.

The use of the GRM provides a check for the reasonableness of the indicators by the various other approaches to value.

Concerning value, it is noted that prices of multi family properties have generally been increasing since late 1992 and early 1993. The primary reason for the increase in value is demand. Demand appears to be driven by the persistently high cost of home ownership. Demand is also pushed by the continued dissolution of households that were "doubling up" as a result of a formerly weak economy.

Demand is projected to remain strong into the near term in part because of weak supply, with only about 400 new market rate units planned for late 1995 and early 1996 in Greater Boston. Also, there is a lack of available (and affordable) land suitable for development. Weak future supply is related to feasibility issues, such as high development costs relative to achievable rents and high costs relative to current sale prices of existing product. Also, down zoning in most municipalities has resulted in low development densities that further impair feasibility of new construction.

As demand for units increases, rents (and values) tend to rise. Activity in the apartment sector is increasing since financing is readily available. Current interest rates are providing favorable coverage ratios, and, due to current price levels, returns to equity are good. The apartment market appears to be nearing equilibrium, where value is maximized.

James H. Symington, MAI, Principal, Real Property Valuators

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    Cambridge, MA 02141

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Eric Reenstierna Associates LLC is a real estate appraisal firm taking on valuation and consultation assignments in Greater Boston, Massachusetts and New England. Eric Reenstierna, MAI, is the office's principal and is a commercial real estate appraiser.


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