San Francisco Apartment Valuations Are Still Falling

San Francisco apartment building valuations have been falling since 2007. Take a look at the chart, below, which shows the median price-per-unit for 5-15 unit buildings.

The median price-per-unit actually rose in 2010, and is only about 10% lower than in 2007. How is that consistent with my assertion that valuations have been falling?

Despite the downturn, rents have remained fairly strong in San Francisco. Take a look at the chart, below, which shows the median rent-per-unit for 5-15 unit buildings.

San Francisco rents actually have been trending upward since the depths of the financial crisis, and appear to be in line with the long-term trend. As a result, if you compare apartment prices to apartment rents, you get something like the chart below, which shows the median 'gross rent multiple' for San Francisco apartment buildings.

The gross rent multiple (GRM) is the ratio between the building price and the gross annual rent. It's analogous to the price/earnings (P/E) ratio for a stock. If the GRM is falling (as it has been since at least 2007), that means that buyers are paying less for every dollar of rent that they expect to obtain from the building. That's what I mean when I say that valuations are falling. (Interestingly, the number of transactions began falling well before there was a noticeable decline in valuations. The same phenomenon occurred in the market for single family homes and condos, as I pointed out here.)

There are many possible explanations for the observed decline in GRM multiples. Ultimately, they all can be attributed to diminished optimism about the future of San Francisco real estate.