Since the bottoming of real estate values in 1994, we have had an incredible ten-year run. One of the major factors in the price appreciation that we have seen is that fact that the Federal Reserve Board has lowered interest rates. In fact, they lowered the Fed Fund rates to a historical low level of 1% and kept it at that level for quite some time. Let’s review the market prices in Santa Monica in 2003 and 2004:

In 2003, as represented by the chart below, average Gross Rent Multiplier (GRM) ranged from 11.8 to 14, however most transactions were done 13+ times the gross. The average Cost per Unit (CPU) ranged from $143,000 to $218,000, with a high of $218,000 in December 2003.

In 2004, the average GRM was higher than in 2003 and ranged from 12.9 to 15.6. The peak occurred in August 2004 when the average GRM hit an all time high of 15.6. However, as of August 2004, both GRM and CPU have been on the decline as is evident on the chart below.

The market seems to have peeked in August 2004 and has softened since then. We believe this is a direct result of the rise in short term interest rates. The Federal Reserve Board has raised the Fed Fund rates five times, one quarter point each time since August. Further, the Stock Market has done well since August 2004, providing an attractive alternative investment vehicle to investors.

The Federal Reserve has signaled that they will continue to increase interest rates on a “measured basis”. It is common knowledge that as the interest rate rises, property cash flows diminish and in order for the investors to receive a competitive yield, the prices will have to adjust downward. The trend towards lower GRM’s, CPU’s, and higher Cap Rates parallel that of higher interest rates. Savvy property owners, believing that their property values will decrease in the near future are taking advantage of this window of opportunity and are selling at today’s high prices. In fact, we have seen a tremendous increase in the number of available properties since August 2004.

We have seen a very active market in 2004 and anticipate a more active market in 2005. We foresee an increase in property owners who will decide to sell in today’s market, one that still commands high prices and buyers that are willing to pay high asking prices as long as they can lock in low long term interest rate loans. We will continue to watch the market and report significant market conditions that affect your investment property in Santa Monica and the Westside.

Kimberly Roberts is the Director of Santa Monica and Beach Properties, RE/MAX Commercial Brokerage.