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The Market Place, August 2002
By Francyne Shapiro-Faraone

Yes, it is still a very strong Seller's Market. Much to the credit of extremely low interest rates, the declining energy prices and lower tax rates resulting in more disposable income. The threat of terrorism still looms and will for many years to come. The fears engendered by the Enron/Anderson scandal are real but maybe limited in time and scope. The information technology business is showing signs of life but still has a tough road ahead. Optimism remains strong about employment stabilization, commodity price increases and low inflation.

Higher sales prices are being achieved as a result of very low inventory. Although interest rates are very low, the loan to value (amount of the loan received, often referred to as LTV) is averaging between 40 to 60% of the purchase price which means the buyer must have a 40 to 60% down payment. Some buyers are even paying all cash and then shopping for a loan at the best rate after purchasing a property. Gross Rent Multipliers (GRM) can vary greatly depending upon location and annual gross income. Rents that are at true market levels will sell on a GRM of 9 to 12 times. In the Pico Corridor, the GRM is 9-10, 10-11 times in Ocean Park and other parts of the city and up to 12 times North of Wilshire. The GRM can be significantly higher in a building with very low rents. Cost per unit (CPU) is anywhere from $135,000-$150,000 per unit and up depending on the size of the unit and also the location. Price per square foot (PSF) is averaging from $145/psf and up and again depends on location.

Unfortunately, we are seeing a lot of false marketing based on market rents verses actual rents. This is great if you are a Seller who can achieve a higher sales price based on this, however; many buyers have been mislead based on rents that will probably not be achievable in their lifetimes and lenders are pretty savvy to these predications. Although these projections may reflect market rents, they may never actually be achieved in a building with tenants who are never going to move.

We are still seeing more vacancies than anticipated and not achieving the projected market rates that we were looking forward to. The demographics have changed dramatically as a result of market rents and tenants who can afford to pay these rent levels are smart enough to take advantage of the low interest rates and become owners. Many owners are renting at lower rental rates in order to get their units rented in lieu of the amount of available rental inventory.

There is lots of talk and lots of confusion about the proposed changes to the ELLIS Law and the actual process. There is not enough talk about SMRPH (Santa Monica Residents Protection & Homeownership). This is so vital to our property values and also allows this new breed of tenants to become owners (and they want to be.)

The cycle continues to be high for Sellers, how long this will last remains to be seen. The real estate market has always been tied to interest rates and questions arise as to how long rates will remain at these levels. As always, it is a question of your personal parameters in conjunction with the market conditions that should determine what is right for you.