Often investors estimate the price that they are willing to pay for apartment projects in New York City by using a gross rent (income) multiplier or an effective gross rent (income) multiplier. The Appraisal Institute defines a gross rent multiplier as:
“The relationship or ratio between the sale price or value of a property and its gross rental income.”
An effective gross rent (income) multiplier is defined as:
“The relationship or ratio between the sale price or value of a property and its effective gross rental income.”
The effective gross rental income is defined as:
“The anticipated income from all operations of the real property after an allowance is made for vacancy and collection losses. Effective gross income includes items constituting other income, i.e., income generated from the operation of the real property that is not derived from space rental (e.g., parking rental or income from vending machines).”
The multipliers have surely moved over time. In the Appraisal Journal, October 1952, Louis Winnick reported the long-run changes in the valuation of real estate by gross rents. Data compiled between 1890 and 1892 for New York from the Real Estate Record and Guide indicated gross rent multipliers between 9.5 and 10.1 for tenements and apartment houses respectively. These multipliers increased slightly with an average of 10.6 indicated by nine properties sold and analyzed in Building for Profit (by Reginald P. Bolton, page 41) in 1912. By 1925, the reported gross rent multiplier dropped to 8 times the gross income. This article indicated that gross rent multipliers fell below 5 during the 1930’s.
In the Appraisal Journal, October 1942, John C. Tredwell, MAI in New York indicated that the “typical speculative buyer” who acquires property with debt would pay about 6.4 times the gross rent. Buyers who pay all cash would pay about 5.7 times the gross rent. These were based on actual transactions. The article inferred that the higher multipliers were due to the low level of interest rates during the war that would rise after the war was over.
Fast forward to 1975, gross rent multipliers fell. In October 1975, the New York Times reported that Edward Sulzberger, president of Sulzberger-Rolfe, Inc., who managed about 150 buildings with 15,000 tenants, stated that three years earlier (1972) investors might be satisfied with a 6% or 7% return, and then (1975), he looked for 10% return. Joseph D. Mandel, a vice president at Sulzberger-Rolfe, Inc. stated going back two years (1973), the gross rent multiplier ranged between 5 and 6 times the gross rent roll. Quality properties were reported to be selling between 2 or 3 times the gross rent in Manhattan in 1975.
In May 2009, Massey-Knakal, real estate brokers, looked at 25 years of history in the movement of apartment capitalization rates and gross rent multipliers in Manhattan for walk-up and elevator apartment projects. By 1988, gross income multipliers peaked at an average of 9.32 for walk-ups and, then, declined during the 1990’s recession to a low of 3.57 in 1992. As the market improved, gross rent multipliers began their move peaking in 2006 or 2007 at more than 15 time gross annual rental income. What goes up; must come down. And, so they did in 2008.
Gross income multipliers must fall because vacancy rates are increasing, operating expenses, especially real estate taxes, are increasing, and the cost of debt and equity are higher. Recent sales clearly indicate the downward momentum in gross income multipliers.