Low CAPs, Clear Crystal Balls

Another new apartment project has been sold in Las Vegas and if the numbers published in the Las Vegas Review Journal are true this purchase is truly a head-scratcher.  Eli Segall writes,

Griffin Capital Co., a Los Angeles-area investment firm, acquired South Beach — a 220-unit complex on Russell Road just east of the 215 Beltway — for $62 million, property records show.

Segall does the math, coming to $281,800 per unit.  Seems rich, however, the project features,

a basketball court, sand volleyball, soccer field, Zen garden, Pilates studio, indoor and outdoor gyms, yoga and meditation classes, steam and sauna rooms, poolside cabanas with a mini-fridge and television, and Sunday brunch.

Residents pay an $80 per month resort fee to avail themselves of these swanky features.  

Segall provides the average monthly rent of  $1,756. Twelve months of that is $22,032 ($80/ month included). An appraiser recently told me the expense ratio for these fancy projects is 36 to 42 percent.  So, the average net rent annually is $12,779 to $14,100.

Thus, South Beach is selling for a CAP rate of 4.5 to 5 percent.  A 5 percent CAP equates to 20 times earnings, CAPs in the 4s are even frothier.   

Can rental rates keep climbing? Will interest rates remain low forever? Griffin Capital seems to think the answer to both questions is ’yes’.

No one can know.  As observed in the latest Grant’s Interest Rate Observer, “the Federal Reserve, which, despite employing more than 22,000 people and mobilizing its own formidable computers, has no clearer view of the financial future than does the average off-duty meteorologist.”