Remember When Apartments in Stockton Were More Expensive Than San Francisco? (neither did we)

Each real estate investor has his or her favorite metric for evaluating what a piece of property is worth. Or perhaps more relevant, at what price it’s an interesting buy. Some look at cap rate, others gross rent multiplier. Others look at price per square foot or price per unit. And some trust the most reliable metric of all: The Gut.

There is no single perfect metric, as each one tells a slightly different story and is more (or less) applicable to certain types of property.

For large multifamily properties, two of the favorite evaluation metrics used are average rent per unit and sale price per unit. So we asked, what if you used them together to evaluate pricing trends relative to rent, then looked at the results for different markets – wouldn’t that allow you to compare markets not simply by rent per unit, or price per unit, but price per dollar of rent? And since ultimately real estate should be valued by the discounted value of projected future cash flow, isn't that the only metric that should matter?

Meanwhile, recent data showing that the fastest rent growth is happening in tertiary, rather than core markets, led us to choose markets that have had vastly performance in the past couple decades.

The graph below shows rent and pricing data, courtesy of CoStar, for San Francisco, Sacramento and Stockton. It may not be a surprise that our price / rent metric shows San Francisco to be roughly twice as expensive as either Sacramento or Stockton, but it surprised us to see that in 2006 at the peak of the housing boom, these two Central Valley cities were roughly in-line with San Francisco. Stockton even ticked higher than San Francisco at the peek of the frenzy.


In other words, things got so out of hand in 2006 that investors were paying more for a dollar of rent in Stockton than they were in San Francisco.

Looking at the data another way, the graph below shows the same data set normalized to 100. Normalization allows us to evaluate relative market performance, stripping out nominal differences (ie, that monthly rent in San Francisco is roughly triples the other two) for a purely apples-to-apples comparison.


Not only did San Francisco recover more quickly after the recession, but since 2001, price relative to rent has doubled in San Francisco. Sacramento is up almost 50% during the same period, but Stockton is hovering just above 2001 levels, having only recently covered past where pricing was more than 15 years ago.

The takeaway here should be more than simply San Francisco is expensive and the other cities are cheap. Price is the great arbiter, and price alone (even a metric like this) must be considered over risks and other factors.

The question becomes: given the dramatic run-up in rents and prices, is San Francisco now too expensive? Or do the inherent supply constraints and fundamental demand drivers warrant this level of pricing?

Conversely, is Stockton too cheap? Or do the city's fiscal troubles, crime problems and high unemployment (7.7% vs 4.8 for the state) warrant the depressed pricing?

A peak at recent migration data leads us to believe that the latter is the more interesting of these two questions.