Price per unit and price per square foot
Also called Price per unit, Price per square foot, Price per door.
Price per unit is the purchase price divided by the number of units; price per square foot divides it by rentable area instead. Both are comparison shorthand rather than valuation methods, and they disagree with each other whenever unit sizes differ.
How it works
These are the two figures a broker leads with and the two an experienced buyer checks first, because they anchor a price to something physical. A cap rate depends on an NOI that can be argued about. A price per unit depends on a count. When a deal prices well above what it would cost to build the same units in the same submarket, that is a fact worth explaining before anything else in the model gets examined.
They also disagree, and the disagreement carries information. Price per unit is the right comparison for multifamily, where the unit is the leasing unit and rent is quoted per unit. Price per square foot is right for office, industrial and retail, where rent is quoted per foot. Apply the multifamily convention across properties with different floor plans and the number looks in line while the deal is not: $254,091 a unit is $274.69 a foot on 925 square foot units and $220.95 a foot on 1,150 square foot units.
The comparison that gives either figure meaning is replacement cost. Land plus hard cost plus soft cost per unit for new construction in the same submarket sets a ceiling that existing product usually trades below, sometimes far below. A deal priced above it is being sold on something other than the building, and whatever that something is belongs in the model explicitly.
Formula
Price per unit = purchase price / units. Price per square foot = purchase price / rentable area- Rentable area, not usable area, and in office the two differ by the load factor
- Count every unit including down and non-revenue units, and say so, because excluding them raises the figure
- Where capital is being funded, compute the same two figures on all-in cost as well as on price
Worked example
The sample property. $55,900,000 for 220 units averaging 925 square feet, with a $2,520,000 renovation budget funded at closing.
| Price per unit | $254,091 |
|---|---|
| Rentable area | 203,500 sq ft |
| Price per square foot | $274.69 |
| All-in cost per unitthe $59,420,000 all-in over 220 units | $270,091 |
| The same price per unit on 1,150 square foot units | $220.95 per sq ft |
| Twenty percent of difference from unit size alone | $274.69 against $220.95 |
Both properties are $254,091 a unit, and one of them buys 24 percent more space for the money. Whenever a per-unit comparison crosses properties with different floor plans, the per-foot figure is the one that says what is actually being bought.
Conventions worth knowing
- Ask whether the area is rentable or usable and where the measurement came from. A different standard moves the denominator by several percent.
- Compare against replacement cost per unit in the same submarket. A trade above it needs an explanation the model can carry.
The common mistake
Reading a low price per unit as a low price
Price per unit is a denominator with no opinion about what the unit produces. A property at $150,000 a unit renting for $1,250 and one at $254,091 a unit renting for $2,090 are priced almost identically against income, and the cheaper one is not cheaper. The figure earns its place as a sanity check against replacement cost and against physical comparables, and it becomes dangerous the moment it substitutes for a yield. Compute both, and when they disagree, the yield is the one that is right.
Related terms
- Gross rent multiplierThe gross rent multiplier is the purchase price divided by annual gross rent. It is a screening ratio, useful because it needs no expense data at all, and unreliable for exactly the same reason.
- Cap rateA cap rate is a property's net operating income divided by its value or price, expressed as a percentage. It is the unlevered first-year yield on the purchase price and the standard shorthand for what a market is paying for a stream of property income.
- Yield on costYield on cost is stabilized net operating income divided by total project cost, including land, hard costs, soft costs, financing costs and carry. It is the development and value-add equivalent of a cap rate, and the spread between it and the market cap rate is where the profit comes from.
- Load factorThe load factor is the percentage by which a tenant's usable area is grossed up to a rentable area for rent purposes, covering its share of lobbies, corridors, restrooms and mechanical space. Rent is charged on the rentable figure, so two buildings quoting the same rate per foot are not quoting the same rent.
- Sources and usesA sources and uses statement lists every dollar going into a transaction and every dollar it pays for, and the two columns have to be equal. Uses are the purchase price plus all the costs of closing and funding; sources are the debt and whatever equity is left to fill the gap.
Every figure, traced to its source
Altyst computes these in exact decimal arithmetic, not with a language model, and clicking any number shows the formula behind it.