$Rent / Month VS $Rent/sqft

[Spencer Gray]

There are several ways to look at rental revenue at a multifamily property with the two most widely used metrics being the nominal monthly rental rate for a unit and the monthly $/sq ft. 

In my experience the nominal $ rent per month is the more important metric as renters rarely looks at the $/sq ft rate when determining to rent or not - they are looking at what their monthly rent check is going to be.

$/sq ft is more widely used in other asset classes of commercial real estate, but it's also a key metric for multifamily development as the goal is to maximize the revenue of the entire building. 

I personally use the $/sq ft as a secondary metric that measures the perceived value of the unit in relationship to it's size. A prospect will probably not lease solely based on a low/high $/sq ft but the size of the unit is certainly a factor in the decision making process.

How do you use $/sq ft in analyzing a multifamily deal? Is it an important metric to you? 

[Erik W.]

I only use rent sq ft for commercial property. SFH, duplexes and quad-plexes are all based on # beds, # baths and proximity to desired amenities. The square footage can't be too far out of expected norms. For example, I would have a very hard time renting someone a 2 bedroom house with only 400 square feet. The ideal for a 2 bed house is between 700 - 950 sq ft. Tenants find it spacious, and I like not having to spend extra $$$ to redo floors and roofs when the same house with 1200 sq ft demands much more $$$ to fix but brings in little to no extra rent.

My automotive shops/bays, on the other hand, are all priced based on sq ft.  Between $6 - $9/sq ft annual seems average for open work space with a small office and a 1/2 bathroom.  Higher if infilled.