45 Unit Palms Closes at a 10.88 GRM- Why I like it

What matters

1. Another Westside Comp Is Finally Here.  I've been waiting for this sale to close because quality Palms transactions have been limited.  I thought it would trade closer to a 10 GRM and the property traded for $13.125 million, or $291,667 per unit, at a 5.61% cap rate and 10.88 GRM.
2. 10.88 GRM for an RSO Building Is the Story.  For me, the most important number isn't the cap rate, it's the 10.88 GRM.  This sale suggests there is still strong demand for well-located RSO assets when they're priced to meet the market. While newer non-RSO buildings still command a higher GRM, buyers continue to pay up for quality RSO properties in West LA.  This sale suggests quality RSO apartments in strong Westside locations still command aggressive pricing. Investors are clearly willing to accept the regulatory risk if they believe in the long-term fundamentals.
3. Replacement Cost Still Matters. The property sold for approximately $314 per square foot. Replacing a similar 45-unit apartment building on the Westside would likely cost well over $400 per square foot, before accounting for land, financing costs, entitlement risk, and years of construction. Buying an existing building at below replacement cost is one of the safest plays if you are going to buy today and that is the only way I would buy an asset today.  
4. I'm Watching for Confirmation. I'm not ready to call a bottom based on one transaction.  If quality Westside apartment buildings consistently begin trading between 10.5 and 11.0 GRM, I'll become much more confident that values have stabilized after the correction we are in.  Markets don't bottom because of one sale.