In Commercial Real Estate, valuations are driven by net operating income (NOI), yet in most offering packages from sponsors, “price per unit” (PPU) is one of the first metrics presented. PPU doesn’t tell you anything about the property’s income stream, but only reflects the it’s relative basis, all things being equal. However, all things aren’t equal and can vary by asset class, size, etc. PPU is, at best, a high-level comparative tool and is not useful by itself.
I’d argue that it’s better to look at ‘price per sq ft’ to compare basis. For example, let’s look at two 100-unit deals:
Deal A – $75K/u (avg. unit 600 sq ft)
Deal B – $90K/u (avg. unit 800 sq ft)
Without taking into account the unit sizes, Deal A looks like a much better deal. But let’s calculate price per SQ/FT:
Deal A – $125 / SQ FT
Deal B – $112.5 / SQ FT
Now on a SQ FT basis, it looks like Deal B is a better deal as it’s at a lower price ‘per pound’ and likely higher rents due to larger units.
What’s a better deal? It depends on a lot more factors such as Cap Rate, IRR, Rent Growth etc.
New passive investors are often lured in by low price per unit or low “basis” presented by sponsors. The point is that education is important to assessing deals and good investors look at multiple metrics