The Real Deal

Ten-Plus Market Shows No Sign of Slowing

by Mark Bonn & Mirella Webb

Editor's Note: This month we introduce a new quarterly column from Mark Bonn and Mirella Webb of Grubb and Ellis. "The Real Deal" will give you the scoop behind some of the more interesting deals in 10-plus-unit sales. However, if they see some interesting smaller deals, they will report on those as well.

Multifamily sales activity for the first quarter of 2006 suggests that this will be another robust year for San Francisco apartment investments, with approximately $174 million in total sales. There are a couple of forces driving the continued trend: both occupancies and rents have improved, and existing supply has been slightly reduced due to apartment-to-condominium and TIC conversions.

The activity was driven by 10-plus-unit building sales, which accounted for 73% of total multifamily investment sales. The largest sale was 788 Harrison St. in SOMA, which sold for $66 million and was purchased by Avalon Bay. But there were many other notable transactions as well.

In January, Terrence Jones of NAI/BT Commercial Real Estate sold 1030 Post St., (photo courtesy of Terrence Jones) a 33,300-square-foot building built in 1915. The property sold for $6,725,000 to a Southern California investor who paid a low gross rent multiplier (GRM) of 9.91 with a CAP rate of 5.16%. The building consists of 64 units, mostly small one-bedroom apartments. Because of the high turnover rate in the building, there was limited upside in the rents and also significant physical deferred maintenance. Terrence Jones represented both the buyer and the seller.

Also representing both the buyer and the seller in January was Dan McGue of Pacific Union, who presided over the sale of 721 Bush St. for $2,897,000. This 20-unit building has been in the same ownership for about 30 years and was self-managed by the seller, who had become tired of managing the property. The buyer saw some good upside in the building because over half of the units were paying below-market rents. The overall condition of the building was good but there had been little upgrading in the units. The local buyer was coming out of a 1031 Exchange.

McGue also represented the buyer in the purchase of 1808 Pacific Ave. in Pacific Heights. This six-story, 37-unit property sold for $8,576,400 at a 14 GRM. A number of the units were long-term tenants, presenting potential upside in the future for the buyer. The building was in fair-to-good condition with upgrades to some units, many of which have great views of the bay. The seller was represented by Carolyn Chandler of Chandler Properties.

An interesting sale in late January was the 12-unit building sold at 3145 Turk Blvd. at Arguello Street. The building came with a recorded condo map, all vacant units, 14-car parking, an elevator, decks, a huge backyard and many other amenities. Debbie Hemingway of Paragon Real Estate Group represented the seller—the University of California—and Michael Klestoff of West & Praszker represented the group that bought the property. The building was in good condition and, after renovations, will soon be sold as condominiums. At the $7,505,000 sales price, the units were $625,416 each and the price per sq. ft. was $342.

In the middle of February, 920 Montgomery St. in Jackson Square sold after being on the market for almost 300 days. Lauren Lai-Bellings of Coldwell Banker represented the seller. The building was on the market for the first time in 50 years. The property traded at $2,250,000, which represents a 13.4 GRM, a discount from the original asking price of over $2.5 million. The buyer was represented by Gary Saydah of Coldwell Banker.
In March, Paul Radcliffe of Grubb & Ellis represented the seller in the sale of 1345 16th Ave. in the Inner Sunset. The 10-unit property sold for $2,172,000—$268 per sq. ft. Six of the 10 apartments were vacant at the time of sale. Lance Fulford of Pacific Union represented the buyer, who was in a 1031 Tax Deferred Exchange and paid all cash for the property.

Clinton Textor of Marcus & Millichap represented both the buyer and the seller in the sale of 248 Anza St. in Lone Mountain. The property included 10 modern units with an eight-car garage and four additional parking spots in the side yard. The most interesting part of the deal, according to Textor, was that on the offer date he received six offers close to the same price and one offer that was considerably higher. The seller accepted the highest offer, but when it came time to remove contingencies the buyers pulled out of the deal. As a result, the sellers went back to one of the other buyers, who was in a 1031 exchange and agreed to a noncontingent offer, increasing the price in order to beat out the competition. The rents were all under-market, some by $100 and others by as much as $700. Since the seller hasn't increased the rents in two to four years, there was approximately $15,000 of annual income that could be immediately added to the bottom line. The building had the original 1960s kitchens and they will definitely need upgrading. The owner is hiring a new property management company to renovate the units as they vacate.

At the end of the quarter in March, Constance Kopriva of Rock & Roll Realty sold her own building at 1701 North Point St. for $6,550,000 and a 17 GRM. The seller owned the property for over 22 years, maintained it beautifully and upgraded most of the units, including 16 new kitchens. This beautiful, pride-of-ownership building consists of 18 units with 15-car parking and was completely seismically retrofitted in 1990. The building had close-to-market rents, with studios renting for $1,550 and one-bedrooms renting for $2,300, on average. There was only one long-term tenant, who was the resident manager and who the buyer retained. The buyer, a local construction group, was represented by Jim Keighran from Peak Realty Group. The seller traded into a triple net lease property in northern California.

From what we've heard already, the second quarter should be a very active one as we're expecting a significantly higher number of sales to finish off the first half of 2006.

The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Mark Bonn and Mirella Webb specialize in the marketing and sale of investment-grade properties, particularly apartments throughout the San Francisco Bay Area. They are part of Grubb & Ellis' dynamic multifamily team. Bonn received Grubb & Ellis San Francisco's Top 5 Producer's Award for 2005 and Webb received the Rookie of the Year Award for 2005. Copyright © 2006 by the San Francisco Apartment Magazine. All rights reserved.