The Real Deal
by Mark Bonn & Mirella Webb
Multifamily sales activity for the second and third quarters has been very active as far as dollar volume. The quantity has exceeded our expectations with about $180 million in closed deals in the second quarter and over $190 million in the third quarter. The second quarter numbers are mostly attributed to a San Francisco family purchasing 18 buildings with 561 units, totaling over $117 million. The tremendous volume in the third quarter is due to one large sale South of Market that closed in September: St. Francis Place, a 410-unit apartment complex with 25,000 sq. ft. of retail and a 425-car garage sold for $170 million to Archstone-Smith. The seller was Legacy Partners.
There were several other notable transactions in the past two quarters. Most of the activity was due to investors’ faith in the improving San Francisco rental market. Rents have increased an average of 8.5% from the end of the second quarter last year.
Susan Mitchell of Paragon Real Estate Group listed and sold 1735 Van Ness Ave. for $9.25 million. This is a beautiful 36-unit building with extremely large units. The seller had owned the building for 15 years, took very good care of it and some of the tenants were very attached to him. This sale translates to $291 per sq. ft. and $257,000 per unit; the gross income of the building exceeded $550,000, fetching a gross rent multiplier (GRM) of 15.5.
Elizabeth Sosnick of TRI Coldwell Banker represented the seller of 500-512 Church St., which closed in mid-July. This terrific corner building has nine residential and three ground-floor commercial units. The property is detached on three sides, which gives all of these units a lot of natural light. Sosnick took this building out on the market at $2.5 million and got several offers. They chose a buyer and entered into contract. The buyer backed out at the last minute and the building came back on the market at $2.3 million. At this point, the building got several offers again, some higher than asking, but the sellers picked a buyer who was willing to pay in cash for the building. They closed the deal in a day and the buyer got a great building at about a 12 GRM and over 8% cap rate, just under $200,000 per unit. Over the past several years, these numbers have been hard to achieve.
Also in July, Meggin Yuen of Habitat Property Group represented both sides of the transaction for 1688 Sutter St. This 1960s building in Pacific Heights received six offers in the first round, with most above asking price. The buyer was coming out of a 1031 exchange and paid about $100,000 over the asking price. The building was immaculate, with most of the units upgraded, and even though there were about five units paying below market rents, the buyer saw the potential upside. Soon after close, a unit became vacant and the buyer is already enjoying the additional market income. The price per unit was $270,833 at 15.74 GRM and a 4.76% cap rate.
In late June, 1301 Fell Street was sold “as-is” for $1.7 million. The seller’s agent, Phil Boersma from Arroyo & Coates, described some of the building’s deferred maintenance: it needed a new roof at $16,000, replacement of the rear fire stairways/fire escapes at almost $40,000, and new paint inside and outside at over $43,000. The buyer is also paying $36,000 for new heaters and $66,400 for various unit renovations/repairs. This equates to over $200,000 on a property with multiple low-paying tenants and five subsidized rents. Presumably, the owner will be able to pass through a portion of these expenses to the tenants. Two units were vacant at the time of sale. This 12-unit building sold for $141,667 per unit and $226.67 per sq. ft., with a GRM of 12 and a 5.86% cap rate.
Earlier in June, 2818-2828 Taraval St. closed for $2.125 million—a very high price per sq. ft. ($343.18) for this Outer Parkside neighborhood. The seller got this price because the buyer was in a 1031 exchange and needed to place his money. Out of the 12 one-bedroom units, 50% have been renovated with hardwood floors, new paint, kitchens with granite countertops, tiled floors, new appliances and bathrooms with new tile and bathtubs. There is also parking for 10 cars, plus all the units have individual water heaters and are separately metered for gas and electric. Allison Chapleau of Marcus & Millichap represented both buyer and seller.
One of the larger transactions was a 39-unit, corner building at 2085 Sacramento St. The building was in a great location at Lafayette Park with magnificent city and bay views from the upper units. There is also parking for 10 cars, onsite laundry and additional storage. James Devincenti of Marcus & Millichap represented both sides of the transaction and sold the building for $9,488,220—$500,000 above asking price. The building received multiple offers and sold for $243,897 per unit, or $420.23 per sq. ft., with a GRM of almost 16 and just under a 4% CAP rate.
In July, Thomas Finnegan and Gary Gitchel of Pacific Regional Group, Inc. sold 1158 Page St. This 1960s-era building sold for $2.775 million at a 13 GRM, 5.4% cap rate and $302 per sq. ft. The seller was in a 1031 Exchange to buy a larger, 268-unit property in Sacramento. The local buyer was also coming out of an exchange and placed her money in this building, where 11 out of the 12 units are renovated, extensive exterior capital improvements have been completed and 14-car parking is included.
With interest rates continuing at close to historic lows and the rental market gaining strength, San Francisco remains a good place to invest in apartments. Appreciation has slowed in recent months, giving buyers the opportunity to choose from a larger pool of available properties. The market looks strong going into the fourth quarter, possibly reaching last year’s record sales volume of over $1 billion in San Francisco apartment sales.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or 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 can be reached at 415-477-9207 or 415-477-9233. Copyright © 2006 by San Francisco Apartment Magazine. All rights reserved.
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