The Real Deal
by Mirella Webb
As the fourth quarter closed in 2006, we did not see the end-of-year frenzy that we’ve seen in the past. Besides a handful of local investors, the buyers have been mostly on the sidelines, waiting to see where the San Francisco market is heading. It was mentioned in our November article that 2006 might break last year’s record sales of over $1 billion in the 10-plus-unit apartment category, but that did not happen. The total sales volume for 2006 was approximately $980 million.
A nice deal that we missed in late October was 444 Hyde St., which consisted of 24 very clean and well-maintained units in the Tenderloin. The property first came on the market in March 2006 for almost $4.5 million and, after a few price reductions over the five-month marketing period, it sold for $4 million.
A package of two properties put on the market by a local investor sold in mid-November at approximately 13 GRM. The downtown buildings included 698 Bush St. and 920 Leavenworth St. Both of these buildings were newly retrofitted, but had some “tired” units. The 45 units at 698 Bush Street were master metered for gas and electricity and there were 17 single-room occupancy units. The 24 units at 920 Leavenworth St. included ground-floor retail and mezzanine-level office space.
November 20 was a big day for agents; about seven properties closed that day, including 755 Bush St. This 28-unit “trophy” building had been on the market for almost two years, first marketed by Pacific Union and then by Marcus & Millichap. Originally, it came on the market for over $6.5 million in early 2005; after several price reductions, the property closed about a million lower than the original asking price. The building has a good tenant profile and income, so at 11.5 GRM this seems like a great deal. The property has a wonderful, private and quiet two-level owner’s unit with a manicured garden and many extras. The elegant marble entry and well-maintained common areas are very impressive as well. With such an ideal location near Union Square, this building could be used for the corporate rental business.
November 20 was also the closing date for the largest single deal of the fourth quarter: 240-243 Sanchez St. (2213 Market St.) This property also reached the highest price per unit: over $450,000. The building only had 32 units, but the 22 residential units were all large flats with either two or three bedrooms. The 10 commercial spaces included such high profile tenants as Prudential Realty, 2223 Restaurant, Fashion Exchange and Bombay Indian Restaurant, with seven of the retail spaces facing a busy section of Market Street near Castro. The building is massive—approximately 55,000 sq. ft.—and has a great presence. With new exterior paint this could be one of the most attractive buildings along this part of Upper Market. The building has good income and sold at a higher cap rate than we’ve seen over the last year, so it was one of the more attractive deals last quarter. The cap for this building was approximately 5.4%, which beats the 4.7% San Francisco average.
On December 1, 559-563 Shotwell St. sold for $1,285,000, $50,000 above the asking price. Congratulations to Jack Bernstine and Ilse Cordoni at Zephyr Real Estate for achieving this price; the team received three offers, with two over the asking price. The tenants living in the building were also interested in purchasing the property through the San Francisco Community Land Trust program (a form of housing in which you purchase a home, but not the land beneath it). But they were too late with their submission and missed out on the opportunity offered by the nonprofit agency. We should also mention that the building had a couple of protected tenants and over half of the units had under-market rents. The agents generated high interest in the property, most likely due to pricing the building at just under 12 GRM.
As 2006 came to an end, a nice building closed at 1741 Polk St. for $2,585,000. This is a great three-story corner building with 11 units on bustling Polk Street. Located in Nob Hill, at the corner of Washington Street, this is a desirable location for any owner, renter or shopper. The ground floor retail includes Crepe House, Finest Nails and one vacant commercial space. The residential units are all spacious one-bedrooms with bay windows and lots of natural light. Rents range between $720 and $1,500 per month. This equated to approximately a 14 GRM.
As for 2007, I feel that it will be another strong year for apartment sales. With interest rates remaining low and rents steadily moving up, investor interest remains strong for San Francisco. The market continues to be very competitive, with many properties selling before they even come on the market. We have talked with many investors who are committed to purchasing apartment buildings in 2007 to gain a foothold in this market or to add to their current portfolio.
A Real-Estate Brainteaser
In our future 2007 articles, I will publish a “real deal” that was completed in the previous quarter. I will give you some clues to the building and you will have to find the address. There will be a prize for the first person who submits the correct answer to mirella.webb@grubb-ellis.com.
So here goes the first brainteaser: Grubb & Ellis sold a 36-unit building in downtown San Francisco in the middle of December 2006. The units are mostly small studios and junior one-bedroom units. There is also a Japanese restaurant on the ground floor. This building, only a few blocks from Union Square, is in a great rental location ideal for students or young professionals. Send me your answer!
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Mirella Webb specializes in the marketing and sale of investment-grade properties, particularly apartments throughout the San Francisco Bay Area. She can be reached via email at mirella.webb@grubb-ellis.com. Copyright © 2007 by SF Apartment Magazine. All rights reserved.