the real deal

by Mark Bonn & Mirella Webb

This has been a stellar spring and summer and, just as we predicted, 10-plus-unit second-quarter sales volume more than doubled, compared to the sales volume in the first quarter. Sales reached over $250 million, which is a record number for a single quarter. We can attribute a lot of this activity to the largest apartment owner in the city, who now owns over 7,000 units and who purchased several large trophy buildings in the second quarter.

Corinthian Court (otherwise known as 512 Van Ness Ave.) was one of the larger deals that closed in April. This high-profile mixed-use property sold for $16 million. This was a gorgeous corner building with great window-lines directly across the street from City Hall. Over the last 10 years, this building operated half of its units on a short-term rental basis, signing corporate leases primarily with theatre companies, the San Francisco Ballet and the San Francisco Opera. Twenty-four of the units were fully furnished and remodeled for this purpose. The allure for the buyer, obviously, was that half the units could be delivered vacant with no long-term tenants. The commercial tenants are California Pizza Kitchen and Countrywide Home Loans, both on the ground floor. This active Van Ness location represents one of the busiest CPK locations in the region, making it likely that the new owner will receive percentage rent in the near future. The buyer of this “trophy” building will most likely continue to operate the building, keeping the short-term leases in place and remodeling the units as they become vacant. Some of you might remember that our firm, Grubb & Ellis, put this property out on the market approximately three years ago. We were asking the same price and even though we generated a lot of interest from well-qualified buyers, none of them stepped up to the $16 million price. It took three years of hard work, but we were finally able to achieve an acceptable price for the seller.

Another great corner building, 295 19th Ave. at Clement Street, also sold in the second quarter. Hill & Company’s Lucy Young sold this 13-unit building for $2.9 million. Young commented that the most interesting part of the transaction had nothing to do with the building, but with one of the buyers. There was an interested party coming out of a 1031 exchange who submitted an offer below the asking price, using the logic that 14 GRM represented fair market value for the property. The prospective buyers said, “We’re not that big owner who creates his own market.” After not hearing back from the seller, the interested party called Young directly and asked if they could revise their offer to reflect the full price. They asked if they still had a chance to buy. Unfortunately for them, the building sold $20,000 over the asking price and they missed out. Young also mentioned that the seller did a great job screening new tenants as units vacated during his 30 years of ownership. Most of the units were rented between 2004 and 2006 to mainly single professionals and there were only two longer-term occupiers, though nobody claimed to be protected. In addition, three units became vacant during the escrow, adding significant upside.

Our next featured building was a sale at 2845 Pierce St. listed by David Parry and Chris O’Connor at McGuire Real Estate. This 12-unit Cow Hollow beauty was purchased in the early 1980s by a tenancy-in-common group that occupied most of the units after the purchase. Over the last few years they slowly vacated the building; at the time of sale only one of the original owners was still living in the building, and that owner was also planning on vacating the building at close of escrow. During the escrow, two other units vacated unexpectedly, giving the buyer great upside on three vacant units. At $4.35 million, this deal was just above 15 GRM and $362,500 per unit.

Here’s a building with a good story: 644 Lyon St. sold off market for $4.5 million and was brokered by Jack Bernstine and Theresa Schreiber of Zephyr Real Estate. The buyers anticipated a lot of upside when they purchased the property in May–and with good reason. This 18-unit building had no rent control, even though it was built in 1902. The property was extensively remodeled after a fire destroyed the majority of the building in the early 1990s. All of the units were redone with above-average finishes and the building had a good tenant profile, most having been there only a few years. The building was well-maintained overall, with some credits given for an older roof and some other minor deferred-maintenance items. One of the sellers mentioned to me that she was not thrilled to sell the building because she had just gotten to the point where she was happy with the tenants and the unit remodels. However, she had to sell as her partner wanted to go his separate way.

To summarize the second quarter, the averages for 10-plus unit buildings are as follows: the GRM is 15.6, the CAP rate is 4.3%, the price per unit is just above $220,000 and the price per sq. ft. is about $323. These numbers are somewhat skewed because of one huge deal that tipped the scale–the Rincon Hill apartment deal at 88 Howard St. in South of Market, where the price per unit was $446,875 and price per sq. ft. soared to $610.33. Even if we eliminate this deal from the quarter, there were still more deals done at higher prices than in previous quarters, making us believe that things will continue this way for the rest of the year.

A Real-Estate Brain Teaser
Now it’s time for our brainteaser! This building was part of a portfolio purchase in April that never came on the market but sold for a whopping $7.5 million, which was pretty high considering its Tenderloin location. Send us your answer for a prize!

The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or SF 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 © 2007 by SF Apartment Magazine. All rights reserved.