The Real Deal
Buyers Blanch at Out-of-Step Pricing
by Mark Bonn and Mirella Webb
The second half of 2008 has been a real struggle for apartment sales activity; the number of deals has reached an all-time low. According to the Multiple Listings Service, there were only 12 deals for 10-plus-unit buildings from the beginning of July through the end of October. That’s only four deals per month! On most deals, we saw the sales price dip close to $200,000 under the asking price, which we think is a sign of things to come.
We’re in the midst of a changing market. Owners will have to realize that buyers are not willing to pay 14 GRM in the Tenderloin or 20 GRM in Russian Hill. Since the biggest buyer in town has been in a selling mode, the rest of the town is putting buildings on the market, too. There are currently over 40 large buildings being actively marketed in San Francisco, but the problem is that they’re being listed at last year’s prices. Even last year there were only a handful of buyers at those inflated prices. Where are all the buyers who drove up the prices in the last few years? There had to be some competition for the Lembi family, but maybe not.
Let’s go back to mid-July, when Clinton Textor and Laila Salma of Marcus &
Millichap sold 5570 Mission St. This is a 12-unit modern building with 12-car parking in the Outer Mission district. The building is very well maintained and consists of spacious one-bedroom units with contemporary layouts. The sellers did very high-end renovations whenever they had a vacancy, so there were three units in beautiful condition. The building was also newly painted and has new windows. Because of the 1959 vintage, it is a low-maintenance property.
The buyer of the property was a well-known local owner who liked the property because of the upside potential. There are a few long-term tenants paying below market rents. The seller’s motivation for the sale was to trade up into another property, and the buyer was coming out of an exchange. Perfect match, right?
Unfortunately, it’s never as simple as that. The buyer was hoping to use his exchange money and obtain a new loan for the balance of the purchase price. This deal was originally supposed to close in early July, but during escrow the buyer asked for an extension because one of his exchange properties needed some additional time to close. At that point, he said his new loan from First Republic would not be ready prior to close, so he would just close with funds from one of his exchange accounts and cash on hand, with the plan of putting a new loan on the property after close. Both parties agreed to an extension, and it was structured so that the buyer would pay the seller $100 per day for every day after July 1, the original close of escrow. The buyer ended up paying with the proceeds from his exchange property and paid cash for the remainder.
In Dolores Heights, 240 Cumberland St. was on the market for almost six months and finally sold $600,000 under the asking price. The original asking price on this property was $6.5 million. This is a modern 30-unit building with panoramic views of the bay and downtown. Richard Meyerson of Zephyr Real Estate marketed the property, and a few weeks later he received a solid offer from a well-qualified buyer. During the due-diligence period, the buyer found out that there were major structural issues with the building that could exceed $500,000. There were dry rot and safety issues with some of the balconies, which we believe were built without permits. This was going to be a lot of work for a new owner. Tim Brown of Brown & Co. represented the buyer, who loved the location and was motivated by the upside in the rents. The building went through some price reductions before finally closing in late August at $5.9 million with a $100,000 credit to the buyer.
In early September, a really nice 12-unit building sold at 1270 Grove St., which was listed by Daniel Reynolds of Reynolds & Associates. The building consists of six studios, which are more like junior one bedrooms, and six one-bedroom units, which are extremely spacious with formal dining rooms plus eat-in kitchens. This 1920s Marina-style building also has six-car parking. Most tenants were paying low rents, hence the high 15.2 GRM. We believe there was only one unit getting market rents. The building was listed at $2.995 million and got some offers that were pretty close. But in this tough lending environment the seller chose the buyer with all-cash and a close in two weeks, even though the offer was far below the asking price. The final selling price was $2.725 million.
One great property is 3535 Fillmore St., which was listed by Steven Caravelli of TRI Coldwell Banker. He originally started marketing this property back in October of 2007 with an asking price of $5.43 million. Back then, that number didn’t seem to be that far out of reach. The property is a beautiful Marina-style building, seismically upgraded in 1991. The units are all spacious, very bright and well laid out. There is also a large garage for eight cars and a courtyard in the middle of the building, which gives the units their brightness.
The building was reduced to $4.625 million back in June and finally started getting some action. Eventually, a local buyer paid $4.525 million using a loan funded by First Foundation Bank in Irvine. This deal closed in mid-October and it was a stressful escrow, as the loan wasn’t completely secured until it was actually funded a few days before the closing date. Neither side of the transaction knew whether it was going to go through or not, but thankfully it did.
We speculate that the remainder of the year will be pretty quiet for apartment sales, mainly because of the turbulence in the financial markets. Investors need to regain confidence in the market and think about the long-term profits instead of buying and flipping the building a year or two later. The days of making huge profits in a couple of years are over. But we don’t need to preach to the choir; long-term San Francisco investors know how to make money on their buildings in this town. As we mentioned earlier, there are 43 large buildings currently on the market. It’s time to submit some offers and negotiate because it’s always a great time to buy in San Francisco.
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the 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 contacted at 415-814-6699. Copyright © 2008 by Black Point Press. All rights reserved.