the real deal
Get Smart
by Mark Bonn and Mirella Webb
We promised in our last article that there would be a lot more activity in the second half of the year and that is exactly what has happened. Since the time we finished our last article, over 15 buildings have sold in the 10-plus-unit category with another 10 or so in contract or pending at press time. While there’s been good activity, most of the transactions have been bank-owned properties or short sales. For this reason, all of the value indicators have seen a major decrease. The average price per square foot has dropped to $245 from $310 this time last year, while the average GRM is now at 11.25 instead of 15.25. The capitalization rates have increased a full point since last year to an average of 5.5%.
August was one of the most active months so far this year, with more than a handful of properties trading hands. The largest transaction closed at the end of August and it was a portfolio of seven properties sold by UBS. This portfolio included the following addresses: 1735 Van Ness Ave., 2001 Pierce St., 3124 Octavia St., 1267 Filbert St., 1837 Oak St., 655 Hyde St. and 525 Hyde St. The properties are a mixture of large and mid-sized buildings ranging from 12 to 45 units and are located from Pacific Heights to the Tenderloin. The total price of the portfolio was $32,950,000. Dan McGue of Paragon Real Estate represented one of the largest owners in San Francisco, who bought these 146 units, increasing his portfolio to about 3,000 units in the San Francisco Bay Area.
A 12-unit property in Alamo Square, 925 Pierce St., also closed in August after a 45-day escrow. The property has a great mix of studios, mostly one-bedrooms and a couple of two-bedrooms with some views of downtown from the top floor. Alain Pinel Invesment Group listed this property in June for $2.1 million, right around 12.5 GRM. We thought this was a fair price for a clean building with five remodeled units. Initially, we got three offers on the property, all around the asking price. When we got into contract, the property had three vacancies. There were two studios, which had just been renovated and were ready to be occupied, and there was one one-bedroom, which was just beginning to get remodeled. While we were in escrow, the lender required that two of the three vacancies get rented before closing so we worked together with the seller to get the vacancies filled. The challenge was to get them rented at the lender’s projected market rents. Eventually, we got it done and the property closed at $2,025,000—just under 12 GRM.
Two properties that we listed and fittingly nicknamed the “China Dolls” also changed hands in August. These two buildings, located at 1330 Mason St. and 943 Jackson St., had many very long-term tenants. The total income for the two buildings only added up to about $135,000 per year for 19 units. This equates to approximately $600 per month on average per unit. The big kicker is that these are all huge two- and three-bedroom flats with fantastic views of the Bay. While the properties were listed separately, there was one buyer who bought the package. During the due diligence period, we found out that there were some major structural issues, especially at 943 Jackson, and that the retaining wall behind the building would have to be reinforced. This was a big-ticket item, and the buyer got a credit. He also ended up paying all-cash for both buildings.
Another property we sold is 466-470 14th St. Out of the 12 properties that we listed back in June, this was one of our favorite properties from a numbers standpoint, as well as the future potential of the building. This sale actually included two separate 12-unit buildings, sitting on two separate parcels. While the seller was operating it as a 24-unit property, the building could easily be separated and operated as two buildings. The only thing the buildings shared was the water heater and the laundry room. I think the buyer saw this potential and jumped on the opportunity.
The building also had some really nice features. It was originally built as 24 identical studios with formal dining rooms and huge closets. The former owner successfully converted two of the studios to one-bedroom units by moving the kitchens to where the walk-in closets had been, and making the kitchen/dining areas into bedrooms. Most of the units had hardwood floors, nice period details, bay windows and original dining cabinets. Most of the tenants were younger professionals or students, and most of the units were kept in very nice condition. The only hiccup during the escrow process was a dry-rot issue in the rear stair area of the building, for which the buyer got a good amount of credit. The property closed at $3.5 million, which equates to a 9.9 GRM and 6.5% cap rate.
In mid-September, there was another interesting sale: 2185 Bay St., which is a wonderful corner building in the prime Marina district. Most of the 24 studio apartments were remodeled for short-term corporate rentals by the previous owner but were then repositioned as long-term rentals. The building also contains 16-car parking and onsite laundry. The property was listed for $5,975,000 and it took a little longer than anticipated to get offers on the property, even though it was at a 12.5 GRM. The key factor was that some of the tenants were paying over-market rents, and the buyers were afraid that tenants would move out once their rental agreements came to an end. This was a legitimate concern, as three of the tenants ended up moving out during the marketing process. Once in contract, there weren’t any major issues besides having to rent up the three vacancies, as required by the lender. The building ended up selling at $5,175,000, or about an 11 GRM.
The fourth quarter continues to be active, and you will see a relatively large number of sales close in this period. The smart buyers are stepping up to purchase the bank-owned properties that have come to the market. They see this period as a great opportunity to purchase very nice buildings at reasonable prices while taking advantage of today’s low interest rates. The quality and location of most of these properties is extremely good, and in almost all cases the former owners did beautiful upgrades to the units and the common areas. For those buyers who have been sitting on the sidelines and waiting, we believe that now is a great time to get back in the game.
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 are with Alain Pinel Investment Group and 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 © 2009 by Black Point Press. All rights reserved.