the real deal
Sidelined Investors Get Back in the Game
By Mark Bonn and Mirella Webb
As we began the first quarter of 2008, the market seemed to be moving along at a slow but steady pace. In the first few months of this year, the volume of sales plunged to about a third of the 2007 numbers, but the overall prices and averages did not drop. Prices even increased slightly from the previous year. This average increase is mainly attributed to the transaction at 2360 Pacific Ave. in Pacific Heights. This building sold for more than $500 a sq. ft. and over $900,000 per unit, increasing averages across the board. The total volume for the first quarter of 2008 was about $50 million, a significant decrease from the same time last year.
In January, we saw several nice buildings find new owners. One of them, 2351 Jackson St., has 10 units and a prime Pacific Heights location. It was marketed by Marcus & Millichap and sold for $2,675,000. This building was formerly a music conservatory that was converted into apartments about 65 years ago. The façade boasts meticulous architectural details, and both the units and the common areas are updated. The hallways are wider than average and have nice hardwood floors; it almost feels like walking through a museum. The property also included a two-story cottage behind the main building, which is a sunny loft-like unit.
Interestingly, the buyer of this building owned a 3-unit property on the next block, which she was able to condo convert. With the proceeds of that small property she was able to buy this building, resulting in a significant increase to her cash flow. As the buyer’s agent, Carolyn Chandler suggested the building only had two long-term tenants and the tenant profile was great. Even though most of the tenants have moved into the building in recent years, the rent roll was about 35% under market, thanks to our city’s popularity and our ever increasing rents. Even if you rented these units at market rents two years ago, with allowable annual increases you’d still be way under current market rents.
Back in early November 2007, Maven Investments listed 1044 Pine St. downtown. The property closed in February 2008. This 13-unit building is an attractive Edwardian, with 10 completely renovated units. There are other nice upgrades, such as the extensively redone common areas and a beautifully landscaped rear garden. The building was originally listed for $3,190,000 but was reduced to $2,995,000 after Thanksgiving. This reduction in price caught the attention of Robert Link of S&L Realty, who alerted his client right away.
While touring the building, it came to light that a unit had just become vacant. The previous tenant had been in the building for 25-plus years and had the lowest rent, paying $825 per month for a one-bedroom unit. His unit needed serious upgrading, but after a remodel, rented for $1,850 a month, adding over $12,000 of gross revenue to the building. The buyer offered $2,975,000 and put the building in contract right away. The deal got even sweeter for the buyer once the seller offered him a $25,000 credit if he assumed the seller’s existing loan. The seller had a $50,000 prepayment penalty and it made sense for him to offer a credit to save some money in the end.
Early April marked the closing of 107 Collingwood St., a well-maintained corner building with two commercial spaces on the ground floor and 12 units above. Most of the residential units have been updated in the last few years and were in nice condition, with some period details and hardwood floors. There were no protected tenants, but there were two tenants who were long-term and paying well below market rents. Over 60% of the income came from the bar and the retail store below, and the residential units had good upside so the buyer saw a good opportunity. This building was on the market for a few weeks before it went into contract with a buyer. This buyer removed contingencies and put up the additional deposit, but ultimately could not close. It took another month for the property to go into contract for a second time.
The lender working with the eventual buyer came to our offices and interviewed us about San Francisco’s strength and the future of the market before putting up the money for this property. The lender certainly did his homework to make sure that our market continues to be strong. Most of our comparables for these types of buildings showed an average of 14 GRM throughout the city, so the $4,415,000 or 12.2 GRM paid for this building was well worth it.
Pacific Heights saw another building change hands in mid-April as 1801 Jackson St. sold to a local buyer. The building was listed in late 2007 by Steve Pugh of Alain Pinel Investment Group and it was on the market for about 90 days before it went into contract. This is a fine corner building at Jackson and Franklin streets and includes eight-car parking. Although the asking price was $4.5 million, which represented over 17 GRM, the buyer appreciated the condition of the building, the remodeled units and the income compared to other buildings that were on the market at the time. The property eventually sold for $4,250,000—16 GRM and just over $500 per sq. ft. First Republic Bank financed the deal.
As we enter the summer, we’re seeing some larger buildings go into contract as soon as they come on the market. This is mainly due to the starved investors who were squeezed out of the market over the last couple of years by some major local players. Our multifamily market is hotter than ever and is expected to lead the nation in rental growth in 2008. San Francisco’s healthy economy will demand over 10,000 new jobs in 2008, and these workers will most likely have to choose apartments over homes as we’re still one of the nation’s least affordable housing markets.
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 recently joined the Alain Pinel Investment Group and can be reached at 415-814-6699. Copyright © 2008 by SF Apartment Magazine. All rights reserved.