the real deal
Slowing to a Trickle
by Mark Bonn and Mirella Webb
For the last quarter of 2008, an average of four apartment sales closed per month. Having this little sales volume is very unusual for end of the year activity, but not surprising given the tight credit markets. Averages for the quarter are as follows: $272,000 per unit, $316 per square foot, 14 GRM and 5% CAP rate. We finally reached a 5% average for CAP rates, which have not been this high since 2003. While the price per unit and square foot are still high, it is because the properties that did sell were of a very high quality.
When 28 Parker Ave. came on the market last July, most of us selling apartments bet right away that this well-listed building would go above the asking price. Not surprisingly, the building received 19 offers—all of them above the $3.3 million asking price. The listing agents told us that after they priced the building and signed the listing agreement, the seller informed them that a long-term tenant (of 25 years) had given his notice and was moving out within a week. With this vacancy, the agents were able to use pro-forma rent on this unit, which immediately added more value.
This prime Laurel Heights building consists of 12 three-room flats with beautiful details. The building also has a 10-car garage. While the units are original, the previous owner kept them up nicely; he also maintained the building itself in great condition. The only deferred maintenance was the antiquated electrical system, but everything else was updated. There were two long term tenants that were most likely protected and were paying below market rents. There was
also one vacancy. The deal appealed to many buyers because of the building’s
location and quality, as well as the $242 per sq. ft. price tag.
The winning bidder was a local TIC developer, but at this point we’re unsure what his plans are for the building. For now, he’s running it as a regular apartment building. He paid almost $500,000 over the asking price and was represented by David Nelson and James DeVincenti from Marcus & Millichap.
A great example of the drastic change that followed the buying spree of 2007 is the deal at 2255 North Point St. This classic Marina building was originally listed for $6,699,000 at the end of 2007. Over the course of five months in early 2008, the sales price was dropped to $4,700,000. At this time, Steve Pugh’s (Alain Pinel Investment Group) client saw the value in the deal and made an offer—but not at the asking price. The buyer ended up getting the property at $4,225,000 and closed on it in November.
All the units are spacious one bedrooms, and the building also has a 10-car garage. It was also seismically retrofitted a few years ago. The buyer saw the upside in the building since there were a few below-market paying tenants. He is an experienced apartment owner who plans on keeping this property long term. We’re told that the lender was First Republic Bank.
We are definitely starting to see some sales that are good deals for investors. A building that sold recently at 115 Haight St. is a good example. This transaction, which closed in late December, was originally listed for $2,999,999 and sold for $2,475,000. The numbers equate to a 10.9 GRM, over a 5% CAP rate, $238 per sq. ft. and $145,588 per unit.
Previous to the sale, the building had been in the same ownership for over 22 years, and it was a professionally managed and well-maintained building. While the building is separately metered for gas and electricity, the heating is steam-heat through radiators serviced by a newer boiler. The other downfall was the brick foundation. Out of the 17 units, only two of the tenants were long term but there was still significant upside in the rents.
On the last day of 2008, 900 Powell St. closed. The property was listed by Phillip Boersma of Arroyo & Coates. This corner Nob Hill building is located in an A-plus location and was operated as corporate rentals. The building is in immaculate condition. It was built in 1909, with a complete remodel in 2001. The property offers well-laid-out units with modern interior finishes and amenities. The building consists of 14 one-bedroom units and one studio unit. The studio unit is “unwarranted” according to the 3R report, so the property was marketed as 14 units.
The property sold for $4,225,000, which represents an 11.2 GRM, $458 per sq. ft. and $281,666 per unit. The CAP rate for this transaction was 5.8% at the time of sale, based on pro-forma income and expenses. There was a lot of interest from buyers when the property hit the market, and the listers received multiple offers. Shanendoah Forbes (also with A & C) represented the buyer and made it a part of the contract that the building should be delivered vacant.
We remain optimistic that as 2009 rolls on credit will start to flow again, and buyer activity will increase. At the end of January, there were only 13 10-plus-unit buildings listed on the MLS and most of them have been sitting on the market for an average of 105 days. San Francisco remains a unique market where tenants are willing to pay a premium to live in the city. More than ever, people want to be close to their jobs, have no commute and be able to walk down to local cafes and entertainment. Therefore, the rental market remains strong, with studies suggesting that rents will continue to rise at a rate of 3% for 2009.
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 © 2009 by Black Point Press. All rights reserved.