the real deal
Bubble No More
by Mark Bonn and Mirella Webb
We have had some significant changes in the market since our last article back in February. We apologize for not updating you on the first quarter’s deals, but there really wasn’t much to write about. As of year-end 2008, the price per sq. ft. was $316; but looking at all the 10-plus unit transactions so far this year, this number has dropped dramatically to $246. Comparing the rest of the data points, the average GRMs fell to just under 13 and the price per unit had the biggest dip, at an average of $182,000. It’s the first time since 2003 that units sold in this price range. Let’s take a closer look at some of the buildings that made a difference in the past few months.
In the Marina, 98 Cervantes Blvd. was definitely the most attractive building that sold in the past quarter. This 12-unit corner structure is the classic Marina gem. With 12-car parking, big, bright units and stellar location, this building sold for $313,333 per unit, bringing up the averages significantly. Before putting the building on the market, the seller had it painted and also had new windows put in. The sellers listed their building two years ago only because they had to sell the property as a requirement of the trust. Norman Valdellon of RE/MAX Westlake initially put it on the market for $4.5 million, and we knew that at 25 GRM this price would have to be reduced significantly. Philip Chan of Pacific Union sold the building to his clients at almost a million-dollar discount. They liked the upside potential, the structure and certainly the location.
Daniel McGue of Paragon Real Estate Group marketed 1051 Post St. for about two months before the property went into contract. This downtown, four-story, 27-unit building was in good condition with no deferred maintenance. Before putting the building on the market, the seller installed a new camera and phone entry system, and upgraded the elevator. Previous to this seller, the original owner did a lot of upgrades as well. He updated the electrical system and the plumbing, and he put on a new roof. He also did a beautiful job of remodeling eight of the units. Samantha DuVall, the buyer’s agent, told us that her buyer was excited about this purchase because, at the $2,587,000 price, these 27 units sold for under $100,000 per unit. There was also tremendous upside in the income since 19 of the 27 units were paying about 50% below market rents.
In early June, 1560 Sacramento St. and 1540 Jones St. closed, with the same investor purchasing both buildings. These two buildings actually first went into contract over a year ago. The buyers were associated with Marcus & Millichap but were acting as principals. Unfortunately, this deal fell apart, but Brad Lagomarsino at Marcus brought the buildings to his client.
Lagomarsino told us that these buildings were incredibly mismanaged. They were self-managed by the long-time owners, who didn’t seem to know much about apartment operations. While a lot of the units had wonderful bay views, both buildings had tons of protected tenants and a lot of deferred maintenance. The Sacramento building consists of 42 units and the Jones property has 15 units. The most appealing ingredient of the transaction was the price per sq. ft.: Sacramento sold at $186 a sq. ft. and Jones sold at $156 a sq. ft. Also, the Sacramento building was delivered with 10 vacant units at close of escrow.
We’re sure that most of you have heard by now about the Lembi portfolio that Alain Pinel Investment Group started marketing a few months ago. The first 10-plus-unit deal to close out of this package was 2050 Powell St. This beautiful mixed-use building at the corner of Chestnut and Powell streets consists of two ground-floor commercial units, a one-car garage and 12 residential units above. The property also includes a large piece of land on the Chestnut street side where there are six parking spots. In the future, there could be the possibility of splitting the parcel and developing the land. The residential units all have period details and hardwood floors. There are four units with brand new kitchens and baths. Only about three of the units had long-term tenants, and there was only one unit that was in bad shape inside. The building has a few upgrades, and it was recently painted inside and outside. It has brand-new hallway carpeting and also a newer roof. Overall, this was a fantastic investment opportunity, and we received numerous offers on the property.
Everest Mwamba represented the buyer, who was coming out of a 1031 tax-deferred exchange. With a low-expense pest inspection report, the buyer never asked for a credit, quickly approved on all documentation and always stuck to the allotted timelines. It was truly a pleasure to deal with such a great buyer and agent.
We know that there will be a lot more sales in the second half of 2009. We have a few things cooking, and we know of several other agents in the city who have some larger properties in contract. It will be nice to finally have some real comparables available instead of overinflated pricing. Hopefully, this activity will bring some confidence back into this market, and investors will see the potential of San Francisco again.
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.