Feature
By Jay Greenberg
Welcome to the Year of the Serpent. We all watched in amazement as rents and values skyrocketed over the last six years. I remember back in 1995 when I was starting to see rents and the velocity of the market quickly begin to pick up. Each year San Francisco experienced higher rents, greater values, and increased momentum, all the way through the end of last year.
The number of transactions for the year 2000 vs. 1999 in the 5-9 unit sector and the 10+ unit sector are virtually the same. A few more sales in the 5-9 unit sector and a fewer in 10+ unit sector. The dollar volume for 2000 vs. 1999 shows a $33 million increase in the 5-9 unit sector and a $77 million decline in the 10+ unit sector.
I believe the increase in dollar volume in the 5-9 unit sector, which saw virtually the same number of sales in 2000 as 1999, is explained by the fact that multi-unit buildings continue to offer one of the cheapest ways to buy housing in San Francisco. With single-family home values skyrocketing, buyers pooled money together to buy smaller buildings.
The decline in dollar volume for the 10+ unit sector is very interesting. Rent continued to rise throughout the year and so did the cost per-square-foot of these buildings. During the second half of the year, however, I noticed that the multiple offers and overbidding had begun to cool off. Many investors I talked with said they were fed up with the bidding wars and had decided not to participate.
I have been showing several units of my own over the last few weeks. These units have been primarily in the mid range of San Francisco rents. I am conservative in that I focus more on getting quality tenants than on getting the highest possible rent. I am still receiving a large number of phone calls— thirty to forty calls a day when I post a unit for rent. However, the number of people actually viewing the apartments has drastically declined.Icustomarilyaskprospective renters for feedback after viewing my units, and the feedback is virtually always the same: nice product, attractive pricing. Even with this feedback, however, I have been showing the units at least five times before finding the kind of tenant I want. Six months ago I would have had a choice of ten quality tenants after one showing. Some prospective renters have told me they have seen units for $2,000 now that were going for $2,400 just a month earlier.
As most of us know, the NASDAQ is approximately half of what it was a year ago, and many Dot-com companies are extinct (or close to it). Many people are looking for new employment with companies that actually make money but offer lower salaries.
I believe rents in San Francisco are flattening or even declining; whether or not you are experiencing an actual decline depends on how aggressive you have been with the rents you charge. If you have been slightly conservative you probably won’t have to lower your rents, but it will take more work than before to rent your units.
Larrie Furst of TRI Coldwell Banker listed 23 units at 1476 Valencia Street, between 25th and 26th Streets in the Inner Mission, for $2,025,000. The unit mix was 22 studios and one two-bedroom, with parking for eight cars. The building was separately metered and had electric heat in the units. The roof was two years old. This was a Marina style building with signs of deferred maintenance. There was a termite report of approximately $87,000 and the building needed work on windows and plumbing. The property was on the market for approximately three weeks and received multiple offers. Marc Wilson of TRI Coldwell Banker represented the buyer. The property sold at list price, which reflects 10.27 GRM $145 per square foot, or $88,000 per unit.Iestimate approximately 40% upside in the rents.
Listed below is a partial list of 10+ unit apartment building sales in San Francisco for November and December. If you have questions or comments regarding any of these sales, please feel free to call me.
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. Jay Greenberg is a real estate broker with Marcus & Millichap. He can be reached at 415-391-9220 ext. 300.